Startup companies are those that are just in the idea phase. They do not yet have a working product, customer base, or revenue stream. These new companies can finance themselves by using founder’s savings, by obtaining bank loans, or by issuing equity shares. Investing in startup companies is a very risky business but it can be very rewarding as well, if and when the investments do pay off.
There has been a lot of talk in recent years about investing in startups. A number of high-profile startup success stories have made it seem like investing in a startup is a surefire way to get amazing returns on your investments. Nowadays, big companies are investing in startups because they need fuel for innovation, desire for top talent, and need to maintain a competitive edge. They are holding entrepreneurship contests, investing in startups, and bringing on entrepreneurs in residence (EIR). In the war for talent and innovation, investing in startups is a great way to survive and thrive.
Many big companies fund small companies or start-ups to test whether new businesses or products can work without placing a big bet on them. The smaller companies can move faster and more nimbly to determine if the new product or business is viable. If the product or business produces satisfactory results, then the big company will acquire it. There are various benefits of investing in startups:
- Investing in startups allows big companies to sample new technologies or product categories that might become part of their businesses without the direct expense of staffing an in-house unit.
- Big companies invest to earn money or earn patent/technology or kill competition.
For example, Google invests in a company XYZ 3$ when total value of XYZ was 10$. Google gets 30% stake in XYZ and when XYZ value reaches at say 20$ or even more and Google thinks it cannot grow any further; it sells XYZ to earn a profit.
- By teaming with start-ups, large companies can take advantage of the smaller partner’s nimbleness to enter new regions, using newer digital channels. For example, Unilever recently backed seven innovative digital companies as part of its “Go Global” program, giving each company funds, mentoring, and a range of services in exchange for a customized digital marketing pilot for its brands. The campaigns will go live across Africa, Europe, and Asia.
- A smaller company is more nimble. So it’s easier to make decisions and implement plans without multiple layers of management having to sign off anything. This is important if the larger company wants to break into a newer, more volatile market which is prone to changes suddenly. The smaller company is in a much better position to respond to changes in a timely manner.
- Another benefit for the large companies to invest in smaller startups is that they can learn new ways of developing new ideas and bringing them quickly to the market.
In the race to improve competitiveness in a challenging global market, both small and large companies can accelerate innovation by working with each other rather than against each other.