Strategic Value: Disrupting Venture Capital From the Inside
This article is co-authored by BCG Digital Venture’s CEO & Founder, Jeff Schumacher and Partner Raj Ganguly.
The myth of venture capital reads like an episode of “Silicon Valley.” A 20-something coding genius enters a room of investors, ready to pitch a game-changer. He begins, hilarity ensues and the young man re-emerges from the room. Only, his pockets are now lined with cash, his success shared by all.
If only it were that simple.
Venture capital is never easy. Most industry insiders place startup failures at the 75 percent mark, and others report failure rates as high as 90 percent. Whatever the actual number, it’s clear that venture capital has under-performed for more than a decade, yet most investment firms never attempt to explain how venture capital became so risky.
Figures like these are shocking. You can’t expect them to change on their own, and there’s no hope for luck to suddenly take up arms and side with the courageous. These numbers must be accounted for, and we’re here to do just that.
Startup investments fail for many reasons, but often because investment firms struggle to look beyond their direct line of vision to discover unseen growth prospects. They seek opportunities in established markets or choose investments based on a narrow list of determinants, and they keep their ventures at arm’s length. They offer founders access to capital, of course, but then supply few other resources to help them build successful businesses.
Herein lies the problem. A lack of strategic insight is the common thread between every venture failure, and it has transformed startup success into a gamble — the business equivalent of throwing a dart while blindfolded and dizzy, hoping luck will deliver it safely to the bulls-eye. The dart rarely hits the target this way, but most firms never remove the blindfold.
Profitability is complicated, to be sure, but it should never be based on chance. To start, venture capital firms must change the way they interpret value and pursue investments. This means abandoning the detached investor mentality in favor of a partnership model. By co-investing, exploring adjacent markets and pivoting successful corporates with startups, venture capital firms can accelerate the growth of investments while positioning them for lasting success.
Synergistic relationships are also vital to improving venture outcomes. Startups are more successful when they align with established organizations, and market leaders will continue to prosper by innovating with new technology and products. In this type of partnership, both the new business and the industry leader bring something to the table. One party offers a thriving customer base and streamlined operations while the other supplies innovation. True, other firms are now capitalizing on this need, but they tend to form partnerships casually or within a limited network of the firm’s own industry leaders. And strategic alignment is the real underpinning of growth.
Jumio, the digital identification verification company, is just one example of how well-planned cooperative relationships improve business outcomes. When Jumio entered the digital ID market with its scanning and validation products, there were plenty of competitors waiting to overtake them in the fraud prevention arena. Instead of battling it out for scraps, Jumio partnered with established competitors like IDology and Equifax to expand their services to a larger audience.
Jumio also spread into adjacent markets, including airlines, financial institutions, online gaming businesses and e-commerce companies, which solidified their success by offering new products to well-known companies. This provided substantial growth in the form of partnership sales. In fact, Jumio’s technology had become so popular by 2014 that they counted half the top 10 consumer Internet and e-commerce companies as clients.
BCGDV’s Mercury platform also shows how strategic partnerships can empower new ventures and established businesses. Mercury, the personalized and same-day delivery service, integrates into existing e-commerce systems, thus providing limitless expansion opportunities. Its flexible operating model can then transform to meet any geographical or regulatory need, allowing Mercury to pivot quickly without limiting future returns.
And these are just a few examples. Plenty of others prove this point just as well.
Working alongside the new wave of venture partnerships, visionary companies are improving the outcome of startup investments, and they’re achieving this by capitalizing on synergistic relationships and strategic value. In fact, they’re rewriting the legend of venture capital altogether — one success at a time.
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