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Published 16 July 2012 06:02, Updated 18 July 2012 05:46
Telstra looks for small companies that have a proven revenue stream Photo: Josh Robenstone
If the first step in addressing a problem is admitting you have one, then parts of corporate Australia are on the right path towards improving how they innovate.
“Large corporates don’t have a great track record of being innovative and disruptive,” Optus and SingTel vice-president, digital communities and ecosystems, Austin Bryan says.
The telecommunications giant recently announced a local seed investment fund and is one of a growing band of large companies that are seeking equity stakes in nimble start-ups.
The slowness that is so often associated with being a large, established entity can suffocate the generation and implementation of new business ideas. By investing in start-ups, companies are simultaneously expanding their own revenue-making opportunities and outsourcing innovation.
For start-ups, apart from the capital injection, the main advantage of having a corporate shareholder comes from their massive customer base. Obtaining access to a ready-made network can provide a cheap and effective testing ground or, for those companies at a later stage, a cost-effective customer acquisition funnel.
On the other hand, however, being linked to one company might limit your ability to sell to its competitors. In addition, having obligations to a risk-averse, slow-moving corporation might cramp your style, not to mention the pace of change required to succeed in start-up land.
But there are start-up founders who think the pros outweigh the cons. The founder of technology accelerator Pushstart, Kim Heras, says corporate investors should just be treated as another potential source of funding.
“For all investors, consider why they’re doing it,” he says. “Try to understand the underlying motive of the companies and do your best to align your pitch to that.”
To contribute to that understanding, BRW spoke to three active corporate investment departments to ask what they look for in a partner.
In each case, the companies’ overwhelming desire was to invest in start-ups that added value to and enhanced the business they already had.
It's “no surprise”, according to group managing director of Telstra’s applications and ventures group Deena Shiff that the company is interested in web-enabled technology plays that touch on cloud, mobility and new media.
“That’s what most telcos are focused pretty intently on,” she says. “The outcome that we seek, apart from making a good investment, is to ensure that we have newer and exciting services that we can present to our customers.”
Telstra’s investment in online restaurant booking platform Dimmi has led to the establishment of Bigpond Dining, a booking and reviews portal that the telco can offer to its many customers.
At APN News & Media, the company’s core philosophy is about helping advertisers connect with audiences, chief development officer Matt Crockett says. “All of our businesses are about helping businesses connect with and sell things to consumers,” he says.
APN has made high-profile investments in a number of e-commerce start-ups, including BRW Fast Starter and online retailer brandsExclusive, as well as New Zealand group buying leader GrabOne and niche group buying player MyTeamDeals.
But Crockett is quick to point out that these aren’t just any e-commerce platforms. BrandsExclusive was chosen because the private shopping club has a commission-based business model and works as an outlet for brands.
Similarly, the group buying space is a marketing channel for small and medium-sized businesses. In this vein, they are e-commerce plays, with advertisers – APN’s core customers – at the heart of their business model.
“We think that the advertising market is shifting [towards] direct digital transactions where the advertiser only pays when they make a sale, away from things that are just putting up ads,” Crockett says.
Bryan explains that the Optus Innov8 Seed Program is focused on mobile technology, especially start-ups that integrate multiple devices, from smartphones to tablets and netbooks.
While a potential investment often needs to add value to the corporation, the flipside of this formula can also apply. Telstra’s Shiff says if the telco couldn’t add value to a start-up, it would not pass the investment committee’s strategic filter. “If they’re looking for distribution, technical support, the ability to get development capital or to grow into Asia, then there’s a potential synergy,” she says.
Bryan also spruiks SingTel’s 445 million customers throughout Asia as a potential growth avenue for portfolio companies.
MyTeamDeals is already enjoying the benefits of giving an undisclosed stake to APN. It helps sporting organisations run their own group buying deals and, to power these individual websites, it can now offer the technology platform of a fellow APN portfolio company. “GrabOne has unbelievable system functionality, so we’re migrating our platform,” chief executive Roland Cage says.
The niche group buying site is what Crockett calls a seed investment because, compared with GrabOne and brandsExclusive, both of which have sizeable revenue, it is still at a very early stage of development.
He says it is unlikely APN will make another investment of a brandsExclusive size ($36 million for 86 per cent), but adds it has enough money to spend if it spots a compelling opportunity. “We could do multiple MyTeamDeals type deals,” he says, although the exact terms of the deal are under wraps.
Telstra is looking for companies that have a proven revenue stream. “They may not yet be profitable but they clearly have a path to profitability and have considerable growth opportunities,” Shiff says.
On the other hand, Optus and SingTel are making seed investments of up to $250,000. “Optus has a far more grass-roots approach to the start-up community,” Pushstart’s Heras says. “The Telstra approach is to wait until the start-ups have been proven.”
The organisations also have differing approaches to what happens in future.
Bryan believes that acquisitions will occur under the right conditions. “If we see fantastic, interesting ideas I’m sure we’d want to participate in a stronger way,” he says.
Shiff says Telstra has taken minority stakes in its three recent investments. “We don’t necessarily look to take the business over, especially if we’d extinguish the flame of entrepreneurship,” she says.
“Dimmi, for example, that’s a business where the founder comes from the hospitality industry and lives and breathes the restaurant business ... You want to maintain the intensity and creativity.”
APN is more definite and usually structures deals “so we have a pathway to gaining full control of the businesses,” Crockett says. In this scenario, having the founders stay on for usually two to four years is “totally pivotal”. “We structure the deal so that the entrepreneurs are heavily incentivised to stay.”
The reason for this is why APN makes these investments. “APN’s philosophy is that corporates are really bad at doing start-ups,” he says.