How can strategics and start-ups work together?

The typical strategic investor in the Clean Technology sector is an international energy, chemicals or agricultural company, looking for technologies which will complement or build on their existing portfolios and capabilities, and which can be replicated on a global scale and generate returns comparable or better than existing businesses. There may also be significant benefits when addressing the demands of Shareholder activists and public pressure, or graduates in the context of recruitment. Strategics expect to eventually integrate and manage such technologies and businesses using the same model that is seen as having served well their historical and existing activities, or not…

The strengths that a Strategic can bring include easier funding, project delivery capabilities and a range of specialist skills such as HSSE, tax etc, global reach – along with a longer term perspective on returns than VC’s.

Start-ups appear to have little to lose with what appears to be on offer from Strategics – funding to scale-up and mature the technology, global visibility and credibility etc – so why does it go wrong? It is generally about culture, not technology failure. The start-up is invariably driven by one or two individuals, perhaps the original inventors or risk investors, who are nimble on their feet and flexible, and who have a clear unchanging vision. In contrast, the Strategic is made up of managers who are driven by changing corporate (or even personal) objectives and appetite for career risk. Often because of inadequate upfront due diligence, or managers’ inexperience, the extended timelines result in the Strategic simply walking away from future investment rounds due to a ‘change in strategy’, or reluctantly taking a majority share, with many unintended consequences in governance – and a likely change/deterioration in relationships.

Another complication is that the original champions within the Strategic inevitably move on to new corporate roles, and the incomers do not have strategic clarity or the appetite for maintaining relationships.

The latest tactic of addressing this risk is through the creation of a venture fund with a narrow focus that is strategically relevant, but in which the Strategic does not have a controlling role. The informal influence only remains during the first, and maybe second fund, after which the newly created, now successful VC will go its own way. During the happy, early part of the marriage between the (constant) GP and the (at some point changing) managers of the Strategic the biggest benefit, if structured well, is the Information Return on Investment: a value-driven dialogue between technology managers and experts from different parties for mutual benefit.

We have observed that focus on stimulating related technology developments of non-core or peripheral technology, inputs and suppliers, markets etc works quite well, as is the benefit of creating “distance” by outsourcing governance and management, reducing reputational risk (and ultimately exit costs.

Alternatives such as Corporate Venturing (a VC controlled by the Strategic) and JV’s are more conventional, with outcomes that have lead to the continued search for other approaches.