“For an entrepreneur the investor is, in a way, the necessary evil. It doesn’t matter whether you are BMW or you’re Sequoia,” says Gregor Gimmy, chief executive at 27Pilots, a consultancy that helps big corporations set up and run venture client programmes. Investors do not really want to give up the equity in their companies and have conditions imposed on them by external financiers.
“But the client is king. Always.”
It is the client that startups want to please, the client that provides revenue, validation, and is, ultimately, the difference between success and failure. Get a great investor and you could still fail. Get a great client and the odds suddenly improve dramatically.
“If you get $100m funding from Sequoia…it doesn’t mean success. But if a BMW boss says…here’s a purchase order….That’s success.”
“If you get $100m funding from Sequoia, that’s on the road to success but it doesn’t mean success. But if a BMW boss says I’m betting on your technology, here’s a purchase order, then you’re done. That’s success.”
This is the reason that Gimmy believes the venture client model, where big corporates do not invest in startups but act as early customers for them, is a better way to tap into the innovation ecosystem. Better for the startups and also a better way for big corporations to take bets on a large number of new technologies.
Gimmy invented the concept while at BMW — he coined the phrase venture client back in 2015 when he was starting up the BMW Startup Garage, an open innovation system to allow BMW to partner with dozens of young startups.
Gimmy, a former entrepreneur and a veteran of Silicon Valley, had been working with the German car maker on various forms of innovation but had an “aha moment” when working with the autonomous driving team. The team had tested dozens of machine vision products and insisted that they would only work with the one created by MobileEye. It was an order of magnitude better, they said, than any of the other candidates on the market. Gimmy realised three things in that moment.
- BMW’s R&D division would never be able to match the spending that had gone into creating technology like that. By 2013, MobileEye had already raised more than $500m in funding, and though corporate research budgets are large, they can never pour that much money into solving just one part of the puzzle like that.
- Owning a part of MobileEye was not going to be the essential thing. The Israeli startup already had a cap table containing Blackrock, Goldman Sachs and Fidelity.
- But BMW could be the kingmaker when it came to getting the technology into the automotive ecosystem.
“Here’s where I started to think that it’s this direct interaction between the user and the startup technology that makes a big difference to both parties,” he says. BMW would be able to mandate that its suppliers used the technology, and, as a client, it would have some influence over the way it was developed — much more so than as an investor.
10x the power of the investor
More importantly, it could do this with ten times as many startups and new technologies than if it was looking for portfolio companies to invest in.
“It allows you to increase by a factor of 10 the amount of technology you can bring into a company. As an investor you are usually limited to five new startups per year, you may invest more often, but many of these are follow-on investments in portfolio startups. So the amount of new startups you can invest in over the lifetime of a fund is limited,” says Gimmy. “VC is not scalable, not even for Sequoia.”
“VC is not scalable, not even for Sequoia.”
“Venture clienting, in contrast, is scalable. A good venture client unit can enable the entire corporation to benefit from hundreds of new startups’ technologies per year, even for non-core areas such as IT, HR, marketing, logistics. A corporation would be unlikely to invest in a HR tech startup, for example, but could really save tens of millions p.a. resulting from the improvement of internal operations by adopting cutting-edge startup tech.
“You can really democratise the access to startups in the company. You’re not just limiting it to the guy from R&D who is trying to bring out an electric car with 1,000 mile range. It can also be for the guy in the paint shop at the factory or the guy in HR [that works with startups].”
The art of being a good venture client
Of course, big corporates have been working with startups for years before the venture client concept was coined. BMW had been present in Silicon Valley in the 1990s and had even worked on a project that what would eventually go onto become Google Maps.
But the carmaker did not have a process to scale these kinds of collaborations.
“You have to make sure selected startup solutions really are better than your own.”
“The trick is to scale the process of finding problems that are startup relevant and to transfer these quickly, at low risk into the corporation The amount of problems is unlimited — cutting costs in factories, making databases safer, improving the product, finding better materials. Startups can solve not all, but many of these. You need a dedicated team, process and resources to identify the problems, and then attract the best startups and enable the adoption of their technologies by the internal business units. You have to make sure selected startup solutions really are better than your own, and that startups are recognised and embraced within your culture.”
Gimmy built a reputation at BMW for being someone who could solve the hardest problems for the business units. At the same time he fought for light-touch, friendly terms for the startup suppliers. Faster payments, less procurement bureaucracy, few onerous terms and conditions. Bad clients, he knew, from having been an entrepreneur himself, could destroy startups.
The model worked so well it has since then been adopted by several companies, including Bosch and Siemens, which spoke to Gimmy at GCV’s Symposium in London about their learnings from this model.
And Gimmy eventually left BMW to start 27Pilots, to help other big corporations do what he had done at BMW. “I saw this was such a huge problem — corporations couldn’t realise the full strategic potential of the startup ecosystem, due to the lack of a scalable corporate venturing vehicle. This is why venture client units are so successful.”
Appropriately enough, 27Pilots has grown through a venture client model, with BMW as its first anchor client and then branching out to others.
“27pilots did not need to raise a single dollar of venture funding,” Gimmy says, noting that the business has been growing every year since it was founded. But that’s not the real measure of success” he counts.
What he takes real pride in is that — so far at least — none of the venture client units he has helped set up has so far closed, even during the turbulent days of Covid.
“It shows that once you set up a good venture client unit it really proves its value,” says Gimmy. The next test will be to see whether the venture client units he has set up —for companies such as BMW, Holcim, Bosch, Siemens and Otto — will weather the coming downturn equally well.
