Seed funds will give large organizations an edge in the competitive environment, but they may need to consider the risky nature of investments and impact of corporate culture to reap benefits.
According to Michael Yoshikami, CEO and founder of wealth management firm Destination Wealth Management, it makes sense for technology companies to work toward providing capital to new ventures, or own seed funds.
Seed funds focus on providing early-stage capital to promising ideas with the hope that eventually the company will yield either profits or technology that can be utilized, he explained. The investing company will also receive a percentage of equity or option to buy equity at some future point in time, and often provides leadership and management capital in addition to capital, he added.
Since research and development costs are high, providing seed capital is a "fertile" method of gaining new technologies to be integrated into current businesses, Yoshikami noted. Companies will also have access to early technology innovation, and if the business venture succeeds, they will have a higher percentage of equity participation, he said.
Many companies also recognize having both research and development efforts and seed equity are necessary to maintain a competitive edge, Yoshikami said.
"The ability to invest capital and leadership expertise into a business without having to completely manage the enterprise is of tremendous value for technology companies in a decreasing margin environment," he noted.
CEO and founder, Destination Wealth Management
Risky move, corporate culture stifle innovation
However, investing in startups is generally a risky business for large organizations, observed Rory El-Nashar, managing partner of early stage venture capitalist firm SeedStartup.
According to El-Nashar, top performing venture capitalist funds are "wrong more often than right" with their investments, though when you are right, the successes can be more than enough to generate a healthy return for the fund.
While some technology giants such as SAP and Intel have had their own corporate venture arms, with varying degrees of success, it is not a good idea for majority of them to launch an internal fund, he remarked.
Corporate culture, risk tolerance, politics, bureaucracy and processes at large organizations are at odds with the fast-moving, agile startup culture needed to foster innovation, he pointed out. This is why most organizations are better off with strategic acquisitions targeting startups with proven market traction and strong, growing metrics, he explained.
Unless a company has strong in-house investment and startup expertise, such as previous early stage venture capitalists or, along with clear autonomy for independent decision-making authority, it is probably not a good idea to launch an internal fund, he advised.
Consider risks, create synergistic startups
Stakeholders involved in the seed fund investments need to assess the risks involved, how quickly the startup can commercialize the technology, the business model and technology's value proposition to the market, Philip Lim, CEO of Exploit Technologies (ETPL), the technology transfer arm of Singapore's Agency for Science, Technology and Research (A*STAR), advised.
In other words, they must consider from the start to the end what the work will be, the risks involved and how they are going to make money from it, Lim, whose company harnesses new technologies and incubate business ventures for commercial purposes, pointed out.
"Therefore, depending on the company’s business model, funding technology assets independently may not serve its best interest," he said.
It is also a more viable option for corporations to "organically" create synergistic startups which could fit more strategically into their future product roadmaps, El-Nashar added. This means working with established accelerators and seed funds to create customized programs, he explained.
One example is Microsoft working with Techstars to create a specialized investment program focused on startups innovating around Microsoft's Kinect platform, he noted.