Duet Partners
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Weekly Briefing Note for Founders 21/8/23

21st August 2023

This week on the startup to scaleup journey:

  • Corporates remain a vital path for venture investment
  • Coaching doesn't come naturally

Corporates remain a vital path for venture investment

Recent research from McKinsey reveals that more than three-quarters of Fortune 100 companies are active in the venture capital (VC) space. Half have a VC arm (CVC) set up as a subsidiary. As a result, large companies are now involved in about a third of all venture deals. Even though the pace has slowed in 2023 as corporates strive for greater capital efficiency, the strategic imperative has become deep-rooted. In turn, this can offer startups a vital source of patient capital, often alongside a commercial partnership. But founders have discovered that navigating this type of relationship is very different from mainstream VC. Startups that understand the true motivations of corporates drive significantly better outcomes than those who see them as just another source of capital. Equally, corporates must align their thinking with startups to ensure their own ROI. Analysis of data from more than 2,000 companies showed that not all CVCs are equal: only 14 percent of corporates that invest in young companies have adopted the practices necessary to sustainably generate value from such relationships. Success is so elusive that a quarter of those that invested in 2015 were gone from the venture scene just three years later. McKinsey also found that more than 70 percent of CVC activity is sporadic or opportunistic, an approach that correlates with poor ROI. 

When done well, CVC investments can produce elevated outcomes for both parties. Top-tier corporate innovators - which tend to be twice as active as their industry peers - have been able to capture 2-3x the economic profit from these deals as their industry competitors. But the big motivation is the potential for long-term strategic benefits: 75% are motivated by the desire to gain market insights and cutting-edge ideas, 55% by access to new products, 45% by the opportunity to build important capabilities and participate in a broader ecosystem, and 25% by the chance to secure strategic options. As for start-ups, finding potential new clients was mentioned by almost all respondents as a key draw of CVC, with 40% also seeking access to distribution channels and 25% looking for help with branding. Those that manage to strike successful partnerships enjoy significant benefits. Startups that receive CVC investment within their first three financing rounds have a higher chance - between 21% and 64% - of making a successful exit than those relying solely on traditional VC. What’s more, the earlier in their development they receive that corporate support, the higher their chances of going public or securing a merger or buyout. The mantra with corporate investment is to start the conversion early, especially if some form of commercial collaboration is also involved. This will be a true multi-level selling task and will always take (a lot) longer than expected.

Seeking vision alignment at the outset is critical as both parties will naturally be driven by very different goals in their respective businesses. Startups want to grow as fast as possible and are ready to adjust their strategies quickly, often pivoting as they learn more during the journey to product/market fit. They see corporates as channels to customers, but they want to protect their technology or other competitive advantages. Corporates, on the other hand, seek access to new solutions but want to be able to steer the strategic direction of their investments, prevent cannibalisation of legacy businesses (often a very misguided endeavour), and preserve their reputation with customers. Corporates that are less au fait with the venture model can also behave with insensitivity towards other investors, whose ultimate aim is to seek returns via an exit. If they are allowed to invest under unreasonably protectionist terms (e.g. right of first refusal in a sale of the business), this can dissuade other financial investors from stepping forward. But with an aligned strategy and a shared roadmap for execution and scale, a joint definition of success can be developed. Key to this is the ability of the corporation to enthusiastically embrace the power of 'disruption', which often does not align with corporate culture. The alternative, one CVC executive noted, is to “be disrupted by someone else.”

Coaching doesn't come naturally

In the early days of the startup, CEO/Founders face a constant stream of issues that need decisive action. They must exert high control across all strategic and operational matters. Their hands are on every lever during the fast and uncertain journey towards product/market fit. But as the business transitions to early growth and the team begins to build, delegation becomes essential. As this happens, effective founders begin to shift into the role of coach. Coaching is aimed at enhancing team selection and improving the learning ability and performance of team members. It involves providing feedback, but it also uses other techniques such as motivation, effective questioning, and consciously matching the coach’s management style to each coachee’s readiness to undertake a particular task. This is a founder skill that becomes vital to unleashing the team's full potential, enabling each member to become the best version of themselves. It seems obvious that we coach to primarily help others, but the payoff cuts both ways. Founders that have a greater level of consciousness about coaching say that they create more time for themselves, hone stronger interpersonal skills, build more resilient organisations, and develop more committed followings. If you help others, they tend to help you. And if you aspire to be a leader, it’s worth remembering that every leader needs a following. So how do founders become better exponents of this crucial skill?

A great primer on this topic, often cited by founders and other business leaders, is 'The Tao of Coaching', by Max Landsberg. This short, accessible book provides an excellent overview of the coaching process and describes, through the use of simple frameworks, a range of powerful coaching tools and habits. For founders looking to instil a culture of an open, learning environment, this is a great foundation on which to build. One of the reasons why founders often find the transition from the early control-centric model to a coaching model so difficult, is that it requires a fundamental shift from a directive (telling) to a non-directive (asking) approach. The tipping point is the realisation that a well-formed question can be significantly more powerful than a suggestion (or an instruction). There is some deep psychology at play here. As Landsberg reveals: "Coaching is usually employed when the coachee would perform better by doing something in a way that differs from their habitual way, or requires seeing something in a new light. Yet, when confronted with a new way of doing something (even from a suggestion that is well-intentioned), the brain reacts adversely. Specifically, a region called the anterior cingulate cortex starts to register a conflict versus the brain’s existing schemas, and the amygdala sounds an alarm to resist. By asking an excellent question, the coachee’s alarm system is to some extent bypassed and his or her brain becomes engaged in a process of exploration rather than of defence."

Coaching is a skill that can be developed. We all have the basic skills required but as so many aspects are counterintuitive, they don't always come naturally. For example, the temptation to tell versus ask, to judge rather than guide, or not to first understand a coachee’s readiness (skill and will) to undertake a task and being ready to adapt your coaching style to fit. CEO/Founders that seek coaching to help unlock their own potential often find that they absorb coaching techniques that they themselves can use. They become the role model. There is then a trickle-down effect that starts at the top and permeates throughout the organisation. Under the CEO's leadership, coaching then becomes part of the learning culture at all levels. The impact is to encourage a greater sense of self-awareness and empower team members to seek the guidance of others when support is needed. This could come from within, or in the case of the CEO this will often come from outside the organisation. One of the best kept secrets of many high-performance CEOs is their ability to build a 'coaching support network'. Some of this will be formal, via an executive coach (as we discussed in our earlier article), and some will be informal. They use this trusted network to help problem-solve and create effective pathways to accomplish specific tasks. By having a greater awareness of coaching we can all benefit, both as coaches and coachees.

Happy reading!

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