(This is part one of a two-part series on corporate venturing for family-owned companies)
Much has been written about the drop in venture funding in the past 18 months. CBInsights' Q2-2023 report shows this decline continuing into the first half of 2023. Initially this impacted growth-stage, pre-IPO companies, but has also been felt at early stage (both in terms of number of rounds and size of rounds). Overall funding went from $156 billion in Q2-2021 to $119 billion in the same quarter in 2022, down to $60.5 billion for Q2-2023. The number of venture deals in Q2 were the lowest quarterly total since Q4-2016.
It's also resulted in a dry fundraising environment for the venture funds themselves. Why would an LP want to invest in an illiquid, risky venture fund when risk-free interest rates are over 5% these days? Of course, this ignores the upside potential of 2023-vintage funds being able to make investments at much lower valuations than funds that started in 2019-2021. The lack of discipline with the past years’ “ZIRP” (zero interest rate policy) investing has now around; investors are more cautious, and the deals themselves are priced lower.
More importantly, from the perspective of investors with a strategic lens, there is way less competition for deals, and startups are much more willing to adapt to the timelines and strategic priorities of corporate investors or strategically-linked family offices.
This presents a unique opportunity for family-owned industrial companies to step in and fill the funding gap, creating a sustainable competitive advantage in the process.
Why Family-Owned Industrial Companies are Primed for this Opportunity
Family-owned industrial companies have several intrinsic characteristics that place them in a unique position to leverage this opportunity. They often possess longevity, a deep understanding of their industry, and a commitment to long-term vision over short-term gains.
Long-term Investment Perspective: Family-owned businesses are known for their long-term thinking. They're less pressured by quarterly reporting and can make strategic investments with an eye on the future. This patience is an asset when it comes to investing in DeepTech startups, which often require a longer timeframe to mature and generate returns.
Deep Industry Knowledge: As multi-generational entities, these businesses have accumulated extensive industry knowledge and expertise. They understand the intricacies and challenges of the industry, which can prove invaluable when identifying promising startups and guiding their growth.
Stability and Trust: Family businesses are generally considered stable and reliable partners, which can help attract and reassure startups during the investment process. This trust can foster a positive environment for collaborative innovation.
How This Opportunity Translates into a Competitive Advantage
The advantages for family-owned businesses in this scenario are manifold:
Early Access to Innovation: By investing in and partnering with DeepTech startups, these companies get early access to potentially disruptive technologies, helping them stay ahead of the curve. This can range from AI, IoT, biotechnology, quantum computing, to advanced materials – all of which can have significant implications for their industries.
Diversification: Engaging with startups provides these family businesses with an avenue to diversify their portfolio. This can hedge against industry-specific risks and contribute to overall business resilience.
Knowledge Transfer: Working closely with startups can lead to a mutual exchange of knowledge. Startups can learn from the rich experience and established networks of these companies, while the latter can gain insights into novel technologies and innovative ways of doing business.
Succession Planning: Providing opportunities to engage the next generation of leaders, to lead businesses that will be sources of company growth in the future, rather than the operations of today.
I am specifically referencing DeepTech in this post, because we are talking about transformative technology that make take several years before an industrial company can commercialize it - but it may become the next billion-dollar line of business for that company.
Not every collaboration needs to be in the investment context: when we work with our corporate partners, we talk in terms of capabilities and outcomes:
Does this create competitive advantage through major improvements in productivity or agility?
Can this startup be part of the engine that powers a major division of the business in 5-10 years time?
Does this create financial wealth for the business or owning family while also leveraging the company’s industry knowledge, network and assets?
Given the capability that a startup may help create for the corporation, the desired outcome of the collaboration will become more obvious. Measuring the impact of that outcome may be purely in financial return, or impact on internal bottom or top line, or more qualitative.
Invest (this gives a seat at the table in the company’s future)
Acquire (get direct strategic advantage and block competitors)
Partner (i.e. research partner, channel partner, joint venture, etc.)
Become a customer (early, strategic customers will have a stronger influence on roadmap and take earlier advantage than those that come in later)
Do nothing (also fine)
Turning Opportunity into Action
Given the current investment climate, family-owned industrial companies have a window of opportunity to step in and support DeepTech startups. This will require a strategic approach, however, which could include:
Developing internal capabilities to identify and evaluate potential startup investments
Establishing collaborative structures to work with startups (such as working with Sente Ventures in a “CVCaaS” model, or establishing their own venture building or CVC structures)
Leveraging industry networks to source potential investment opportunities
In the next post, I will discuss the considerations for an industrial company to build its own venturing capabilities vs. partnering to accomplish similar goals.