Insights

Sia Partners UK Digital Series: How can mature operators benefit from digital disruption?

The opportunity presented by Corporate Venture Capital, Incubators and Accelerators

“Digital disruption is the change that occurs when new digital technologies and business models affect the value proposition of existing goods and services.”

TechTarget

Last year, I attended an event hosted by London Business School where speakers discussed the impact of disruptive technology in the Energy industry. While much of the discussion focused around different technologies and how they might affect the status quo, one speaker discussed how mature operators could use their position to limit the impact of disruptive technology.

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While this is the attitude of some operators, others across multiple sectors have been attempting to exploit the opportunity it presents by harnessing the creativity and dynamism of start-ups through various funding models including Corporate Venture Capital, Incubators and Accelerators. By investing in innovative technologies and developing an operating model that supports the rapid adoption of new ways of working, mature operators can experiment with evolutionary, and revolutionary offerings targeting both existing and new customers.

“Growth Matrix” – Ansoff (1957)

“Growth Matrix” – Ansoff (1957)

Incubators

An incubator assists early stage start-ups (pre-launch, pre-revenue) with the tasks of figuring out their market, their team, their value proposition and their early customers. Due to the number of organisations running incubators (governments, universities, corporates, private individuals etc.), a large range of business models and approaches exist. The idea of ‘incubating’ businesses is not new, and since the mid 2000’s hundreds have been set up worldwide. One example of how a mature operator can utilise the ‘incubation’ as a concept is ‘Kamet’, an InsurTech incubator founded by AXA in 2015.

Kamet operates as a hybrid between an incubator and accelerator utilising a 4-stage incubation process:

  • Ideation (new idea development)
  • Solidification (market testing)
  • Minimum Viable Product (prototyping & and refining)
  • Growth

Kamet develops multiple ideas that could disrupt any part of the insurance value chain, and takes a ‘Dragons Den’ style approach when progressing ideas through the incubation stages, ensuring only those with the most viable business cases progress. At Kamet, projects benefit from both the agility of the start-up model and AXA’s expertise, and are led by either entrepreneurs or AXA employees with the goal:

“to imagine disruptive projects and incubate start-ups linked to our insurance business, for the ultimate benefit of our clients in terms of protection and services.”

Henri De Castries, Chairman & CEO of AXA

Accelerators

Accelerators, such as ‘Y Combinator’ – the crucible that forged Dropbox, Airbnb, Twitch TV and many, many others – offer up a proving ground for more advanced start-ups. In return for equity, entrepreneurs receive a fixed term (usually 3-4 months) of advice, contacts, back office resources, legal counsel and potentially, that all important seed money. At the end of the term, most accelerators offer a ‘demo day’ where start-ups are presented to investors to pitch for further investment.

As a case for the success of accelerators, in 2008 Airbnb (the room / apartment rental website) was struggling. The website had no traction, the idea wasn’t clear and the founders Brian Chesky, Joe Gebbia and Nate Blecharczyk had no money. When they were accepted for their three-month term in Y Combinator, they received $20,000 in seed money in return for a 6% stake in the company. Airbnb recently raised more than a billion dollars in funding, and is now currently valued at approximately $31 billion.

Beyond the seed money, Paul Graham (the venture capitalist behind Y Combinator) provided training that pushed the founders in three specific directions that had an instant and distinct impact:

  • The founders took professional photographs of rental properties in New York (something the founders had avoided as it wasn’t ‘scalable’)
  • The name changed from “Airbedandbreakfast” to “Airbnb” (a significant improvement!)
  • Airbnb evolved from simply offering airbeds in spare rooms, to offering entire homes, apartments, castles, manors and boats etc.

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    Airbnb (cumulative) bookings – Source: Estimates, press releases and various news reports

This combination of seed money and advice was enough to generate the initial momentum required and bring Airbnb from near the point of closure, to a business ready to complete multiple rounds of fundraising and grow to over 3 million lodging listings across 65,000 cities with more than 100 million bookings taken by July 2016.

Corporate Venture Capital

Corporate Venture Capital (CVC) vehicles such as ‘Intel Capital’ involve companies directly investing corporate funds in external start-ups. While CVC can be used as an investment in the same manner as traditional venture capital (typically, CVC vehicles have produced an internal rate of return (IRR) between 10 and 30%), more strategic operators will aim to link their ventures with their strategic and operational objectives. As an example, Intel Capital invested in a tech start up called StealthMine that enables enterprise applications (e.g. your HR or Finance systems) to run on encrypted data, a key area for Intel to develop. With less of an emphasis on short-term financial gain, strategic operators like Intel can integrate themselves into projects, monitoring and nurturing the growth of the start-up with long-term objectives in mind.

Another example of a Corporate Venture Capital vehicle is that of Sia Partners own investment fund, ‘Studio’. Sia Partners plans to invest in companies to which we can bring significant added value. Studio, directly overseen by Sia Partners’ partnership and consisting of the group’s own funds, is planning on accompanying selected start-ups through their incubation and acceleration periods over the next three years.

How to utilise these funding models

For a mature operator to make digital disruption their ally, designing an operating model that includes elements of Corporate Venture Capital, Incubation and Acceleration will open a wide range of investment and growth opportunities. A well-designed model will provide both a controlled and protective environment for innovative ideas to grow and develop, and a platform for scalable ideas to evolve into stand-alone ventures, or to transition into the operator’s core operations.

While many articles and blogs have discussed what a successful venture capital division or accelerator looks like, little has been written about how best to tie these efforts into a corporate’s key activities. Rather than simply adding the words “Innovative” or “Disruptive” to their strategic vision, effective operators must ensure that whichever model is chosen, CVC, accelerator or incubator, that it is integrated with every aspect of their operating model.Sia-Partners-UK-Digital-Series-How-can-mature-operators-benefit-from-digital-disruption-Golden-Thread_800px

A company’s innovation funding model should be a key element of the ‘golden thread’ that links the company’s strategy and the organisational capabilities designed to allow the company to deliver value for its customers.

While the fundamentals of business are the same at any stage, from a start-up to an established player, what differs is the degree of flexibility required to operate. While an idea in the incubation phase needs a high degree of flexibility to be able to adapt and grow when presented with opportunities, as the idea grows it requires more structure from its operating model to transition into something truly sustainable.

In our experience, operating models consist of 6 key elements: Organisation, People, Process, Technology, Information and Governance. Designing an operating model that will nurture, accelerate and then assimilate innovation is a complex but necessary task if mature operators wish to compete. Whether it is ensuring that the various business units have clear visibility of developing projects, upskilling staff with the skills required to quickly transition proven ideas into core operations, or taking an agile approach to infrastructure and applications by scaling solutions to match growing needs, a company’s operating model should be consistent with its strategic goal of funding and deploying innovation.

So, instead of fearing the effects of digital disruption on your business, align your operating model to your strategic goals. Closely integrate your innovation funding model with your organisational capabilities, whether CVC, an accelerator or incubator, and set yourself up to be leading the wave of digitisation, rather than mitigating the damage.