CVC-Startups partnerships: A “deal with the devil”?

One of the highlights at the recent CB Insights Future of Fintech conference, was a fireside chat between Nathaniel Popper, a business journalist for the New York Times & author of Digital Gold, and Fred Wilson, the prominent venture capitalist and co-founder of Union Square Ventures (USV). During the conversation, Wilson stated, “startups that go to corporates are those that can’t get a deal elsewhere”. He added that corporates should buy companies and not invest in them and that startups that get corporate VC money are doing business with the devil.

USV has had a billion dollar exit every year for 5 straight years (CB Insights, 2015) and is responsible for funding companies such as Zynga, Tumblr, Etsy, FeedBurner, Twitter, Indeed, and Twilio. It can thus be safely said that they have had spectacular returns, are highly respected in the space, and have a knack for detecting potential. It is also for this reason that when Fred Wilson talks, people listen.

The fireside chat between Popper and Wilson was with regards to bitcoin and blockchain. Over the past 18 months, as banks and incumbent financial institutions have educated themselves of the potential of the technology, a growing number of accelerators, incubators, and hackathon-esque events have led to the build of partnerships between corporates and startups. These partnerships vary according to the goals and ambitions of both counter-parties, but there is a general trend. Incumbents now realize that there are economies of scale to be achieved with the use of this technology and increasing pressure regarding transparency is forcing them to look at new technological solutions that can appease regulators and clients, whilst updating their IT systems at a low cost. The blockchain ticks the boxes on a number of these demands. The growth of the R3 partnership is a testament that this attitude is shared by most large financial institutions.

For the startups creating value in this space, the ideology is along the same lines but in a different context. The ability to access a large client base, get access to funds (and build a credible brand image to access successive rounds of funding) and the opportunity to leverage the other resources of established firms (legal, working space, mentors, etc.…) helps them achieve scale and penetrate markets faster. In a lot of ways, this seems like a Win-Win relationship and is becoming a technology agnostic trend across sectors.

Symbiotic or Predatory 

As per a recent report by INSEAD and 500 Startups, 262 companies out of the 500 world’s biggest public companies (based on Forbes Global 2000 ranking) are working with startups in one way or another. That’s 52.4%. Of the 7 different channels used to engage with startups (Technical Support, Business Support, Startup Programs, Co-working space, Accelerators & Incubators, Startup Competitions and Corporate Venture Capital), CVC partnerships are the most popular option (62.6%). France (not the USA!) has the highest percentage of top corporations engaging startups: 23 out of 25 work with startups.

Thus, the partnerships seem largely symbiotic in most respects.  Firms partnering with startups are able to fill the innovation gap faster – rather than train personnel or get new hires, partnering with a startup helps them access new technology and adapt it to their business model quickly. Apart from the influx of technology, there is also the transference of ‘soft’ attributes such a trade of culture (via co-working spaces or exchange programs) and an innovative brand image. Startups are able to get much-needed PR recognition and access to harder tangibles such as distribution channels, clientele, suppliers and, most importantly, funding. For those startups that are about to become early-stage companies, this also offers them the opportunity to gain an understanding of processes and systems, which they can refer to as they scale. (Processes do create efficiencies. The trick with processes is not to set in place a routine infused habit that makes employees complacent and dependent on them).

As a result, Wilson’s remarks 35 minutes into the conversation, seem divergent and scathing to the trend. But do they represent something more noteworthy than just a dismissive scorn?

CVC Partnerships – A buffer for adapting to the future work landscape

In one way, what this difference in opinion represents is an indication about how business and work will be defined in the future. Today, successful long-term venture capitalists can make remarks that berate CVC -startup partnership’s, as they have participated and witnessed the birth of a new conception of work. Having got into the Venture Capital game in the late 1990’s, investors such as Wilson have seen the definition of work change from getting an education and landing a job, to creating a startup and breaking the norm. In a certain way, they pioneered this model and brought about a counter-culture movement with respect to the concept of earning a living.

