Start-ups force finance chiefs to rethink attitude to risk
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When Heriberto Diarte started the corporate venture fund at Schneider Electric in 2017, he banned any member of the French utility company’s senior management from being part of the investment committee. Especially the chief financial officer.
“I said: ‘No. Absolutely not. Everything that makes you an amazing CFO makes you a lousy investor’,” says Mr Diarte.
A free rein to invest the company’s $500m corporate venture fund was one of Mr Diarte’s conditions when he came to the company. He was brought in to help Schneider Electric make investments in the companies that would be transforming the energy business a decade later.
To do this successfully meant not only keeping senior managers at arm’s length but also educating the finance chief in particular on how to approach investing in start-ups. Mr Diarte warned that he would probably lose most of the $500m within the first five years. Then, if he was lucky, in the following five he would gain it back, probably on one of the most unpromising investments.
Almost every large corporation these days is experimenting with different forms of innovation, whether through an in-house lab, running a start-up accelerator programme or setting up a corporate innovation fund. They are looking for ways to capture new ideas from younger companies and to make sure they stay abreast of disruptive change before an upstart puts them out of business.
“Ten years ago, nobody wanted to work with start-ups, now that has changed, certainly in banking,” says Alex Barkley, portfolio manager at HSBC Ventures. “Most of our senior leaders recognise that start-ups play a role in our supply chains.”
Since 2014, HSBC Ventures has invested in start-up and scale-up companies such as supply chain platform Tradeshift and Quantexa, a financial-crime detecting tool, and has partnerships with many of these.
Working with start-ups can be a chief financial officer’s nightmare, however. These projects seldom look good on a conventional profit-and-loss account. A company can spend millions on a pilot project that goes nowhere.
Some 55 per cent of start-ups and 45 per cent of corporations end up dissatisfied with their partnerships, according to research conducted in Europe by Boston Consulting Group.
“Innovation projects are littered with failures and they can be hard to justify,” says Oliver Graham-Yooll, an innovation consultant at Sia Partners, an innovation consultant at Sia Partners, who regularly works with large corporations to help them find start-ups to collaborate with or invest in.
Mr Barkley says: “CFOs traditionally have a mindset that is cost-efficiency driven and risk-averse. They don’t like to waste any money.
“With innovation projects, there needs to be an acceptance that you’ll not always be successful. Many proofs of concept will not work. That doesn’t necessarily mean the project overall has been a failure.”
In addition, start-ups can be frustrating to work with because they are scrappy and immature, and may not understand how to navigate the procurement systems of a large company. “I have been presented with a vendor contract that was written on a single sheet of A4 paper,” says Mr Barkley.
But shutting the chief financial officer out of the picture is not necessarily the right approach, he adds. “Innovation is a team sport and if you work in a silo it will come back to bite you.”
As a consultant, Mr Graham-Yooll says he often meets the chief financial officer for the first time when a project has already been designed and is being presented to an investment committee for funding. “That’s far too late. You have to bring them on board much earlier,” he says.
Late involvement often results in rejection of a project: “CFOs don’t want to be prison guards or gatekeepers, but often they get brought such deformed financial plans they have no choice but to kill the project.”
Mr Graham-Yooll says chief financial officers could make a number of small changes to help start-up projects run more smoothly.
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First, they should consider easing some financial and procurement rules because start-ups need to be paid faster than big suppliers. Fledgling companies may be unable to take on unlimited liabilities in the same way as a bigger supplier can.
If companies are investing in start-ups, it helps to commit a sum of money for a period of five years or more to avoid the innovation team having to come cap in hand for every transaction. Small sums of money can be harder to get approved than large sums, and this can slow down a project.
Chief financial officers should also be prepared to stomach losses for those five years.
At Schneider Electric, Mr Diarte says it took about two years to get the senior leadership team to understand how the venture team wanted to operate. It has helped that the power sector is becoming interested in the kinds of alternative energy, electric vehicle and battery development companies that the venture team invests in.
But the uncertainties of betting on young companies still sit uneasily with the chief financial officer. As Mr Diarte tells it: “One day, two years after I started, the CFO came to me and said, ‘I get it. I understand that you will lose all your money some of the time’. I said, ‘No, you still don’t understand, I will lose all of the money most of the time’.”