And yet, investments in new businesses don’t always work out the way you hope, as any experienced investor will tell you.
Funnily enough, M&S has been around this track once already. In the dotcom boom it committed funds to a venture unit that invested in companies such as the online lingerie retailer Splendour – and, in fairness, you can at least see a thought process there – and the media start-up Talkcast (full disclosure: I was paid a crazy amount of money by Talkcast, along with several distinguished financial journalists, to create what was described as a “cross between Goldman Sachs and The Wall Street Journal” but which turned out to be closer to a hybrid of Lehman Brothers and GB News).
It didn’t work out very well. In fact, there are three big problems for any big company trying to get into “corporate venturing” as it is known.
First, and most obviously, investing in start-ups is a lot harder than it looks. It takes a special knack to work out which markets are ripe for disruption, which ideas will work, and, most importantly, which entrepreneurs can actually make it happen. The failure rate is very high, and the earlier you invest, the higher it goes.
It is hard to believe anyone working for a traditional company knows how to do that. Next, the core business has no real expertise to offer. M&S may be a retailer, and Shell an energy business, but that doesn’t mean either have any real insight into which new technologies will take the world by storm.
By contrast, they are more likely to suffer from an instinctive conservatism that dismisses new ideas as irrelevant. Finally, the culture of a FTSE giant is very different from a start-up.
The best new companies are run by mavericks, who don’t like rules, run a mile from a committee, and offend people as a matter or routine. Think Elon Musk or Steve Jobs. None of them would last more than five minutes in a corporate setting. A big company will have sent them packing before they have a chance to explain their ideas.
In fairness, Shell Ventures has been quite successful. And Unilever’s unit has not been a catastrophe. But neither have done anything to transform the prospects of the parent business.
Shell’s shares are trading at less than they were 20 years ago. Unilever Ventures has performed well enough, but it has hardly set the world alight, and it is still Bovril and Ben & Jerry’s that make the real money.
A venture investment would have to turn into the next Netflix or Uber to make any real difference to companies of the size of either of those giants. In truth, most of the money will be wasted. And even when it works, the returns will be modest, and will hardly transform a business, nor rescue it from long-term decline.
Any traditional conglomerates thinking that a whizzy start-up or two, backed with a few million from a far bigger balance sheet, is the answer to all their problems should think again. It isn’t going to happen – and they would be far better off working out how to fix their core business instead.
Giants like M&S, Shell and Unilever would be better off focussing on their core business than turning to ‘corporate venturing’ to save them