How corporate venturing with start-ups helps African businesses innovate

Corporate venturing is the practice of using enterpise funds to invest in, develop or sponsor start-ups in order to create innovative products or services, including technology applications. Unlike traditional R&D, corporate venturing typically involves a separate start-up company, funded by the corporate parent, which has the freedom to operate without corporate bureaucracy and can become a self-sustaining business in its own right.

Corporate venturing allows enterprises to play around with the most disruptive technologies and business models that are likely to affect their core business in the medium- to long-term, without any operational impact on the business in the short-term, says Llew Claasen, a managing partner at Newtown Partners, an early-stage venture capital firm that operates out of offices in Cape Town, South Africa and San Diego, California. It is also a great way to change how organisations and business leaders think in the medium- to long-term, because it exposes employees to the most disruptive technologies and business models, without creating an immediate impetus to disrupt the way that people work.

Corporate venturing can manage competition

This approach to innovation makes it possible for early-stage opportunities to get adequate resources and to ensure that they don’t face unnecessary revenue pressure, Claasen says. These can then be integrated into the corporate value chain when they’re much older and more reliable. Used as part of either a defensive or offensive strategy, Claasen believes that corporate venturing is the most appropriate way to counteract certain types of competitors and proactively manage conflicts of interest that exist between the corporate and the challenger start-up.

Speaking during a panel discussion at the SA Innovation Summit in Cape Town recently, Mmathebe Zvobwo, executive at Telkom FutureMakers, noted that corporate venturing makes it possible to partner with start-ups in more meaningful and impactful ways. According to Zvobwo, the FutureMakers programme, by definition, was launched in 2015 to support technology start-ups in different ways. Their work falls within two key focus areas — opening up small ICT businesses to the Telkom supply chain and building and developing technology start-ups of the future. As part of the supply chain focus area,

Telkom partners with tech SMEs to deliver work to their clients. “We work with start-ups to develop and deliver our technology capability so that we can get the job done for our clients. Last year, we contracted about R126 million (US$8.4 million) worth of services to these small businesses,” Zvobwo said.

In the telco sector, there is disruption everywhere, she explained, noting that with consumers always asking for more, it’s very important for Telkom to keep up with what our customers require. This can only happen if we innovate what we deliver and how we deliver it, she adds. “Given the rate of change that’s happening, no single organisation will have all the answers. This means that we have to look outside the business and co-create externally,” Zvobwo said. “Working with start-ups and SMEs is a way of accelerating innovation and translating this digital innovation into commercial value propositions.”

Corporate venturing in action

In March this year, food and beverage company Nestlé launched Nestlé Hatcher, an open-innovation platform that offers innovators and start-ups the opportunity to collaborate with the company to solve some of their current business challenges across the East and Southern Africa Region (ESAR).

Also speaking at the SA Innovation Summit, Nestlé’s João Barreto, head of innovation and PMO (project management office), explained how the South Africa-bsed Hatcher works. According to Barreto, a “challenge” is posted on the Hatcher platform and interested innovators and startups are invited to submit their proposed solutions. Once the applications close, the different concepts are reviewed. The best candidates are then interviewed and a “winner” is chosen. This start-up is onboarded and then works closely with the Nestle team as part of a pilot phase. During this time, they are provided with the necessary business and technology support. At the end of the pilot, the start-up will present their solution and Nestlé will decide if hey want to scale the solution or not. If they do decide to scale, the start-up will become a Nestlé vendor.

“We see technology as a very important enabler for us as a food company because it helps us to reach consumers. Today, in the technological and digital world we live in, we need to be using the same technologies that our consumers are using. In a nutshell, it’s about using emerging technologies to link us with our consumers and enable us to better communicate with our customers,” Barreto explained, speaking to CIO after the summit. “This is why we went outside the business and brought tech innovations in.” Most start-ups are very specialised, particularly when it comes to technology, and Nestlé recognised that they don’t necessarily have the same specialised skills internally, he continues.  

Since the launch of Hatcher, two challenges have been completed. While Barreto can’t divulge too much, he reveals that the first solution is a cloud-based platform that gives Nestlé a space where they can communicate with their consumers. “It took just six months from when the challenge was first issued to the pilot being ready to be launched to the market. This is a big win for me.”

The second challenge focused on mobile commerce and called on creative start-ups to identify new and emerging mobile platforms that can provide lifestyle and engagement solutions to millions of its customers in East and Southern Africa. The solution currently being piloted makes use of USSD technology. “This technology is particularly relevant in East Africa where there are a lot of mobile phones but not a lot of smartphones. Developing an app, for example, won’t reach the same amount of people as you can with USSD (unstructured supplementary service data), which can be used on both smartphones and feature phones.”

Corporate venturing do’s and don’ts

For Zvobwo, business leaders must remember that the process is never going to be perfect. “True innovation means that you’re in different territories all the time. You’ll never have a recipe that works every single time. I’ve seen some start-ups thrive and some don’t do too well.” As such, corporate venturing demands that you have a learning culture and that you aren’t uncomfortable with failure.

When we discuss investments, we always talk about VCs, Barreto added. But it’s just as important for corporates to get involved in the long-term sustainability of start-ups. “Obviously working with early ventures is risky, which is why you have to do everything you can to mitigate these risks.” Nestlé’s approach entails partnering with the start-ups early so that anything that is developed is geared towards, and closely aligns with, the business’ needs. “This being said, we are always open to new and creative ideas. When you’re doing this kind of thing, you have to trust that the start-ups have the knowledge and that they are up-to-speed with the latest innovations that the corporate is not aware of. If it works, that’s great. If it doesn’t work, we learn, rethink and start again.”

Looking specifically at corporate venture funds in South Africa, Fabian Whate, head of Naspers Foundry, comments that it’s important to remember that you are dealing in a nascent environment. “You are almost always going to be backing entrepreneurs who are doing this for the first time. This means that you have to roll up your sleeves and understand that there is a lot of work to be done.”

For Claasen, if you’re the CEO of the business, you have to get comfortable investing in start-ups that could be most disruptive to your core business and then get comfortable helping them to fulfil this potential. “It’s going to happen, whether you do it or not. Would you rather that your competitor owns that capability?”

Barreto agrees. “We, as corporates, need to adapt. If we are saying that we are willing to work with start-ups and develop relationships with these businesses, we have to become more open to taking risks,” he says, explaining that there is often a lot of red tape that prevents corporates from moving quickly and successfully tapping into new and innovative opportunities. Culture is key to this. “If your culture isn’t comfortable with new ideas and with failure, you won’t be willing to take the risk of investing in a start-up and working with start-ups.”

When adopting this approach to innovation, Claasen stresses that corporates don’t try to go it alone. “Finding, structuring, closing and working with great start-ups is a lot harder than it looks and you can’t manage inevitable conflicts of interest between your organisation and the portfolio of start-ups if you’re firmly in the organisation camp. Let a fund manager help you — if they know what they’re doing, they will cost you net nothing over the fund lifetime.” Cobus Rossouw, executive VP for digital and IT at Imperial Logistics Limited, shares this sentiment, highlighting that it is not second nature for most corporates to know how to manage and support start-ups. “You have to keep this thing outside of the corporate crocodile, otherwise it will go nowhere fast.”