Startups and Venture Capitalists
Executives at startups need to understand when and why larger corporations may approach them with offers of venture capital funding. The advantages to the established, funding company are described below. The startup executives must balance the obvious advantages of the funding opportunities with their own organizational survival in a competitive market.
An established company's survival sometimes hinges on its ability to keep up or catch up with cutting-edge firms in its industry. For such a company, a corporate venture-capital fund provides a means to collaborate with a trailblazing start-up in the early stages of its life cycle. In doing so, the more established company can gain insights to new methods or technologies and use this knowledge to become more competitive in the current marketplace. But the corporate venture-capital fund offers the established company other advantages as well.
Exposure to Current Technologies and Business Models
The research and development (R&D) departments of established corporations are sometimes focused on a narrow range of projects that align somewhat with the company's current product offering. Consequently, it can be difficult for R&D to identify competitive threats if those threats are outside the department's central area of expertise.
By using a venture-capital fund to enter a collaboration with a pioneer in its industry, the established company -- the sponsor -- can gain direct access to the inner workings of the new entry in the competitive landscape. Through this exposure, the established company gains information it requires to move quickly to respond to new technologies and business models in its markets.
In addition, the partnership made possible by the venture-capital fund might ensure the sponsor's employees acquire knowledge that can lead to a new corporate strategy that will make the best use of knowledge the company gains from its start-up investment.
Granted Up-Close View of Competitor Products
An internal research and development department tends to focus on a few projects, limiting its view of external competitive threats. Partnering through a venture-capital fund helps to ensure the company is not blind-sided by competitor developments.
By underwriting a venture-capital fund, a company can gain access to the internal workings and projects of a competing business. In the process, the company can gather intelligence that might help it respond to threats in its external operating environment.
Earn Financial Returns
The use of a venture-capital fund to partner with an innovative company earns the company a return in terms of new knowledge it can apply to its own business lines, as well as a possible financial return on its investment. Although the profits from the venture may not be significant, some profits are better than no profits.
Enact More Prompt Response to Competitive Landscape
R&D departments are often large groups, which may focus on projects related to existing product or service offerings. Consequently, a company's R&D department's recognition of and response to industry disruptions can be slow-footed, which can have a negative effect on innovation.
In contrast, startups often consist of smaller, more highly focused teams headed by leaders in their field who may be capable of guiding their teams to greatness. When a traditional company partners with one of these startups by means of a venture-capital fund, it can gain an inside peek at new technology and processes. In addition, the traditional company might be given an option for part ownership of new idea, which will allow it to more quickly respond to a market transformation.
Lower Cost of Product Innovation
The processes of a large company can bog down internal processes, including gaining access to R&D funds. But even with funding, developing the capabilities that are needed to develop a novel new product is often a long-term and expensive process.
In addition, should a research facility require facility updates to pursue a certain venture, the process required to do so, let alone the recruitment of the scientists with the needed expertise, is a slow one. By using a venture-capital fund to partner with a company that has developed ground-breaking technologies or processes, the traditional company gain immediately gain access to ideas that might help them revise existing products or introduce new ones to stimulate customer demand.
Methods learned might also enable the company to lower its costs of production, which may make its products more competitive in the marketplace.
A well-established company is not unlike any other in that, to remain competitive, it must incorporate the latest industry thinking in its products or services. A corporate venture-capital fund, which allows the sponsoring company to invest in a cutting-edge firm, grants the well-established firm access to some of a startup's methods, processes and technology. Consequently, the funding company may benefit from not only its financial investment, but also the knowledge it acquires through the partnership.
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