The how – different collaboration models and when to deploy them
Once its motivations are clear (see part two of this series), an energy company looking to collaborate with a startup must establish how exactly it will do so.
Will it buy-up stakes in startups or just forge a partnership? Perhaps it will even create the startup itself and unleash it into the market at a later date? There is no one size fits all approach, but we can broadly classify collaborations into four groups based on two variables: whether or not they involve equity transactions and whether they are ‘inside-out’ or ‘outside-in’.
- Outside-in, buying shares – examples include direct investment, corporate venture capital (VC) and investment through third party private equity (PE) funds
- Outside-in, no shares – examples include events such as hackathons, strategic partnerships and startup incubators
- Inside-out, and shares – examples include intrapreneurship (spin-off creation)
- Inside-out, no shares – examples include licences and startup platforms
Outside-in: first choice for the energy industry
Outside-in models are far more prevalent in the energy industry than inside-out ones. Of these, the most common are corporate VC models.
The likes of BP Ventures, ABB Technology Ventures, Equinor Energy Ventures and Iberdrola Ventures (Perseo) all take this route. Some companies have a twist on the model where it buys shares in startups both through its venture capital unit and directly through its business units (e.g. Engie), but most operate through the former.
Corporate VC is not the only game in town though. Schneider Electric and ENEL, for example, have opted for models that don’t involve equity holdings. ENEL’s innovation hubs seek out startups which can jointly develop solutions for their problems, then proceed through a pilot stage to partnership.
Alternatively, companies can simply support the development of startups in order to secure access to innovation. Shell has done this well with its social innovation incubator, as has Fundación Repsol with its ‘Entrepreneurs Fund’. However, such initiatives mostly fall flat and many have been discontinued. The exposure to startup innovation was outweighed by the level of investment and effort required to get startups off the ground – not a traditional specialism for energy companies.
Corporate VC: almost ubiquitous
In 2013, EIT InnoEnergy created the first VC community focused on sustainable energy. Now, we have company: corporate VC is by far the most popular route and therefore merits some special attention.
Corporate VC is ideal for the energy sector as, unlike many traditional VCs, energy companies are patient investors that don’t chase short-term gains. This outlook aligns perfectly with a capital-intensive industry with long lead times to market such as energy. However, that doesn’t mean it is easy – the right strategy is still key.
Here, two decisions are crucial. First, is the investment future or present facing? Second, what type of relationship does the investor want with the startup – how close and will it be purely financial or also operational?
These two variables give us four archetypes of energy corporate VC:
- Developer: Investees are related to today’s strategy and can improve the investor’s market position in the near future. For example, a wind turbine manufacturer may invest in a startup that reduces maintenance costs, such as drone company that inspects the blades – future integration in the business is a high possibility.
- Complementary: Also related to today’s strategy but without the same close relationship. For example, this could mean investing in startups that boost demand for the main product, thus a battery manufacturer may invest in e-mobility startups to expand its market.
- Emergent: This strategy is future-facing and speculative, yet still close. A boiler manufacturer worried about gas phase-out may surmise that its future lies in smart home tech and make investments accordingly, readying itself for change.
- Passive: Future-facing and more hands-off, the passive strategy seeks opportunities that aren’t necessarily related to today’s strategy and don’t require close cooperation. These may be purely financial investments (like traditional VC), but the door is open for investees to link into future strategy should things change.
Don’t forget the inside-out
Corporate VC – and indeed the outside-in structure – may not be for everyone though. Other successful models are possible.
Enagas Emprende is a good example. This programme supports internal entrepreneurship (intrapreneurship) within the organisation, supporting startups created by ideas and teams within the company. This creates startups laser-focused on Enagas’ problems and allows them to explore new markets with low risk.
It is a smart approach, but comes with its own challenges. For one, entrepreneurial people tend to be…entrepreneurs. Not working for large corporations (or so you may think). Then, once the startup has found its feet and needs to grow, do you spin it out or keep it in-house?
EIT InnoEnergy is working with Enagas on exactly these challenges. Firstly, using our proprietary tool built to assess startups, we have profiled potentially entrepreneurial individuals within the organisation and to what degree teams are complementary.
Secondly, spin-offs are brought into our own incubator, the Highway, allowing them to grow in a flexible environment (that boasts a startup survival rate of 97%).
Ultimately, no one model is superior to the others. It is all about fit – complementary cultures and strategies. Get those right and you are on your way to startup collaboration success. However, there is also the ‘where’ to consider – the creation of the most hospitable environment possible for the collaboration to thrive. More on that in part four of the series.