How to successfully invest in startups as an established company – Desifer Venture Club

The number of established businesses that have incorporated startup investments as a part of their growth strategy has increased rapidly during the last couple of years. Between 2010 and 2020, the number of corporate investors grew more than six times to over 4,000. Together they invested a record US$169.3 billion in 2021, up 142 percent compared to 2020. Even though investment appetite has cooled a bit this year, as is to be expected, we don’t see a strong trend of corporates leaving the investment space.

Startup investments come with high risk, and those organizations that are not prepared for that will not stay in the game for long. Even among those who can accept that risk, going into venture investments comes with a whole new set of new challenges. So what does it take for an established organization to succeed with venture investments as a growth strategy?

In our final Desifer Venture Club of 2022, we invited four experts to discuss how established companies can successfully invest in, and partner with startups: Philip Hallsmar, Investment Manager at AxSol (Axel Johnson), Siri Marie Hagen, Investment Director at Bring Ventures, Ingrid af Sandeberg, Head of BU Sustainable Water Management at Aliaxis Next, and Mark Johnson, Head of Corporate Ventures at Husqvarna Group. Some key takeaways from the discussion are summarized in this article

Balancing financial KPIs with impact KPIs

The majority of our panelists represent investment organizations set up not solely for the purpose of bringing in financial returns, but also for driving innovation in a certain area, or securing long term growth. They all stress that financial KPIs remain key, but need to be balanced with other, often more complex KPIs. As Siri of Bring Ventures describes:

– Of course, financial return is very important for us. Especially over the long term, it’s very important that the company has financial sustainability. But we also have more strategic KPIs to ensure the value that we want to create together with the company. These strategic KPIs are usually tailored to each startup, so they differ from one to another.

As an impact investor, Ingrid and Aliaxis Next are working on developing KPIs to accurately reflect their purpose – to address the world’s water challenges (UN SDG6):

– In addition to financial KPIs, we also want to measure deviations from the business plan that underlies our investment case in terms of e.g. revenue and EBITDA. We also aim to measure what we could call “water impact”, i.e. how, and how much, positive impact an investment has in counteracting water scarcity. This is a difficult one, and it might be defined slightly differently for different startups, but the goal is to have some metric that is comparable across companies and across portfolios.

Ensuring strategic value from your investments

Philip from AxSol shares experiences from the years spent at Klarna previously:

– In my experience, the investments that make a real difference to a corporation are never purely financial. They have a clear plan for how to add value to the company and its strategic priorities over the short and long term. When we made minority investments at Klarna, we would typically combine them with a strategic partnership agreement that was signed simultaneously. I strongly support anchoring within the organization and establishing a clear rationale for doing so, unless the mandate and scope for the CVC is to be a purely financial investor.

Ingrid adds that it is just as crucial to find companies that have a cultural fit with their organization:

– Sometimes we meet companies who have a really promising solution or technology, but where where there is a mismatch with the team. We must ensure alignment to be able to develop a fruitful strategic partnership with the companies we invest in, says Ingrid.

A clear and differentiated value proposition to stay attractive in competition with traditional venture capital firms

As a corporate venture investor you regularly go head to head with traditional venture capital firms. It is not always possible to offer the most beneficial terms financially. How can a CVC ensure that they have an attractive offer towards the startups?

– We are offering the companies we invest in a collaboration partner in their niche, says Mark Johnson from Husqvarna. But we are also very happy to co-invest with traditional VC firms. There is even a preference for it. Having experienced venture capitalists on the board and involved in the business is great because then they can hammer the startup with prompts that they’re not doing things right or running their business fast enough.

– We also love to invest together with other professional VC companies and we also see that we can complement these players as we bring different qualities to the table. For example, when we invested in a high-profile startup together with an international first tier VC, they chose to include us because we could be a test arena and be one of the first customers to the launching product, Siri tunes in. Personally I think it is positive to have a mix of different types of investors on the cap-table that can contribute with different types of competence.

– We also love to invest together with other professional VC companies. We also see that we can compete with these big players as we bring different qualities to the table. For example, when we invested in a high-profile startup that Sequoia Capital had previously invested in, they finally chose us because of our huge supplier network and that we could use their product in our own system, Siri tunes in.

Philip concludes by sharing his perspective:

– Indeed, this increased interest in co-investments is definitely a trend, at least here in the Swedish ecosystem. Our ambition is typically to eventually become the majority owner and be able to realize synergies between companies over time. However, while we often aim to become a majority shareholder, we also see value in partnering with other investors and are very open to consider different forms of cooperation.

A bright future for CVCs

A key takeaway from the panel discussion is that a growing number of startups are seeing greater value in being backed by an industry related corporation, compared to traditional VCs. As a startup, being backed by a large corporation within or related to your sector means getting access to valuable assets such as industry specific know-how or important relationships in the value chain. To stay focused and build long term success it is key for a CVC unit to have a clear investment thesis and long-term goals. Having a CVC unit is becoming an increasingly important tool for industry leaders; not just for making money, but also to stay relevant as the industry evolves. In fact, the panel agrees that corporate venture investments become all the more important in challenging times, when companies have to find new ways to ensure future success.