This interview is content that would normally only be available to subscribers. Sign up for a four-week free trial to see what you have been missing
Gregor Gimmy is the founder of Munich-based 27pilots, a Venture Client solutions provider, which aims to establish the Venture Client model as the main global corporate venturing tool. Its clients include BMW, Bosch, Siemens, and Holcim, a Swiss-based global supplier of building materials. Prior to 27pilots, Gimmy spent six years at BMW, where he established an internal innovation strategy team known as BMW Innovation Works. After recognizing that BMW could benefit strategically from adopting more leading startup solutions, he created the Venture Client model and the world’s first Venture Client unit, the BMW Startup Garage. Prior to BMW, Gimmy started various VC-funded ventures in Silicon Valley and Europe. He also worked at IDEO in Palo Alto, which he helped transform into a strategic innovation consultancy, and at Roland Berger Strategy Consultants. Gimmy is an active angel investor, Executive in Residence at the IMD Business School, guest lecturer at INSEAD business school, and a sought-after keynote speaker. He recently spoke to The Innovator about why he believes the Venture Client model enables companies of any size and type to benefit strategically from top startups while rendering strategic corporate venture capital programs unnecessary.
Q: Why did you feel a need to come up with a different model for corporates to benefit strategically from startups?
GG: After working on innovation strategy and methodology at IDEO, and working in the start-up ecosystem in Silicon Valley, including 10 years of starting companies myself and selling one of my startups to a public company, I agreed to join BMW in 2012. The aim was to establish a new innovation process and team, based on IDEO’s Design Thinking innovation method and define long-term innovation strategies. While doing this, I discovered an -at the time- unknown problem, the startup resource gap. I noticed that BMW was not leveraging startup technologies at scale, i.e. in high numbers and across the entire value chain. Given the leading-edge nature of startup solutions, I sensed that BMW was missing many startups as a strategic resource to further strengthen its competitive position. If you can, for example, reduce the manufacturing time for products by a fraction of a second, you save millions on a yearly basis. So, in 2012-2013 I started to look for a way to close that startup gap. I first looked towards the BMW corporate venture fund [CVC], wondering why we didn’t make the fund bigger and invest in more startups? I quickly realized, though, that the strategic CVC model is more of a barrier to startup innovation than a catalyst.
Q: Why is that the case?
GG: CVCs and corporate accelerators struggle to attract the best startups. The better the startups, the less likely they are to allow a corporation to invest, especially during the early stage when the strategic benefit for the corporations is significant. I call this the CVC paradox. Corporations cannot replicate the deep experience private VCs and accelerators such as Y Combinator have in identifying, funding, and helping entrepreneurs to succeed. It is why, I would argue, that no corporate accelerator has managed to incubate world-class startups. CVCs claim that they are succeeding financially, but data shows that the strategic benefits they generate are only indirect and not measurable. This is very relevant, as the raison d’être of CVCs is to drive strategic impact from startups. If not, why would a CFO not just put capital into private VC funds with a proven track record? What’s more, CVC is not scalable. On average CVCs invest in less than five new startups per year over the lifetime of a fund. This doesn’t close the startup gap, was my conclusion. For any corporation, the number of relevant startups is in the thousands. At BMW, for example, we calculated that there are at least 25.000 relevant startups in the global ecosystem.
To drive a strategic impact, a corporation needs to assess thousands, then transfer and use dozens of startup technologies per year, either through a partnership or M&A. According to CB Insights, just about 10% of CVC portfolio startups partner with the parent corporation, if at all. Less than 5% are acquired, according to MIT research. So, for a corporation to benefit strategically from one startup, its CVC unit needs to invest in 10 new startups per year. This is costly, risky, and slow, as Corporate VCs and accelerators are complex to operate.
During my time at BMW, I and several renowned academics from business schools conducted research with executives at large corporations, and founders of startups as well as numerous innovation projects with large and midsize companies and published our findings in the Harvard Business Review. Our research showed it takes at least 12 months between the first touch point of the CVC with a startup and the kick-off of a pilot with the business unit. If you start by talking with engineers to find out what they need, even if you identify a startup that can solve a problem, the corporate VC would take at least six months to find a startup and close an investment – if the corporation is invited to invest. After closing the round, it would take an additional six to 18 months for the engineer to access the startup technology. It does not come for free or automatically with the investment. This means the engineer won’t be able to access the tech for 12 months to over two years. So, CVCs simply can’t solve burning strategic problems fast enough. What’s more, the fixed costs from touch point-to-pilot are huge. For example, a CVC fund, which can close five to 10 investments a year, typically requires from $1 to $5 million per startup — not including the administrative and variable costs of the pilot itself. Let’s assume that a given CVC invests $1 million per startup, its parent corporation needs at least $10 million in capital plus the fixed cost of running a CVC unit, to derive a strategic benefit from just one startup. This is not scalable. CVC is an ineffective, slow, capital intensive, risky and atrophied driver of innovation.
Q: But don’t startups benefit from CVC investments!?
GG: Well, most startups (i.e. 98% plus) would take any capital, no matter where it comes from. The top 2% of startups, however, ie about 100.000 startups worldwide, can be selective. They and their private VC investors know that a CVC investor might poison the startup. For example, if corporation A invests in startup X, corporation B, which is the direct competitor of A, is naturally wary of adopting X’s technology. A could just acquire X, and that way control B’s access to the technology of X.
Q: How does the Venture Client model solve these issues?
GG: As an investor, you are helping the startup, but what a corporation seeks is getting help from the startup to solve a problem better than they could. That’s why startups exist and why private VCs invest, to solve problems incumbents cannot, right? So, it makes sense to switch, from being a venture investor to becoming a client,not just a normal client but a ‘venture’ client. Just like corporations have introduced a different investment model for startups (CVC), now they need a different client model: a Venture Client model. In essence, the Venture Client, instead of equity, buys the technology of a startup to obtain an immediate strategic benefit when it is still ‘a venture’ to do so.
