Russ Shaw: Large corps benefit massively from investing in start-ups. Here's proof

The founder of Tech London Advocates and Mayor of London’s Tech Ambassador explains why we need kids who code

Last year a record 581,173 new businesses were registered in the UK (with nearly 185,000 registrations in London); given that between 2009 and 2012 London’s tech sector grew by 76%, it is clear that the number of tech start-ups in need of finance is dramatically increasing.

In response to the squeezing of traditional high-street bank finance, the government announced a £900 million small business finance package in the Autumn Statement. Whilst encouraging, the state alone cannot plug the funding gap. The provision of finance must primarily derive from private investment – and a very effective means of doing so is through corporate venture capital.

With global economic instability continuing, many corporations are sitting on large amounts of cash in case the markets take another downward turn. The losses made in the aftermath of the dot.com bubble have also made many corporations intrinsically wary of corporate venture capital investment in tech.

But Britain’s corporations do have money to spend; the UK’s largest companies are sitting on an estimated £53.3 billion, 40% more than they held in 2013. And with Britain boasting one of the world’s most dynamic fintech industries, the time is right for a new chapter of corporate venture capital investment in our tech start-ups.

Larger corporations have sometimes been seen as ‘anti-innovation’ and wanting to protect their position as industry leaders. But in increasingly competitive marketplaces where innovative start-ups are gaining greater market share and customer loyalty, corporations must ensure they themselves are disrupting – or else face being disrupted.

How Intel & BMW gained from start-up investments

Investing in a start-up can certainly help a parent corporation foster innovation and broaden its horizons. Tapping into a start-up’s expertise and creativity and bringing them in as a partner may also help a parent corporation secure a competitive advantage or solve an internal problem, as well as provide more cost effective access to research and development.

In short, corporate venture capital investment has the potential to reinvent the relationship between corporation and start-up towards one of greater collaboration with significant benefits to both.

Of course, any investment – corporate venture or otherwise – brings with it a degree of risk. But the financial benefits of investing corporate venture capital are there to be seen. Take Intel’s investment in Imagination Technologies, a British-based Semiconductor R&D firm. Having paid £25m for 20m shares in 2009, Intel sold 9% of its 15% stake last year for £54m.

And for a growing company, investment from a corporate could provide it with the capital necessary to fulfil its potential and break into the market. One example is JustPark, who secured an initial £250,000 of investment from BMW’s venture capital division in 2011. Today the parking service is used by half a million drivers worldwide and has grown to a workforce of over 30 in just a few years.

Equally as important to the start-up are the non-financial benefits that come through such a relationship, especially if both parent company and investment operate within the same sector. Along with capital, a corporate investor can provide a strong network of contacts, as well as guiding support and expertise to help navigate that sector’s market. Furthermore the prestige of being invested in by a larger, more established company may often be to the start-up’s benefit.

But for the investment and partnership between corporate and start-up to fully flourish it must be managed effectively, with a strong onus on the investing corporate to ensure a dynamic and healthy relationship. The venture’s vision, drive and ambition must be matched by that of the investing corporation – and the parent corporation’s leadership must ensure that their involvement and influence in their venture is restricted – or else run the risk of stifling creativity and innovation. Start-ups must ensure their innovation is driven by insights from potential customers and markets on both an emotional and functional level.

Indeed to truly pioneer, investments must be able to branch out and operate along different structures to their parent corporations, without limitations or rules being imposed. And corporates must appreciate that venture capital investment is usually a marathon not a sprint – tangible returns may not materialise for a number of years following initial investment, so patience will be required.

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