Corporate Venturing In The Middle East Can Be A Mirage.
This article was originally published on Forbes on 11-Jul-2016 and is written by Mr Kamal Hassan, General partner TURN8 Fund.
Large corporations in the Middle East (and elsewhere) tend to lag behind in innovation. Once they reach a certain size, competitive pressures seem to diminish, and they lose their nimbleness. Recognising this, some companies have started to think about investing in startups as a strategy for spotting and ultimately profiting from innovation. But there is an art to doing this successfully, and many Middle East organisations have not yet mastered it.
Let’s start with the basics. There are three ways for large companies to innovate:
1. Inorganic: do an M&A deal.
2. Organic: engage in internal research and development, testing new products and expanding the ones that work.
3. Invest in early stage innovation: set up a venture arm.
Five to seven years ago, #3 was not really a factor in the Arab world. Corporate investment basically entailed buying out your potential competitors. But more recently, companies are beginning to look at startups as a way to innovate. On the positive side, that’s great news. This is what happens in much of the developed world, and it’s a proven strategy.
On the not so positive side, the Middle East lacks an IPO exit market, so investors are limited to M&A deals as their exit path. This is a manageable problem, but a bigger one looms large: in this region, executives are not experienced investors. In other words, they don’t know how to loosely hold an entrepreneurial relationship, or to cultivate cultures of entrepreneurship and innovation. They invest in a manner that has the potential to crush innovation. For example, experienced investors are hands-on — dispensing advice, helping startups gain traction, build strong teams, and globalize their offerings. But in this region, many corporate investors treat entrepreneurs like employees. They impose restrictions that forbid the entrepreneurs from doing business with the investor’s competitors, or they impose bureaucracy on these still delicate entities. They want exclusivity. They want 10-year plans. In reality, entrepreneurs have no idea where they will be in 10 years, or even five. They may be forced to pivot. Market conditions may change. Each new executive hire has the potential to shift paths. If you push all the uncertainty out of the entrepreneurial process, you will be left with a process that is anything but entrepreneurial. Instead, corporate venture investors should be thinking like real VCs.
Even in the United States, where corporate ventures are commonplace, large organizations have trouble maintaining the deft touch necessary to nurture rather than crush innovation.
What leaders in the Middle East call corporate venturing isn’t really corporate venturing.
It makes sense to look elsewhere for examples. For example, nearly every bank and telecom in Southeast Asia invests in venture capital funds. The banks understand they are not the experts in this realm, so they are content to watch and learn.
They might seek to embed some sort of terms that give them the option to invest more at a certain trigger stage, or perhaps a right of first refusal. They might also seek the right to co-brand with a startup as their technology matures and they expand. But such actions simply give them a window of six to twelve months in which they will have an innovation head start; they do not crush innovation.By being a limited partner in an established venture capital fund, established organisations participate in the purest form of innovation. VCs are more skilled at finding and nurturing innovators with the hope of achieving market success; their objective is simple: produce attractive financial returns. In contrast, corporate ventures tend to have a strategic objective, and in the Middle East such objectives can be so dominant as to all but eliminate any true innovation.
To nurture innovation, you can’t simply go through the motions. You have to give innovators room to innovate.