Why Large Companies Invest in Startups?

By Raquel C. Hub101 Staff

Startups are often seen as modern-day pillars of the American entrepreneurial spirit. To take a startup from brainstorming sessions to boardrooms and successful IPOs is the goal of countless entrepreneurs across the world. However, the often casually flexible culture of the American startup scene is typically thought of as antithetical to the assumed stuffiness and formality of mega-corporations. 

With this in mind, it can be baffling to some that such corporations often promote a business strategy of actively seeking out and investing in promising startups. Don’t be fooled by what at first glance appears to be a clash of company cultures. There are a variety of reasons as to why a counter-corporate-culture startup can prove an invaluable investment for a corporate giant.

1.)   Complementary technologies are in.

Investing in an existing startup with a product which has already proved its usefulness is often seen as a faster and more reliable source of innovation than traditional Research and Development teams. Corporations such as Google utilize investment wings of their company to identify unique economic opportunities to be found in startups across the globe.

Part of this trend is driven by economic necessity. As giant companies find themselves less agile than in previous years, they discover a new challenge in continuing to progress in innovation. When both profit margins and a corporation’s position in the global marketplace are endangered by R&D projects not coming to fruition, providing funding and networking opportunities to existing technology often proves an attractive solution. Typically, investment branches will seek out startups to complement their own niche within the industry. Such a strategy ensures a corporation can maintain a focus on its brand while also extending upon the functionality of its services.

1.)   Can’t beat them? Join them.

It’s an oft-repeated adage of business that everyone is looking for the next big thing. This is especially the case for any corporation looking to maintain its edge within the marketplace. However, as any entrepreneur knows, market disruption can come from any number of places. This is why corporate investment branches may also be on the lookout for potential competitors or market revolutionaries still in their early stages--to get them on their team early on. Identifying market game-changers in advance can be the best way to ensure a large corporation is able to get in on the game, or to successfully adapt if a market change is inevitable. Sometimes a startup’s product just has the critical edge to outperform existing groups within its industry. In these cases, corporate investment wings may see the opportunity to invest in stability for the future through making soon-to-be successful friends.

1.)   Localize yourself.

Occasionally, it’s easier for a corporation to rely on the groundwork already provided by a startup when working within an unfamiliar locale. Rather than focusing on funneling money into researching potential market entry points and understanding local tastes, turning to a startup with a pre-existing foothold or an insightful outlook on an area can be a safer way to spend money. In some cases, investing in a startup is simply the best way to do business in an area which is otherwise not open to new companies moving in. If a foreign corporation can expand business into a new place while utilizing the image of a local face, it can make expanding on business a much smoother process.

This, of course, is not a comprehensive list of reasons as to why corporations often seem to take interest in startup investment. Those with interest in further research of the subject need not look far. Oftentimes all that is necessary is to glance at the newspaper’s business section to see how the complex interactions between startups and larger corporations shape the economic landscape of today.

Operated by Cal Lutheran University in Westlake Village, CA, Hub101 offers coworking, incubation and community for entrepreneurs and small business owners to start, grow, and scale their startups with the help of mentors, coaches and service providers.