The rampant digitisation of almost every sector this year has pushed corporates, once slow-moving goliaths comfortable in their traditional industries to engage with startups and technology companies with an eagerness that scarcely existed prior to the coronavirus outbreak.
The success and high usage of communications tools like Zoom and Slack and the rise of sectors like e-grocery and last mile logistics highlighted the need and importance not only of digitisation, but the agility and innovation that startups embody.
This agility was demonstrated when startups fulfilled the needs of the population during lockdown, responding quickly to the new environment. This was particularly clear in the e-grocery sector where the startups managed to charge ahead of the longstanding supermarkets that struggled to make the switch to online effectively. The value of such startups was proven when Germany’s Delivery Hero acquired InstaShop in August for $360 million, making it one of the most significant exists to date.
What has become clear to many corporates is that they did not have, and in many cases still do not have sufficient exposure to the technology sector, leaving them vulnerable in the long run.
“The traditional means of doing business is changing. Covid has fast-tracked digital adoption, everyone was aware we needed to go digital, but this has given a new motivation and push to embrace this move towards technology,” says Ali Asghar, general manager at UAE-based Al Futtaim Investment Management, an investment and asset manager with a $385 million fund, part of the Al Futtaim Group.
Even prior to the pandemic, many conglomerates in the Middle East were facing challenges generating growth in their core businesses, a result of a slowing economy and low price of oil. And so, the corporates that once shunned startups are now looking to partner, acquire or invest in them.
“Businesses are being fundamentally disrupted by startups, rapid tech changes are changing not just business models, but the way business is approached,” says Tushar Singhvi, deputy CEO and head of CE-Ventures, the corporate venture capital platform of Crescent Enterprises which is close to fully deploying its $150 million fund. “Corporates are realising that, in order to stay relevant and embed those technologies, it is better to work along with startups rather than compete with them.”
Over the past few years, there has been a proliferation of companies like Saudi Aramco and SABIC establishing accelerators and incubators focusing on either entrepreneurship or intrapreneurship (or both) while many became LPs in existing venture capital funds. Increasingly, corporates are establishing their own corporate venture capital (CVC) funds in a bid to complement their portfolios, or to diversify their investment entirely.
CVC funds although similar to traditional venture capital firms, are funded by and benefit one company. Across the world CVCs are a vital source of investment, fuelling research and development (R&D). In 2019 global CVC-backed deals and funding rose 8 per cent to $57billion of which $10.6 billion was invested in artificial intelligence (AI) companies according to CB Insights. While the amount invested in the second quarter of this year fell by 20 per cent, corporate investment still accounts for about a quarter of all VC deals according to 500Startups.
According to Faisal Hakki, managing director at AB Ventures, the fintech-focused VC arm of Jordan's Arab Bank Group, corporate investing has existed “in one form or another for at least a 100 years. Despite a few recent bright spots, CVC has not been a significant constituent of the VC industry in the Arab world", but that is now changing new funds and investment vehicles of about $20-30 million attached to corporates is on the rise.
“For us the CVC comes from one our principle values – enabling prosperity and supporting entrepreneurship. As a holding company, we need to diversify the company. We want to diversify both in terms of regionally and internationally and in terms of sectors and ideas,” says Mateen Shah, head of planning and product development at A.R.M Holding, the holding company of Sheikh Ahmed Bin Rashid Al Maktoum. “Even the most successfully innovative companies like Google or Facebook go out and acquire businesses which innovate and come up with better ideas and more current trends. They go and acquire them or support that at early stage investments.”
This development in corporate mentality is in stark contrast to the resentment that startups felt towards them. Startups often complained that corporates in the region treated them as competitors, preferring to sideline them than give them rather than engage with them.
“Corporates are more open to both acquisitions as well as accelerating and supporting startups as a whole. The old school mentality of ‘we have the resources we can do this’ has changed because a lot of young people are coming in with new ideas. We see the success stories and people are more open to the idea of supporting startups at the idea or later stage,” says Shah.
While attitudes have changed, particularly among the family-owned enterprises that are seeing the younger generation take the reins, their sheer size can be a hindrace.
“It requires a different kind of mindset, this innovation culture mindset that a lot of these traditional business houses don’t have. We’re such a big organisation and changing that direction is not so easy, if it’s a smaller organisation, agility can be fast-tracked. There is deal motivation and investing will take some time,” says Asghar.
Many corporates hoped to inspire innovation from within through intrapreneurship, but according to Asghar, they have realised that creating startups themselves is more difficult and so investing in startups is an alternative that makes much more sense.
“The primary objective is to see if startups can benefit the group, if they are in the sectors we are in or if we can learn from them or advance our business operations,” he says.
For startups, investment from a CVC can provide the “smart money” that can benefit their technology and business, providing tactical and strategic advice related to an industry in which they have expertise. Corporates can provide them with access to their portfolio of businesses, technologies and a network that can become potential clients.
“If you give that money to a startup, they will use it to develop their tech, build infrastructure and scale. If I give them access to customers, integration to digital assets, co-marketing with them, giving them that is more valuable than money,” says Joe Abi Akl, chief corporate development officer at Majid Al Futtaim Holding. “A partner that will give them a stamp of quality and someone who will help them scale is worth more than money.”
Many industries and sectors in the Middle East are heavily regulated and startups often struggle to secure the right licences, get approvals, secure supplies or access distribution channels, areas that a CVC can help and add value. Moreover, the corporates themselves are a viable exit option for the startups.
But one major issue that CVCs face is startups tend to prefer to get funding from the traditional VCs.
“For the most part, tech startups and their founders want to work with CVCs. Nonetheless, we are aware that – for certain businesses - we might not be a founder’s first choice, but that is a good filter for us. It’s an early litmus test," says Hakki.
It can also limit a startup's future funding rounds and can eliminate future partnerships with others deemed a competitor by their corporate backers.
“There’s a tendency from corporates to take a startup as a partner and the startup becomes a mini team, that’s not good, neither for the startup nor for the corporate,” says Abi Akl. “You want to keep startups at arm’s length so they benefit from you but they keep their independence. The moment you try to embed them into your team, you lose the agility and entrepreneurial spirit they have. Yes, we have to support them, but we keep them at arm’s length.”
Timing and processes is also an issue for the CVCs.
“When we speak to these guys, they’re a bit weary of corporates. CVCs tend to take their time and startups want very clear answers. They want to know what your strategy is, how quickly you make your decisions. They prefer VCs as they’re more set up for these kinds of investments,” says Asghar. “It will evolve, as a corporate, we’re tying to evolve and fast track things and partner with one or two of the VCs out there to streamline our processes. Startups themselves value a strategic partner and that is always attractive to them, so over time this gap will be bridged.”