Despite the best efforts of entrepreneurs, investors and venture capitalists, research has shown that 75% of startups and 50% of acquisitions end in failure. With 2015 showing approximately $10bn of corporate venturing activity in the first quarter – representing nearly a third of total venture activity – plus merger and acquisition (M&A) events rising by 47% in 2014 , it seems that deep due diligence could be successfully replaced by a coin toss for investment or acquisition decisions. There is clearly a need for a different approach to meet corporates’ insatiable demand for innovation, and this has spawned the creation of new initiatives, such as that delivered by Frost Data Capital – called intentional M&A.
Frost Data Capital specialises in launching startups to solve specific analytic and big data problems identified jointly with corporate partners. It believes that while corporate venturing, development and internal research and development address certain needs, they have frequently fallen short in providing predictable, scalable outcomes. Frost’s new approach to venture-corporate partnerships is centred on the concept of tightly-coupled relationships with a select group of Fortune 500 firms. Frost will ideate, launch and grow startup businesses to meet future gaps in strategic partners’ roadmaps. The firm concentrates exclusively on big data and analytics, featuring strongly in the internet-of-things market, and providing a tightly woven ecosystem. The end goal of this approach is to create a series of startups that are a natural fit for acquisition by partners. It is called intentional M&A, since the potential acquirer has been involved in the entire lifecycle of the company, rather than scouring the market for technology to fill a strategic vacancy.
George Ugras, a partner at Frost Data Capital, spent 15 years in venture capital and has been on the boards of numerous startups. He says: “The venture model relies on a blow-out success in each fund to provide a good return, while at Frost our model looks for more predictable outcomes at a lower sale-price to our partners and network. For this to work we need fewer write-offs and have to be very capital efficient.”
That sounds like an admirable goal, but how do you achieve that? “Essentially, it comes down to a few factors. The top three are our partnerships, lean startup method and singular focus. The first aspect though, is generating the right ideas. We do this by ensuring our strategic partnerships are with category-owning companies. These partners actively seek disruptive products to fill portfolio gaps, and experience has shown them that internal development efforts are too often inefficient and stifled by culture. We work with their product and customer-facing teams to develop new concepts, and rapidly turn them into companies. These relationships also address the main failure mechanisms for startups – market accessibility, funding and exit options. Our partners validate the need, provide market access, and are natural acquirers, as well as contributing to the overall fund.”
Last year, Frost announced a partnership with General Electric to launch up to 30 companies over three years. One recent example of this partnership was the joint funding of PingThings, which gleans intelligence from tremendous volumes of high fidelity, high volume electric utility data, and combines this with additional information sources and unique algorithms to deliver pinpoint visibility into a wide range of critical asset and environmental scenarios that would previously have required millions of dollars of dedicated sensors and field surveys. Bill Ruh, vice-president of GE Software noted, “PingThings is a great example of the type of disruptive software that industries need to scale up the industrial internet.”
Ugras continued: “Another key element in our model is goal alignment. Everyone participates in the outcome of each company. That includes our corporate partners, investors, C-level executives of our companies, and our incubation team.” One of the biggest lessons learnt has been in recruiting. “We have changed the hiring profile over time. Early on, we chose technical leaders, but now we tend to hire industry insiders with go-to-market expertise. The increased visibility generated by our partnerships has made it easier to attract experienced executives.”
Ugras explained how the process differed from traditional incubators. “The way in which we validate hypotheses, build the initial product, hire the team, create the investor and sales narrative, and ultimately take the product to market is all engineered around efficiency and effectiveness. We tune these processes and constantly revisit them to ensure we remain world class in our thinking, but we do not rely exclusively on process. All of our entrepreneurial executives remain very hands-on, with daily interactions with the CEOs.
“So far we have formed more than 25 companies working closely with our partners, and many have already raised follow-on funding. There are clear signs that we are meeting the corporate innovation mandate through the commercial traction we are seeing. There is always going to be a need for corporate venture and development, though. We believe intentional M&A is a new product that fits alongside existing approaches and enables large companies to construct, develop and acquire innovation in a more predictable and scalable way.”