Traditionally, getting funding for a new startup is tough. However, in recent years, there has been a surge in corporate investment in startup accelerators, as today’s entrepreneurial economy takes over from the bootstrapping days of yesterday.
Big companies recognize the vast potential of working with startups, which has led to a boom in venture builders, venture clients, and corporate accelerators. These initiatives spur innovation, helping corporations innovate and evolve to stay competitive in a rapidly changing market.
According to Harvard Business Research, the number of corporate investments in startups tripled from 980 in 2013 to 2,795 in 2018, with their total value growing from $19 to $180 billion. Today, 75% of Fortune 100 companies have an internal venture capital arm, like a startup accelerator.
With 2020's volatile and uncertain economic struggles, corporate teams need to look into innovation now more than ever. Studies showing larger companies that invested in innovation during the 2001 and 2008 economic recessions gained competitive advantages in the longer run. Now there are specific organizations like accelerators aimed to connect them to entrepreneurs more effectively.
In this article, we’ll explore the advantages that corporate accelerators and partnerships offer to big companies.
Callout: Since 2010, MassChallenge has graduated more than 1,500 alumni startups, 80% of which are still active. Learn more about our partner program here.
What Does It Mean to Partner With a Startup Accelerator?
Startup accelerators offer entrepreneurs a springboard to success. When partnering with an accelerator, engagements can take many forms, including:
- Advisory roles
- Investment opportunities
New ventures get access to the resources, expertise, and industry connections they need to get their concept off the ground. Best of all, it often comes at zero cost, and they don’t need to give up any equity.
Here are a few examples of corporate investments in accelerator programs:
- Microsoft teamed up with TechStars for a three-month incubator mentoring companies that design products for Microsoft Kinect and Windows Azure. In the end, the startups had the chance to pitch venture capitalists and angel investors.
- Pepsi runs a digital incubator - PepsiCo10 - to fund and support ten tech startups in mobile, retail, entertainment, and sustainability. Top companies are matched with PepsiCo brands for mentoring and pilot campaigns.
- Johnson & Johnson has four innovation centers -- in San Francisco, Boston, London, and Shanghai -- to fund early-stage life-science companies. They also have a biotech incubator in San Diego, which is home to 18 startup companies.
- MassChallenge helped SwissRe when they wanted to explore new opportunities and technology in the insurance industry. By partnering with MassChallenge affiliate, Resonance, Swiss Re developed a better understanding of its own supply chain and was able to enhance its customer service and user experience.
The chart below shows corporate investing activity in startups, segmented by stage, for every year from 2007 - 2018.
As you can see, corporate investment has grown a lot in the past decade, which is excellent news for new ventures. However, it's essential to realize that the value isn't exclusive to startups.
7 Ways Investing in Startup Accelerators Can Benefit Corporations in 2020
So, what’s in it for the corporations?
Many big companies overlook early-stage startups, as they have yet to prove their worth. As a result, companies who take a gamble can quickly gain a competitive advantage.
And that’s not all.
Here are seven ways that corporations benefit from investing in startup accelerator programs:
#1: Build an agile reputation
Agility is paramount in modern business. If your company isn't ready to react to rapid changes in technology, market competition, or consumer interests, it will struggle to stay afloat.
The growing consensus is that it all boils down to give brands a simple choice:
Innovate or die.
While the right choice may be obvious, the way forward isn't always so clear. How a company drives innovation depends on its resources, goals, and company structure:
Historically, corporates are seen as slow and clunky, and often considered slightly out of touch with the mainstream. Big names may think they are invincible, but this is the age of digital disruption - nobody is safe.
Major brands like Kodak, Xerox, and Blockbuster once dominated their respective industries. However, despite their best efforts, each met their demise because they weren't sufficiently attuned to developments in the digital landscape.
With an accelerator, corporations can work with agile startups at different growth stages, learning from them to adapt their own strategies and stay ahead of the curve. By embracing new innovative practices and technologies, you can establish a reputation as a “game-changer”, ultimately securing your company's future.
#2: Gain insight into emerging markets
Sometimes, big corporations get tunnel-vision, focusing so much on running the business that they stop thinking outside the box. By comparison, startups usually comprise a diverse team of talented individuals with different backgrounds. This makeup breeds unique insights and ingenuity.
When startups team up with global corporate partners, they have a wealth of new opportunities that will help them grow.
But what do the corporations get?
If you get hung up on how to value a startup with no revenue, it's possible to miss out on excellent investment opportunities. Instead, think outside the box to see what else is on offer.
In return for providing their powerful resources and distribution agreements, large corporations are exposed to next-gen technologies and methodologies. Furthermore, they gain access and valuable insight into emerging market trends, which gives them the chance to forge relationships with promising startups at earlier stages.
#3: Reap large gains from early investment
Whenever corporations open their wallets to startups, they’ll be keen to know about the potential return on investment (ROI).
According to the Thomson Reuters Venture Capital Research Index, overall venture capital investment has generated a steady return of around 20% since 1996. That stacks up pretty well compared to the somewhat paltry ROI for public equities and bonds - 7.5% and 5.9% respectively.
