The increasing value of small and early stage tech companies to larger firms’ growth ambitions.
When it comes to venture capital and EIS investing, the real measure of success comes at exit. That’s when investors and investment managers find out just how much value they have generated with their growth and development strategies.
Exit value is, of course, in the eye of the beholder, although a little healthy competition doesn’t hurt. And the good news is that there is growing recognition that the last decade has seen large companies become increasingly willing to work with early-stage companies. (Wall Street Journal).
Not only does this mean that they are more likely to enter into contracts and buy services from firms outside the traditional, market incumbants, but it also points to an appreciating appetite for partnerships and acquisitions where fresh ideas are available. This applies in particular to innovators in digital transformation as long-standing companies realise they can’t tackle its challenges alone, said Hilary Gosher, managing director of Insight Venture Partners, a growth equity firm that invests in software and internet companies.
There has been a noticeable shift from larger firms only buying tech solutions from established and sizeable technology vendors. According to Ed Sim, founder and managing partner of US seed-stage fund Boldstart Ventures, more recently, they’ve accepted the value of partnering with early stage businesses.
These relationships can be mutually beneficial in that the early stage company may be in a position to leverage resources, such as engineering talent and experience. While the larger enterprises can access much more than just new technology. According to Jennifer Morgan, an executive board member at SAP and Bank of New York Mellon, “We can learn so much, not just about technology, but about different ways of thinking.”
She added that seeing what entrepreneurs are able to accomplish with very few people and limited time really “opens your eyes when you’re a big company,” and sometimes teaches the company to approach problems in a different way.
“That diversity of thought and really wrestling through a problem with people that maybe you didn’t think were part of the solution, it really opens your eyes,” she said.
This is testament to the importance of nurturing entrepreneurs and ideas. It’s also a major positive for the EIS and VC sectors, particularly those with a technology slant, where the engagement of clients with the investees is crucial to rapid growth and the potential exit opportunities are essential to the realisation of investment gains.