Strategic investing – how to make your investment pay off
25 June, 2020
Your expert for questions
Florian Noell
EMEA Startups, Scaleups & Venturing Leader at PwC Germany
Tel.: +49 30 2636-4176
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The different types of investment in startups, and when they're worth it
Exploring promising markets and tapping into new business sectors, innovating without incurring major research and development costs, or simply generating returns: there are many ways for established firms to profit by investing in up-and-coming startups.
However, companies must carefully examine which opportunities are offered by investing in startups – and know which objectives they are pursuing by making such investments. They are looking for access to highly-qualified talent or promising technologies. Generally speaking, there are four types of investments in startups by companies (corporate venture capital, or CVC for short), depending on the relevant objective. What those are – and which advantages and disadvantages they entail – are familiar territory for Florian Nöll, Head of Corporate Venture Capital at PwC Deutschland.
“The primary goal for investing in startups shouldn’t be a quick financial return. Companies would be well advised to consider corporate venture capital a strategic tool for sustainable growth of their business.”
Strategic, or profit-oriented?
Before undertaking any action, CVC investors should ask themselves two questions, based on the theory put forth by the American economist and innovation researcher, Henry Chesbrough: First, what is the general thrust of the investment: will it be driven by strategic aspects or financial returns? A company looking for strategic investments is primarily seeking synergies between its own business model and the new venture. By contrast, financial investments are centered around achieving an attractive return – and less concerned with whether or not the startup's business model and its product or service offering fit with those of the investor.
The second question a company needs to ask itself before investing in a startup is: how well should the startup fit to our core operating business? In other words: how closely aligned should it be with the investing company's activities?
Tried and tested framework for assessing corporate investments in startups
According to the model developed by Henry Chesbrough, there are four types of VC investments depending on the answers to these two questions. This framework can help companies seeking to invest to assess existing and future investments in startups and determine how they wish to use their investments as a tool for strategic growth.
A clear strategy
No matter the type of investment a company opts for, it needs to fully understand its own strategy and its operational abilities. Moreover, it must manage its investment in such a manner as to ensure that it is able to reap the strategic benefits and is not merely after financial income.
Prospective targets
- Prospective targets
- Emergent investments enable companies to discover new business sectors
- Enabling investments complement the current business strategy
- Passive investments merely seek returns
Prospective targets
When we speak of “driving investments”, we mean those investments where the focus lies on strategic objectives. This enables companies to drive their strategy in the truest meaning of the word. When an established company makes a driving investment, it invests, for instance, in a startup which offers products and services which drive forward a technological standard which the investing company has itself developed. The startup is thus closely involved in the investing company's core operating business.
“From a strategic standpoint, such an investment can make a lot of sense. However, this form of investment is less suited to disruptive strategies or identifying new opportunities. Companies that want to grow beyond their current strategy and processes should therefore not limit themselves to driving investments”, says PwC expert Florian Noell.
“If you take a targeted approach to corporate venture capital and are aware of the various strengths and weaknesses, you should also be able to successfully invest in innovative startups in difficult economic times, thereby generating valuable growth.”
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