Of course, a startup investment is a risky business, particularly when the companies are still in their infancy. That being said, many early-stage startups don't need a lot of capital. For a large corporation, making a small investment in a startup that can demonstrate high-growth potential is an attractive proposition.
The real challenge is identifying which ventures are worth backing. Sometimes, this requires a degree of flexibility for corporations, as they may need to overcome ingrained beliefs and practices.
MassChallenge and BCG conducted a study of over 350 startups, which revealed that businesses founded by women tend to make better investments. Women-owned companies yielded over double the ROI than those founded by men.
#4: Establish an integral voice
Typically, investors in startups and small companies play a more significant part in the company than investors in established organizations. In the startup scene, it's quite common for investors to lend their expertise in an advisory role.
By getting in on the ground floor, corporate investors can lay claim to a significant portion of voting shares, and exercise influence over crucial decision-making. Many startups will gladly welcome experienced corporate investors into their management team. After all, the new company doesn't just need money - it also needs mentorship and industry knowledge to guide it to success.
Also, investors with a personal brand that aligns with a company’s mission may help drive it to greater success. One such example is the female-led email newsletter, theSkimm. When raising funds to grow its female millennial brand, it received backing by female entrepreneurs - Tyra Banks and Shonda Rhimes. Not only was this a financial injection, but it proved to be a PR boon.
Through accelerator programs like MassChallenge, corporate sponsors have a chance to offer startups what they need. If they partner with new ventures at an early-stage, investors can establish an authoritative position that gives them more control over their financial investment.
#5: Diversify your investment portfolio
Investopedia defines diversification as “a risk management strategy that mixes a wide variety of investments within a portfolio.”
The theory is that an investment portfolio with a combination of different asset types will ultimately yield a higher ROI than a portfolio with a narrow focus on one industry.
As all stocks aren’t tied to one industry, fluctuations in the market are less likely to impact the entire portfolio.
Source: Pacific Life
Put simply: don’t put all your eggs in one basket.
By using accelerators to construct an eclectic investment portfolio of budding ventures in several industries, corporations can enjoy a diversification premium that offers higher rewards and less risk.
The real challenge is figuring out which companies to back. This is the startup age, with U.S. startups alone generating an incredible $30.8 billion in the first quarter of 2019.
#6: Access a vetted pool of investment opportunities
While most businesses understand innovation is essential for future growth, as many as 54% of company executives have difficulty aligning their innovation strategy with current corporate practices. Quite often, corporations simply don't have the time to dedicate to researching and experimenting with innovation properly.
And so, investing in startups makes a lot of sense. In doing so, corporates open their doors to a wider talent pool. An accelerator program presents the corporation with opportunities for learning and recruitment.
Moreover, it also gives them unbridled access to a vetted pool of emerging startup companies that are looking for investment.
As they review startups for their accelerator, corporations can ramp up their ideation efforts and will become adept at identifying promising investment opportunities in the market.
#7: Create jobs and develop talent
Bureau of Labor Statistics shows that a total of 415,226 startups were created in 2017, which lead to the creation of 1.7 million new jobs. New companies are the primary source of new jobs. Therefore, it's not surprising to see how corporate accelerator programs have flourished.
Source: U.S. Bureau of Labor Statistics
The Tony Elumelu Foundation Entrepreneurship Program is a fantastic example of how corporations can use accelerators to tackle unemployment and nurture talent. TEF is the largest African philanthropic initiative devoted to entrepreneurship. Since its inception in 2010, this $100 million commitment has set out to empower African entrepreneurs, and create a million jobs, with the goal of adding $10 billion in revenues to Africa’s economy.
Supporting startup companies doesn't just help corporations establish a stronger investment portfolio, but it also instigates massive growth in job creation and talent development. The positive impact of this can benefit the corporation, the market, and the wider society.
Startup Accelerators Give Corporations a New Lease of Life
Back in 1960, the average lifespan of a company on the S&P 500 Index was almost 60 years. With the modern technology culture, companies listed on the stock exchange now have an average age below 20 years old.
Older business models are failing, and with it, huge corporate names that once dominated their industries are fading into obscurity. As the shelf life of companies continues to shrink, there is a pressing need for large corporations to take action if they are to future-proof their organization.
However, it's vital to realize that it can't be a one-way street. Corporations can't simply throw money at the problems in their own company and hope to plug the holes. Instead, they must give back to the market, and at the same time, make their company more valuable to shareholders.
Corporations can partner with accelerators to access emerging talent pools, learn about innovative new technologies and practices, and diversify their existing investment portfolio.
Join the MassChallenge Partner Program
The MassChallenge Partner program involves a rigorous application process, and a critical judging phase to ensure all startups are viable investments that indicate high-growth potential.
This phenomenal accelerator program offers corporate partners immediate access to our startups, facilitating easy, personal connections with promising, early-stage companies.
Since 2010, MassChallenge has partnered with 150+ corporations, including some of the world’s most recognizable brands, such as General Electric, We Work, and Southwest Airlines.
Join the MassChallenge program today to give your corporation the edge in the startup era.