Fionnghuala Griggs  -  Lisa Chang  -  Derek Tong FintechLinks

Get involved or get left behind: how established companies can access the technology revolution

Technology is changing the way global businesses operate on a scale not seen since the Industrial Revolution of the 18th and 19th centuries. Much of the technology changing the market is being developed by start-ups. Start-ups have the agility that will facilitate access to new audiences and customers and the ability to quickly react to changing markets by detecting disruptive changes.

So, what are the options for financial institutions and other corporates looking to embrace this revolution?

Incubation

What? Ideas generated inside the organisation are developed by an internal entity that enjoys complete autonomy from the rest of the organisation.

Why? The technology under development is not mature enough to be integrated into your organisation as a whole; an incubator allows the ideas to be developed on a standalone basis, even whilst the entity itself remains part of the corporate group.
Pros Cons
  • Autonomy from internal processes
  • Full control of innovation assets
  • Safe way to introduce new kinds of thinking inside an organisation whilst maintaining stability of its exising operations
  • Similar to R&D if no spin-in (bringing the entity into the main group) or spin-off (sell to a third party)
  • Difficult to implement
  • Long-term timeline to return on investment
  • Betting on a single, untested idea

 

Acceleration

What? A group of start-ups are selected to participate in a limited-time program run by the company and then return to the outside economy (or are acquired by the company).

Why? You are not ready to invest and wish to explore different options before a potential future investment.

Pros Cons
  • Access to creative thinkers and new talent
  • Limited financial investment (seed financing)
  • Limited duration (4-18 months)
  • Broad focus on different ideas
  • Limited control over innovation assets and the direction of travel of the start-ups
  • Start-up can eventually sell out to competitors
 
Commercial cooperation

What? An established company and a start-up cooperate on the basis of a commercial contract.

Why? The company wishes to access technology without making an investment or exposing itself to the risk of the start-up failing.

Pros Cons
  • No financial investment or risk
  • Getting to know the products/services
  • Getting to know the team
  • No or very limited control
  • Assumes a certain level of organisational maturity from the start-up
  • Others may benefit from the same products/services
 
Joint venture/consortium

What? A group of investors/corporates works together through an incorporated or unincorporated entity.

Why? You can team up with other investors/corporates to develop the technology.

Pros Cons
  • Share innovation/combine technologies
  • Expansion from established business lines
  • Risk sharing and cost savings
  • Complexity of establishment and decision-making
  • Slow and delicate implementation
  • High rate of failure

Note that collaborations between (potential) competitors should be carefully considered under the applicable antitrust laws.

Acquisition

What? A corporation acquires a majority or minority interest in a start-up or scale-up

Why? The technology already exists and is mature enough to be incorporated into your business. You get access to a technology, service or product that is not developed internally. This would save time, resources and enable you to engage in more risky ventures in an external entity.

Pros Cons
  • More control over innovation
  • More due diligence, so more certainty on what you are getting and understanding of the risks
  • Technology may already be developed and ready to integrate into your business
  • More complex governance of relationship with the founders on an ongoing basis
  • How to fix the right valuation and pricing mechanics?
 
What next?

Join us for a seminar in our London office this Autumn to find out more about the main issues in conducting M&A in the Tech sector.