You want your company to access the latest & greatest from emerging companies. But there are many distractions and disruptions as well. What's the best approach? Should you invest as well? Should you centralize or let various managers freelance?

1. Options for
Large
Companies
WORKING WITH
STARTUPS
Bill Youstra
@youstra

2. The WhySITUATION

3. Accelerating advances in technology
Explosion of platforms, form factors & APIs
Low capital requirements for startups
Easy access to capital
Corporate imperative to experiment (find a
better model) is driving M&A exits
VELOCITY AND IMPACT OF EMERGING
COMPANIES ARE GROWING FAST

4. Sourcing
Production
Packaging
Targeting
Distribution
Monetization
THIS EFFECTS ALL ASPECTS
OF THE ECO-SYSTEM

5. Strategic advantages for early adopters
Institutional awareness of experiments & best
practices
Enterprise value gain in core business or
equity share of partner
Distraction of engagement & dead-ends with
partner initiatives
CREATES BOTH OPPORTUNITIES & THREATS
FOR LARGE CO’S CORE BUSINESS

6. Difficult for managers to monitor & assess all
developments
Too many meeting requests & inbound calls
Decentralized – requests scattered across
company w/ little shared learning
All compounded by FOMO - fear of missing out
BUT: DISCOVERY IS INEFFICIENT

7. Partnerships w/ startups require a
disproportionate amount of time
Limits the number of simultaneous initiatives
Money left on the table: large companies
often overlook strategic value of their
contribution to the emerging company
IMPLEMENTATION IS INEFFICIENT TOO

8. You need a centralized solution…
…to proactively scan & score opportunities…
…and secure strategic & product benefits…
…with minimal distraction to operating teams.
CONCLUSION

9. and what
not to do…WHAT TO DO

10. Illuminate new products & services to
enhance current offerings
Inform strategic decision-making
Respond quickly to competitive threats
TOP GOAL: CORE ENTERPRISE VALUE

11. Trying to play VC (optimize for equity returns)
is a mistake
There is significant potential financial upside
However:
Emphasis is on “potential”
Financial, time & opportunity costs are high
WHAT ABOUT EQUITY RETURNS?

12.  VCs in aggregate do only a fair job picking winners
 VCs have historically underperformed as an asset
class, with a handful of exceptional huge outcomes
for a handful of partnerships making the difference
 Yet they enjoy superior deal flow, more capital, larger
diversification and are much more attractive to
entrepreneurs
 Can you really do better?
PICKING WINNERS IS HARD

13. There is a natural conflict between investment
returns and operational excellence
Example
GSI’s early investment in PowerReviews complicated
the product manager’s ability to later switch to
Bazaarvoice. Making the switch damaged the
enterprise value of PowerReviews and the reputation
of GSI as an attractive investor for startups.
FURTHER: OPERATIONAL CONFLICT

14.  2-3 people focus on innovations for core business
strategy and operations: “BD not VC”
 Manage centralized intake to screen prospective
early-stage partners
 Liaise proactively with startup community,
conferences & influencers
 Understand priorities of internal operating units
 Present “Innovation Seminars” and “Demo Days” of
concepts or startups to operating groups
 Establish boilerplate deal terms (warrants,
exclusivity)
SUGGESTED APPROACH:
INNOVATION GROUP

15. Conduct ad hoc research for execs & board
Deconstructing competitor’s innovations
Preliminary research on prospective initiatives
Serve as internal innovation lab, building
prototypes for department initiatives
OPTIONAL: INNOVATION GROUP COULD

16. If you still
want to
play VC…
APPENDIX

17. Corporate Investments
Incubator
Accelerator
OTHER OPTIONS (NOT RECOMMENDED)

18. Establish “Media Co Ventures” arm
Staff with 2-3 investing professionals with
domain expertise
Operate as in-house VC
Focus on Series A & B investments, reserving
50% of capital for follow-on
CORPORATE INVESTMENTS

19. Significant capital (incl 50% for follow-on)
7-10 year commitment
Can create great pay disparity
Not competitive with other capital sources
Can impede BD with attractive start-ups
Operational conflict
CORPORATE INVESTMENTS: DON’T DO IT

20. You can attract uniquely attractive deal-flow
Your business is willing to aggressively
embrace DNA transfers from startups
You have at least $200m available capital
over 7 years
You anticipate initiating a second $200m fund
in 4-5 years
You “firewall” the investing group (like Google
Ventures)
CORPORATE INVESTMENTS: PROCEED IF

21. Cultivate cohorts of seed-stage ventures that
are generated internally or externally
Offer cash, offices, overhead, support &
expertise for 3-6 month sessions
Usually $15-80K for 5-20% equity
Staff with 3-6 professionals and a network of
advisors
Stage “Demo Day” to introduce hatchlings to
operating groups and external investors
INCUBATOR

22.  Incubator structure limits the number of new ideas
you’ll see
 Generally too immature to integrate into core
business for 12+ months
 Very high risk; seed stage ventures have high
mortality rate and pivot rate; they may easily pivot
out of your interest range
 On average, the most successful startups are from
second-timers who eschew incubators
 This model underperforms for all but the very top
incubators (Y-Combinator)
INCUBATOR: DON’T DO IT

23. Don’t. It’s a seductive notion but ultimately
makes no sense.
INCUBATOR: PROCEED IF

24. Similar to incubator, but with later stage seed
ventures; all externally-generated
Ventures are beyond the napkin stage; have a
concept, prototype and have engaged with
customers
ACCELERATOR

25. Same downsides as incubators albeit with less
risk
ACCELERATOR: DON’T DO IT

26. You can sponsor a third-party accelerator with
terms that provide exclusive benefits
ACCELERATOR: PROCEED IF

27.  Corporate Incubator
 Founders are employees of co
 Focus is on developing new initiatives entrepreneurially
 No equity upside for founders
 Some enhanced payout & job with corporate adoption
 Side Investment Vehicle
 Separate fund held outside of operating company authority
 Takes referrals from company
 Possesses warrant transfer rights
 Takes ownership of pro-rata rights for preferred warrants
VARIATIONS

28. bill@youstra.com
@youstra
linkedin.com/in/youstra
FOR MORE INFO