It should come as no surprise that tech startups across various industries can leverage Internet-scale technologies like cloud computing, mobility, and data analysis more quickly than large companies. This leaves many established and often regulated industries exposed or vulnerable to this new breed of disruption.
In response, some companies invest in startups as a means of embracing different types of tech-enabled business inventions. This can be done either through acquisitions or by simply leveraging their venture capital arm to participate in funding rounds. Up until recently, corporate development teams have been looked at by the venture capital community as exit opportunities (M&A), but more corporations are now focusing on the early stages of investment with increased attention, thanks to the growing number of tech startups scaling to incredibly high valuations at a rapid rate. These accelerating valuations essentially preclude such startups from consideration for a corporate buy-out. As such, it has become imperative for corporations to learn how to work more effectively with venture capital to gain access.
Even if it’s empirical, a framework to better define the rationale behind corporate investment objectives seems timely. To decide why, when, and who a company should invest in, we should carefully look at the “Three N’s”: the Now, the New, and the Next.
The Now is about investing in existing products, services, or expertise and talent that helps companies to improve their current business and operational efficiencies. They know what they’re looking for and if they cannot find it through their existing vendors, they’ll go out and talk to startups to see if they have what these companies want now. It is about what companies need. It is about sourcing products that only startups can and have developed.
The New is what corporations should envision that they would use if only it was available today. This is mostly coming from technology startups oftentimes created by those who have experience working inside large enterprises and have identified ways to significantly improve a particular product or system. With an entrepreneurial mindset, such startup entrepreneurs leave to form a company built around their idea. The New is about what companies want. It is about sourcing new edgy products that we hope one startup has been working on. It may not necessarily be in a final, stable stage.
With both the Now and the New, investments are considered to be in synergy with the current core businesses. It’s an incremental play – an evolution, not a revolution. Additionally, decisions are often consensus-based from inside organizations, and they are about sourcing products, systems, or infrastructure components. It is not about a new business category or business innovation.
The Next is much different. It’s about preparing companies to play in new domains – those with no immediate clear synergy with their core business. It is not about investing in products but about digital platforms capable of creating significantly new economic flows and transactions between customers and suppliers (who can also be individuals). Here, decisions to invest are based on convictions versus consensus, conjecture versus prospective analysis. They are also made by only a few people inside the organization.
Although the “three Ns” are combinatorial and not exclusive, it is important to try and connect these ideas with the ambiguity – and exponential potential – of longer term bets. The Next big new businesses are likely about investing beyond today’s constraints and the need for immediate strategic alignment.
Even if it is rational to focus on the Now and the New, no one wants to miss unexpected market categories or opportunities, great business innovations, or the future non-linear growth represented in the Next. Anything is possible with digital. Making multiple bets in the Next is as important as in the Now and the New so that companies can participate in the next business currents.
San Francisco, CA
July 7, 2015