More companies are choosing to become customers of startups rather than invest in those companies as a way to bring short-term innovation into their businesses.
When Swiss construction company Holcim was looking at how to collaborate with startups, Bengt Steinbrecher, startup partner at Holcim, recalls talking to corporate investment teams at some large European corporates and being unimpressed with the interaction between those CVCs and the parent companies’ business units.
“When we spoke with the people responsible for the CVC, they were complaining that it’s very difficult to connect with the business, and the business does not understand these technologies,” says Steinbrecher. “And if you talked to the business owners there and asked what they thought about the CVC activities, they said, ‘Well, I have no clue what they are doing and what they’re investing in.’”
The negative feedback made the Holcim team rethink the idea that it should start off investing in startups as a way to integrate technologies into the parent organisation. It turned instead to venture clienting – the concept of becoming a customer of startups rather than making equity investments in those companies.
“We went into this venture clienting approach with the ambition to be able to demonstrate quick wins in the sense that we are bringing our business together with startups to solve existing pain points within a couple of months,” says Steinbrecher.
Holcim runs more than 25 pilot projects a year globally which last between three and six months. Projects have included remittance payment schemes in the Philippines, micro credits in Colombia and predictive maintenance in Canada. “Half of the pilots were successful, and then another half of the successful ones led to some adoption in the organisation,” says Steinbrecher.
Some 49% of companies with corporate venturing teams also run venture clienting operations.
Venture clienting is growing in popularity among corporates seeking a quick and efficient way of bringing startup technologies into their businesses. Nearly half (49%) of corporate venturing teams said they engage in venture clienting, according to GCV’s Keystone survey, up from 47% the year before.
Becoming a customer of a startup’s technology rather than investing from the get-go brings several benefits. Corporates can test out whether a startup’s technology will work for the business and sometimes its customers too, before spending a lot of money upfront through an investment.
If the startup’s technology proves successful, the corporate venturing team can still invest in that company, or they may find that in fact they do not need to take an equity stake to benefit from the technology as a customer.
Cheaper than investing
Venture clienting is “one of the hottest topics” for corporations, says Sebastian Schäfer, venture client solutions lead at 27pilots, a venture clienting service provider. “Integrating it with a company’s strategy and other corporate venturing vehicles is key to strategically benefitting from many top startup solutions,” he says.
The cost benefits are a big motivator for corporates, especially in today’s economic climate. “It’s very cheap in a sense that you only need to pay for a pilot project with a startup to test its technology. It is significantly reducing the risk. Then you can decide whether you are going to continue with it or not,” says Schäfer.
German carmaker BMW has been honing its venture clienting operations over more than 10 years, learning what works best. It started to measure, for example, the financial impact and outcome of doing pilots with startups.
“At the beginning we talk to the business units about the impact of the solution. Because, even after a pilot project, you have to convince the management why it is valuable to invest money and do the follow-up project,” says Alexandra Renner, programme manager at BMW Startup Garage, the company’s venture clienting outfit.
BMW runs 40 pilots a year with startups, lasting between three to five months on average.
BMW typically does around 40 pilots a year with startups. Time is of the essence on these. BMW keeps the pilot projects as short as possible — between three and five months on average. If a project is successful, the team pushes for a purchase of the startups product or service as soon as possible.
“We have KPIs, so we measure the outcome of every project. It is standard now, but 10 years ago we were like, let’s see if that startup is cool or not. That’s changed a lot. The process has become much more structured,” says Renner.
The team found that it is much easier to integrate new software solutions into BMW’s business than hardware, which is subject to more automotive regulation and certification. It switched from doing between 70% and 80% hardware pilots to doing between 20% and 30%. “We’re focusing on process optimisation and digital solutions, not so much on hardware solutions,” she says.
The BMW venture clienting team also found pilot projects with startups tend to be more successful when business units are looking for solutions to particular pain points. Occasionally, the team will try to ‘push’ a technology into the business without first being asked for a solution, but the ‘pull’ approach – when a business unit approaches the venture clienting team with a specific need – has proven more effective.
Getting business units to collaborate with startups is sometimes not that straight forward, say practitioners. Often employees are reluctant to adopt technologies because they are risk averse or they say they would rather build a solution themselves.
“I completely underestimated how important the human component is,” says Steinbrecher at Holcim. “In most cases, it’s really not about the technology of the startup, it’s more about people willing to collaborate with a startup.”
The Holcim team seeks to work with colleagues in the business units that are willing to try new technologies, so-called ‘ambassadors’ for startup collaborations. To find those ambassadors, it talks a lot internally about what it is doing and shares success stories. If a business unit has had success with a pilot, it is more likely to want to do another.
Venture clienting teams also have to market themselves aggressively, especially in large organisations, to make themselves known to business units. At BMW, the team tries to participate in top-level management meetings.
When venture clienting leads to investment
A venture client relationship with a startup often leads to investment in that company. At BMW, the venture clienting team work closely with the investment unit, BMW i Ventures. It has helped to integrate technologies that the venture team has invested in, and it has also led pilots with startups that were a validation for an investment. This happened in the case of portfolio company Embotech, a Swiss startup specialising in autonomous driving technology. The venture team invested in the company five years after the company entered a pilot to test the startup’s solution.
Holcim launched a venture clienting operation first and then created a venture investment unit after finding it wanted deeper relationships with some startups.
Construction company Holcim started out doing venture clienting and then decided to launch a corporate venturing unit to invest in startups after finding that it wanted a deeper relationship with certain startups.
The venture clienting and investment teams merged under one unit, Holcim MAQER Ventures, in 2023. The CVC invests in a maximum 10% of companies that start as venture clienting agreements. These investments tend to be in deep tech sectors where a pilot project would take longer and where the technology has a strategic relevance to the corporate.
Holcom invests in companies where it can get something more than just a commercial agreement, such as influence over the startups’ development roadmap or where it can benefit from rights of first refusal as part of an investment agreement. It can be harder to make an argument why it should invest in a digital solution, for example, where it can get all the benefits of the technology solely from a commercial agreement.
It will also do “test before invest” arrangements where it seeks to become convinced that the solution will work for the business before investing. In some cases, startup founders who have entered a commercial agreement with Holcim have later approached the company during a fundraising round to ask if it will become a strategic investor.
“Sometimes you have to be flexible” about how to work with startups, says Steinbrecher.
