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And a pleasure to be joined by Serguei Netessine, Wharton professor, to talk about corporate venturing, which is something that he knows quite a bit about.
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Sergei, this is an interesting concept. I guess, give us the backstory on what it is and how it potentially has an impact.
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Well, Dan, so if you go back, uh, 30, 40, even 20 years ago, I think big corporations and startups lived, uh, in pretty separate worlds, they, you know,
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didn't hire the same people, didn't go to the same conferences, didn't really overlap a lot, um, and they faced really different issues.
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Um, startups were hungry for, for capital. Um, and, um, corporations were hungry for ideas, but then fast forward to our
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times, it's kind of hard to imagine, uh, any big corporation to move forward with innovation without a startup's help.
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So if you look at open AI, uh, partnering with Microsoft or maybe Antropic partnering with Amazon, these are, uh, partnerships that are absolutely
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necessary to get AI, for example, in this case of the ground, because investments
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are so massive and the amount of innovations that you need is massive as well.
So that's why increasingly we see corporations and startups uniting
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and kind of helping each other. So, but obviously the venture component of it becomes very much important because
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of all of the money that is kind of tied up in these components, correct? Uh, yeah, absolutely.
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So, um, again, startups are hungry for cash and, uh, corporations have cash and have money to invest.
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And I think historically, uh, 20, 30 years ago, kind of the predominant way for corporations to partner with startups would be what is called
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corporate venture capital. So, uh, corporation would set up a venture fund and this venture fund
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would invest in startups. And, and that was okay. You know, that, that's a, uh, that's perfectly fine way to invest in
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innovation, but the problem is that is a, it requires a lot of money. So corporate venture capital fund is two, $300 million probably.
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And B, you don't see results of that investment for a long, long time. And it's mostly monetary benefits.
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So you don't necessarily learn that much from startups. You don't necessarily infuse your company with innovation right away, at least.
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Uh, the expectation is that these are the type of partnerships we're going to see more of as we move forward here in the next, uh, in the next several years
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because of, of the importance of AI. Uh, I would say so for sure. And I've done this kind of report, um, some 10 years ago, and then now we've
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done it again at Wharton with several colleagues and we see that, um, all kinds of practices around, um, corporate venturing are increasing.
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So, uh, we see some old practices, uh, we see corporate venture capital, of course, that doesn't go away.
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We see more and more accelerators and incubators launched by, uh, large companies, we see all kinds of business services that large companies offer to
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startups. Uh, often they create a common co-working workspace and run events with
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startups. But then what's interesting, we started seeing a couple of new practices.
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For example, one is venture building. When a corporation actually builds a venture internally, finds a problem to
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solve, identifies who can solve this problem, and then says, look, we're going to create a kind of a sandbox for you.
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You're not going to have to follow our rules or KPIs or whatever. So you kind of like a, a startup, but created by a corporation.
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So you don't need to worry about funding. For example, company will give it to you.
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Another very interesting practice is, uh, what we call venture clienting and venture clienting is when, um, corporation becomes a client for a startup.
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So startup becomes kind of a supplier for a big corporation. And these two practices, we have not seen them all that much, like 10 years ago,
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even, and they're really growing and they're really impactful. We think this is kind of shows you an, an evolving space of corporate venturing,
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taking new shapes and engaging more and more corporations and startups. With the component of the venture being one that is bringing companies together
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from different sides of the equation as we move forward here. Uh, yes, absolutely.
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Absolutely. And I think what is particularly interesting about this new practice is like venture clienting.
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They allow big company to innovate from day one. So imagine you want to, you want to bring a novel product or
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service to banking clients. And you're a big bank, you have a bunch of clients, uh, you can sign up
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immediately, start up as a supplier, connect startups through an API and offer this new product or service to your clients right away.
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And, um, and the benefit is of course the risk is somewhat reduced because, you know, if it doesn't go well, you just say, okay, we are not going to
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offer this product or service anymore. And you kind of disconnect from startup, remove the startup.