This change has had a profound impact on mindsets. Increasingly, graduates from top business schools prefer to go join or found a startup rather than get a job at an investment bank. In light of the rise of startups like Ayasdi, Kensho, and Wealthfront, this might be the most sensible move as soon jobs at these places may no longer exist. The accelerating pace of technological development, the growing disgust at a routine job and the temptation of making an invention that will change the way people live is too hard to ignore. As a front seat spectator to this cultural revolution, it is completely sensible for investors like Wilson to state that forging a deal with a corporation is contrary to the defining principles of this new era…. And to a large extent, I would agree with him. But what needs to be taken into consideration is the scale of the shift.

As creating or joining startups becomes a defining factor of our generation, unfortunately, it is accompanied with a stark realization. A majority of the current and future workforce may want to enter this realm, but they are unable to as the education that they have received for most of their lives is one that is tailored to conformity and working in a large institution. As stated by Sugata Mitra in his 2013 prize-winning Ted Talk,

“…present day schooling [comes from] 300 years ago… The Victorians [ran the world] by making a global computer made up of people…In order to have this machine running, they made another machine to make those people…the school. The schools would produce the people who would then become part of the Bureaucratic Administrative Machine…They [had to] be identical to each other…They [had to] be so identical that you could pick one up from New Zealand and ship them to Canada and they would be instantly functional. They engineered a system that was so robust, that it is still with us today…continuously producing identical people for a machine that no longer exists”.

As someone who works with startups and large firms on a daily basis, this galvanizing truth is an existential reality we witness periodically. Frequently we have the privilege of meeting brilliant, innovative and creative individuals who are dissuaded by the corporate culture, yet have been trained to function exclusively in that domain. As a result, they are apprehensive and cautionary when thinking about creating a startup. It is not a question of skills. It is a question of a mindset that is emblematic of an out-dated educational model.

It is in these cases that the startup – corporate partnerships make sense. By providing girders to help an entrepreneur create a business, they provide the catalyst that allows for the explosion of creativity and discovery of self-worth, whilst providing a frame of reference that is attuned to the scaffolding of the past. Without this lattice, those with brilliant ideas but with self-doubt about their experience may wallow in the bureaucratic administrative machine under the guise of ‘job security’. Certainly, this is not a solution to the problem of adapting mindsets to the future of work. But it does function as a household antidote to the current malaise.

Breaking Corporate Shackles

The information revolution is reversing the industrial revolution. While the industrial age allowed for people to team up in mechanistic organizational hierarchies to create factories and companies, the information revolution is in the process of breaking down communication barriers and creating technologies that reduce intermediaries to create smaller and smaller teams (this is often looked at as technological unemployment).

As we increasingly adapt and evolve to the digital age, the profusion of startups and independent workers will continue to scale. On a long enough time-scale (say 50 years from now), it is even plausible to speculate that almost everyone will work for themselves. This can be either in the form of small teams or as independents and to a large extent this is already happening as platform economies (Amazon Turk, WikiStrat, The DAO, etc. …), continue to grow. When that day arrives, partnering with a corporation (if they still exist in the current form), will be a curious concept.

Eventually, we could get to the point that every morning a person wakes up and receives a notification about the various jobs and contracts that are tailored to their skills and specialties. Based on our social connections and the compensation that is offered we would select the ones that we like, sign a contract, perform our tasks and get paid. We would also get ranked and rated on it, on the basis of which we receive the next offer.  This can be extended to working individually or in the form of a startup.

In this future socially connected world, reputation and status would be intrinsic to prosperity and happiness. The future of work will be based on individual brands and if this seems too far out to envisage, it is something that is already happening – today academics and journalist build individual brands via websites and on social media outlets like Twitter. People will be recognized as independent brands and we need an educational and training system that is capable of adapting to this paradigm.

The change is already underway and the culture of startups will bring us to this point preferably sooner rather than later. What VC’s like Wilson need to consider is that for a large part of the population, the CVC-Startup partnership is allowing a generation to adapt to this cultural change rather than being given a rude awakening. As we remove the blinders and rethink our ways of learning and creating prosperity, we will need help from any source that is available and this includes CVC-led alliances.

Corporates might be reaping the benefits of entrepreneurship via CVC partnerships today. But in the long run, they might want to rethink this strategy over a stiff drink.

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Crocodile Image Source: Right -Google images, ‘Crocodile and the Plover Bird’. Left – Frog and Crocodile, National geographic.

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