Corporate Development and External Innovation Through M&A and Corporate Venturing – Part 1: ChallengesJune 6, 2019
Corporate Startup Engagement – A Summary of Current PublicationsJuly 2, 2019
In our previous article, we discussed the challenges of corporate development in generating external innovations through M&A and corporate venturing activities. These can be summarized in three main challenges, namely too little and too slow added value and the lack of scalability in the implementation of innovations. From these challenges, the following critical success factors can be derived for a successful implementation of innovation measures through M&A and corporate venturing.
Types of Innovations
Innovations offer strategic competitive advantages for companies. However, they only make sense if they offer an added value, such as an increase in efficiency or significant cost savings. Innovations can be associated with monetary or reputational risks as well as fears and reservations. Classifying innovation goals helps to better assess the risks that can arise at the product’s market launch.
We distinguish between the following types of innovations:
This type of innovations represent improvements to an existing product/service or process. The risks associated with this type are mostly known and predictable. Traditional risk management techniques can be used. Nevertheless, new wishes may evolve from changing customer needs, which require agility and shorter development cycles.
This type of innovation reacts to changes in customer behavior and is usually based on the creation of new technologies. Traditional risk management procedures can still be applied, but these innovations require a higher degree of agility and shorter development cycles.
Disruptions change entire markets and create new business fields and business models. This type of innovation hides the biggest risks that have to be faced in order to not threaten the core business.
The main goal of each innovation is the achievement of the satisfaction of customer needs. As a result, it can be assumed that in a market environment with different players, competitors will develop as well. The longer the product development process takes, the bigger the risk is that the intended benefits of the innovation will decrease, disappear, or even have already been exploited by another market player.
In order to avoid this situation, it is crucial to define the innovation goals, the cooperation guidelines with partners and parameters such as fault tolerance and risk indicators in advance.
Deal Flow Sources
Deal Flow sources are fundamental for the development of the company. They support the discovery of the right innovations, partners and concepts to cover the M&A and CV requirements. Above all, they help the company to track market trends and to establish themselves in networks.
The following deal flow sources can be mentioned in this context:
Partner with organizations and universities to innovate together. Partnerships can be, for example, accelerator programs or venture capital fonds.
These are conducted primarily by employees of the company and include activities such as intrapreneurship programs, hackathons, technology offices and jury activities or employee memberships in relevant organizations and associations.
External activities are usually carried out by third parties. These include the support by external scouts, who are very well connected, or by consulting firms. Another external activity is the integration of databases, which enables a structured search for innovations.
Most companies are not limited to one activity, they use the benefits of multiple sources. However, to secure the success of all mentioned activities, they should be integrated into the company’s overall concept.
Engagement with Business Devisions
A sustainable integration of the various business divisions, like business units or subsidiaries, is a critical success factor to set the right requirements towards the innovations. This helps to reduce common problems such as silo thinking or the “Not Invented Here” syndrome. Any type of external innovation generation should therefore be integrated into the business process.
In practice, the following types of integration of the various business areas and functions often occur:
The various stakeholders are aware of the fact that there are different activities to generate innovation. Requirements and information are shared not systematically or only when needed.
People and divisions cooperate across the company, the information is systematically shared and the tasks are coordinated.
The business divisions take actively part in the startup process. They have common goals and ideally share resources.
Early involvement of the business units in the corporate development process creates trust and the basis for a participatory change process. The type of involvement may vary due to the different parameters of M&A and corporate venture activities.
Integration of Corporate Functions
In addition to the engagement of the business divisions, the integration of corporate functions also represents an important and success-critical aspect for the various innovation activities. Corporate functions are key areas of the company like purchasing, finance, law, and so on. The type of cooperation between them determines the degree of integration of startups and innovations in the company.
The possible types of cooperation are as follows:
The participants receive information about the current state of affairs on a regular basis. The awareness of an M&A/CV process exists, but concrete activities are not initiated.
The stakeholders indicate the need of information and expect to be involved in the decision-making process. Goals are defined, but the cooperation is kept formal.
The participants are involved in the M&A/CV process and receive continuous feedback. Central services, such as support from the legal department, can be claimed by the participants.
In addition to the depth of integration, the various functions and usage habits result in an increasing need for information, which must be satisfied.
The aim of the M&A and CV activities is to increase the company’s value. While M&A deals often contribute synergies to ROI (return on investment) in the context of post-merger integration projects, the additional potential in startups is more in the area of soft skills, such as agility and customer orientation. In order to not destroy these values, the cooperation/relationship form should be established in advance. Integration measures should add value to both parties.
The relationship types can be summarized as follows:
The most simple form of possible integration measures is by implementing a defined and regular reporting from the startup to the company.
In addition to regular reportings, the startup is also supported through appropriate measures such as a facilitated market access or the use of the corporate’s services.
In this relationship type the corporate is seriously interested in learning from the startup.
In case of a failed startup relationship, the company not only risks to lose the money of the investment, but also gets a bad reputation in the well-connected startup scene.
In the corporate development area, there is a trend towards a stronger mix of internal and external activities to generate innovations. Accessing innovations by cooperating or investing in startups also seems to be gaining importance in Germany. Therefore, it will become more important to establish a coordinated approach to implement a standardized approach that allows a scalable and continuous transparent process. Thus, the activities are designed to create value, M&A and CV measures can promote cultural change in the company, and motivate employees through appreciation and participation.
Today, companies are more than ever asked to reinvent themselves and to secure and create strategic competitive advantages. M&A and corporate venture can make their contribution to corporate development in this sense.
Please find the whole article, which was published by the M&A Review here
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CEO aumentoo GmbH
Author, Business Angel and Growth Enthusiast
Harald Ostler is an entrepreneur, investor and author of various publications. After positions as Director R&D and Chief Pricing Officer, he has been very active as an IT Business Angel since 2013.
His motivation and main reason for his intensive engagement as CEO at aumentoo is based on the following sentence: We believe in evolutionary change through digitized corporate development for strategic competitive advantages.