How big companies deal with successful startups: ignore, 'invest,' capitulate, then buy

Corporates may also "invest" by setting up incubators and accelerators inside the company. Employees may be able to use them to innovate. They might also bring in outside startups and try to incubate them.

It is extremely difficult to change a corporate culture that never embraced innovation and turn it into one that treasures it. The core reason is corporate politics and failure. Tolerating failure is not something a corporation does very well, especially when it's publicly traded. Failure is a hit on earnings.

Meanwhile, while the corporation is "investing," the startup continues to grow. They move from the margins into some of the core cash streams of the corporation. This is when it gets interesting. The startup creates value for the corporation's other competitors. They might buy the startup in order to gain entry into the market.

If the startup can continue to grow and can continue to eat up or maintain some market share, the corporation capitulates and bids for them.

One of the things that I am watching is to see how early corporations start bidding for startups. How big do they have to be in terms of market size or top line revenue? I think that if the Trump administration drops the corporate tax from 35% to 15%, you are going to see a big change in the way corporations engage. I think they start buying a lot earlier in the cycle. Combine a change in tax law with a corresponding change in interest rates and the internal corporate hurdle rates for M&A change drastically. How they calculate risk changes.

Most corporate balance sheets look pretty healthy right now. They have gotten rid of a lot of debt, or refinanced it at low rates. They have cash, and their stock is worth something so there are many ways to purchase things.

That's going to be very tough on entrepreneurs and investors because of risk/reward. Do you take the sure thing on an early bid, or do you try and build a blow out business that sells in the nine figure or more range?

Jeffrey Carter is an angel investor and independent trader. In April of 2007, he co-founded Hyde Park Angels, one of the most active angel groups in the United States. This post first appeared on his blog and is republished here with permission.


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