In this arrangement, private VC funds and accelerators do the complex work of sorting high-potential startups and nurturing them in the early days. Corporate Venture Clients enter further downstream by becoming an early reference client of young companies that have either graduated from an accelerator and/or received professional VC funding. BMW, for example, would not consider a startup unless it has graduated from a prestigious accelerator or has received professional venture funding. One of the keys to making a client-relation with startups work is creating specific and dedicated Venture Client processes and resources. This allows the creation of high-quality and scalable Venture Client operations. For example, a good Venture Client corporation has a dedicated Venture Client unit, with a trained team, a proven Venture Client process, and tools that enable it to efficiently identify strategic problems across the entire value chain for which startups have unique solutions. (At BMW I created and managed for 3 years the world’s first Venture Client unit: The BMW Startup Garage.) If the startup technology is not unique, you should not become a Venture Client.
In analogy to the VC process, the Venture Client initially just makes a small purchase. I call this a ‘minimum viable purchase’ since the corporate buys just a sample of the startup’s solution for validation in a real pilot project conducted by the real problem owner in a business unit, i.e. the Venture Client, not in a lab or incubator.
Q: What does a good Venture Client model look like?
GG: Part of a good Venture Client model is to define specific KPIs that allow the business units to measure the strategic impact of the startup technology. A critical metric is how much new revenue or savings does the startup technology enable?. A good Venture Client model also changes legacy processes to accelerate startup technology adoption. For example, the BMW Startup Garage has an agreement with central procurement that allows it to issue supplier numbers and purchase orders to qualified startups significantly faster than to non-startups. Finally, a good Venture Client model is not a ‘supply-chain’ tool. It is a competitive tool that enables the corporation to decide faster and with less risk of any type of long-term partnership agreement (e.g., licensing, co-development, alliance, …) or on a controlling investment (e.g. M&A, joint venture…).
Q: Can you give an example?
GG: A BMW startup story that inspired me to coin the term Venture Client and to invent the Venture Client model happened with Mobileye, in the early 2000s, some 15 years prior to establishing the BMW Startup Garage, the first dedicated Venture Client unit. Back then, BMW used an early version of Mobileye’s revolutionary camera-vision technology. It validated that it was better than competing technology solutions offered by incumbent suppliers. That historic Venture Client project was essential for BMW to become the world’s first OEM to launch a combination of Lane Departure Warning, Intelligent Highbeam Control, and Traffic Sign Recognition on the BMW 7 series. For Mobileye it was a milestone towards raising over $500 million in private venture capital, going public in 2014 and being acquired by Intel in 2017 for $15.3 billion.
By creating its Venture Client unit, the BMW Startup Garage in 2015, BMW sought to repeat and scale the success it had with Mobileye. A recent success case from the BMW Startup Garage is the Israeli startup Tactile Mobility. The BMW Driving Dynamics team worked together with Tactile Mobility to establish a new technology for road condition detection, critical for autonomous driving. As of July 2021, the Tactile Mobility solution is being embedded into every next-gen vehicle of the BMW Group.
Since its start in 2015, the BMW Startup Garage has transferred over 100 startup technologies. That is about 10x the number of startup transfers corporations accomplish in 10 years, using CVC or generic technology transfer methods.
This is the power of the Venture Client model.
Do you want to benefit strategically from many top startups, fast, and at low risk? Then, establish a strong Venture Client unit with a proven model that enables the entire corporation (not just R&D) to adopt the world’s best startup technologies that make a difference to the corporation and, of course, to the startup.
Q: Why aren’t more corporations adopting the Venture Client model?
GG: Well, at this point dozens of corporations across the globe have established Venture Client capabilities. Among these are Bosch and Siemens. Yet, like any innovation, the Venture Client model also has its adoption curve. In the last few years, some leading global corporations have been the early adopters of the model. Among these are Siemens, Bosch, and Holcim as well as smaller and family-owned enterprises such as Otto, Giesecke & Devrient, and CAF. It will take a few years for the Venture Client model to reach the mainstream.
Becoming a good Venture Client, meaning finding the right startups out of 5 million, and adopting their technology effectively has its complexities. There is a whole system behind establishing a state-of-the-art Venture Client operation. Many corporates approached me for help. That is why three years ago I decided to create 27pilots to help corporations establish, grow and operate successful Venture Client competencies. 27pilots provides a comprehensive suite of Venture Clientsolutions, including Venture Client specific services, technologies, and data. Part of our service offering is to enable an organization to build and grow high-quality Venture Client operations. Our Venture Client technology allows corporations to digitalize the Venture Client process and activities. For example, we have specific software that can measure the strategic impact of startups. The final component of our solutions is Venture Client data, which helps corporations make decisions about which problems and startups are relevant and have a high chance of generating a competitive advantage.
Q: Do you work with corporates that already have corporate Venture Client units as well as companies that want to set up new ones?
GG: Yes, we do. For example, Bosch had created a Venture Client unit, called Open Bosch, on its own in 2017. Bosch engaged 27pilots in 2019 to help refine the Venture Client process, and also support Open Bosch with resources to further scale its ability to adopt startup technologies. As successful corporate Venture Client units, like BMW’s, grow, they need more and more external support.
We see Venture Clienting as a growing trend. 27pilots have just announced a partnership with the technology conference Slush. My vision is that in the future, at leading conferences such as Slush, corporations will be able to learn about the Venture Client model through speeches, panels, and workshops; network with other corporations that have Venture Client units; and find providers of Venture Client services and technologies.
To access more of The Innovator’s Interview Of The Week articles click here