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And for a startup, believe it or not, investment is not as valuable as having a large corporation as a client, because that gives a real proof
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that startups innovation works. A startup can take, uh, this, uh, this kind of agreement that they have
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with a big company and bring it to other big companies, sign them up as clients and that gives them, you know, a revenue stream for many, many years
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to come, not just the single investments that they would get before. And from the relationship perspective, being the client does not concern
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certain entities more so than being a partner, they are okay with this? Uh, I think so.
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Yeah.
So for example, as you can imagine, uh, for banks, banks are very heavily regulated and there are all kinds of data protections and so on.
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So it's very hard for banks to innovate. It's very hard for them to, you know, create new things internally.
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And with a startup as a kind of, you know, provider of a new product or service, you can always say like, look, we are trying things, if it doesn't
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go well, we kind of, we can make it go away relatively quickly without spending really any money on innovation.
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But if it works, then you have all kinds of options. Now we can think about investing in startup or acquiring a startup or
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just letting startup grow and continue to be a client for this startup. Where do you expect then this concept and this process to take us moving
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forward in the, in the years ahead? Um, we expect it to, um, to penetrate more and more industries.
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So what we are seeing right now, for example, um, uh, adoption of various practices, uh, of collaboration between startups and big companies, it's very
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uneven, um, for, uh, venture clienting, it's actually, um, uh, relatively big already, about 40% of the world's largest companies are already adopting
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venture clienting, uh, but for example, in transportation industry, we see that about 43% of big fortune 500 companies are adopting venture clienting.
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But in construction, it's only 16%. So, uh, there is big, big, big disparity. So we think it's just going to be becoming bigger and bigger across the
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entire spectrum of various industries. Will this though, at some point probably draw at least some questioning from the
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regulatory side about, you know, this process being maybe slightly different than what the traditional process is.
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Uh, certainly, certainly. And I think, uh, there's always scalability link risk.
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So, you know, a startup solution may work in the pilot, but then you scale it to
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many people and, and it fails. And I'm sure there's going to be some disasters that you're going to learn
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about, uh, there are issues on IP and confidentiality, uh, effective integration
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is difficult and there is cultural mismatch. So, you know, dealing with a big corporation approval, hierarchies,
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process, compliance, and so on. So I think if, if corporation kind of ensures that the startups that they work
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with is compliant and there is a procurement disciplines and there is a way to mitigate, uh, many of those risks.
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What ends up being the, the, the greatest benefit for startups in general by being a part of this process?
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Startups are looking to demonstrate product market fit to the investors. That's why they get investments.
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If they demonstrate that whatever they're creating has market demand, that's kind
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of a, um, a big part of the success of the startup, and there is no better way to demonstrate this, uh, when you can say, Hey, a big company signed up for my
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product or service, they're using it. I'm getting paid for it. You know, that's the proof of the concept.
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Then you can take this to investors and raise more money and then continue raising money.
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So, um, I think it's, uh, it's, it's kind of a, in many ways, a win-win for both a startup and, and a big company.
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Uh, so I expect this kind of practice to continue growing. How is this impacting the work you're doing at Wharton and your colleagues
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in terms of teaching this? Um, well, um, Wharton sometimes, believe it or not, becomes a, uh,
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customer for startups. So we constantly, uh, we constantly revisit all kinds of solutions that
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startups provide. We look around, we test them out and we adopt some of them, be it a research
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tool or sometimes it's a teaching tool. So we are also a pretty big corporation.
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You know, we, we are, we are a big company for them, slow company, kind of slow moving company.
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But that for us is also one of the easiest ways to innovate by partnering with startups.
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Sergei, great to talk to you again. Thanks very much for your time. All the best.
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Yeah.
Thank you, Dan, for having me. Always a great pleasure. Thank you. Wharton Professor Sergei Netasin.