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How Corporates are Plugging In

Not a week goes by without a national or global corporate announcing their arrival in Silicon Valley.    It’s certainly fashionable to be in Silicon Valley, but is it useful?  What are the engagement models and are there some ways to plug in without writing $1M+ checks?  

New innovations in beer packaging.    Source:   AB-InBev

New innovations in beer packaging.    Source:  AB-InBev

Last week’s article in the San Jose Mercury News heralded the arrival of Volkswagen, Lego, and Anheuser-Busch’s “Beer Garage” in the Valley.    Volkswagen’s arrival is decades-old news, Lego has an on-again off-again relationship with tech, but the establishment of a Beer Garage is definitely new and newsworthy!

What are these corporates looking for?   In the above article, David Newman, head of Target’s Technology Innovation Center in San Francisco explains:

 "The key areas we're focused on are the unexplored, and underexplored, sections of technology. This is where a presence in the Bay Area is so valuable."

This makes a lot of sense.     Corporate innovation teams are here to immerse themselves in our culture, scouting technology and trends and then figuring out how to apply the tech to their specific businesses.    Startup innovation is a global phenomenon, of course, but many startups are local to Silicon Valley, and the rest leave a detectable footprint as they make their pilgrimage to Silicon Valley looking for publicity, investors, market access, or all of the above.

Thus, it’s good insurance to place a “listening post” here in Silicon Valley.    Name any industry and chances are good that there is a startup “disruption” in the works that is likely to affect that industry.    The key is to get in early on that disruption, or even spot a disruption in an adjacent industry and work together with a startup to bring that disruption to your industry – Target’s strategy, I presume.

Traditionally, three corporate engagement models have dominated.   Note that these are not mutually exclusive. Some corporates engage all three models simultaneously:

  1. Limited Partnerships with prominent venture capital funds promise access to startup deal flow, but require a large amount of capital ($1M+) with limited control over how this capital is invested.
  2. Corporate Venture is becoming very popular and tempts with the prospect of an ROI that may cover the total administrative cost of this effort - but it requires more capital and operating costs than an LP.   Furthermore, this effort is typically led out of the office of the CFO – limiting the linkages (and resulting benefits) to corporate R&D in most large companies and thus negating the original purpose for creating this venture fund to begin with!
  3. As a third option, corporates can locate an R&D facility within Silicon Valley, incurring facility expenses and coordination challenges.  Surprisingly, a local R&D team may not increase the company’s interaction with the startup eco-system as employees attracted to corporate development teams have a different mindset from those attracted to startups.

Access to startup “deal flow” is key of course, and the general rule prevails that the amount of access is proportional to the amount of money the corporate brings to the table.    As word gets out that you are investing, startups find you, and you will no longer need to go scouting.     As a name-brand VC recently commented to me, “believe me, the last thing we need is *more* deal flow”.  

A visualization of these engagement models can be summed up by the following chart:

Deal Flow.jpg

In general, corporates that spend heavily on their own venture fund or VC limited partnerships get excellent deal flow (blue).   Corporates with R&D or innovation teams here in the Valley generally get a little less exposure, and the amount of deal flow can vary greatly (red).   This makes sense – some R&D teams are located here not specifically to scout opportunities, but to actually perform engineering projects for their company!

It seems that access to innovation in Silicon Valley is like drinking fine wine.    In general, spending more gets you a better quality experience, but it begs the question - what gets you the most “bang for the buck”, i.e. is there a $15 bottle of wine out there that tastes like a $50 bottle?    My hypothesis is YES and I will explain further in my next article!

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