Venture Client: Working With Startups, Saving and Hedging Risks

Hi, I’m Max Volokhov, head of R&D at Mitgo Tech. Today I want to talk about a relatively young tool – Venture Client. It seems to have been specially created for IT businesses with their increased demands for speed, product testing, and other magic. If you take into account that in our turbulent times any modern company is a little bit IT, then the circle of interested parties expands almost to the entire market. So,

There is a field of knowledge called corporate innovation, in which a company creates something new. Recently, innovation tools have shifted from R&D laboratories towards open innovation – working with the external market. The company creates an interface that is responsible for searching and analyzing everything new that appears in the relevant field.

For a long time, the paradigm was: if you want to work with a startup, you must buy a stake in it, enter it through a VC. Or you could buy it completely, which is called M&A. The venture client model solves roughly the same tasks, but by working with it, you don’t have to buy shares or invest, you just need to buy the startup’s services at market price.

You get the product, and the startup gets the money to continue developing and not die. That is, for business, it is the same step towards innovation, but cheaper and with a wider choice, because not everyone is willing to sell their shares for various reasons. Therefore, it is a way to greatly expand the number of projects and the range of solutions that can be applied in the company.

What distinguishes purchasing services from a startup from the classic procurement of a company? Why is it singled out as a separate direction, which even has its own name?

These are completely fair questions. Buying services and products from both large and small companies is a long-standing practice, and there is nothing new about it. However, as the market structure changes and startups begin to play an increasingly important role, there is a need to turn the process of interacting with startups from an isolated incident into a systematic approach. This is where “venture client” comes in – a conscious and formulated process of systematically and massively procuring services and products from startups, while also managing the risk that comes with working with startups.

Two factors come into play here. Firstly, purchasing needs to be done relatively quickly, as the procurement process in a company, with all its approvals, can take up to a year, while in the case of startups, it may need to be done in just a month. Secondly, startups always carry a risk. It is highly undesirable for a large company to expose itself to risk from such a small partner, which is why there is a special “sandbox” where mutual benefits can be tested without risking the entire business.

Within companies, both business and service can act as “customers” for such a dedicated department. Some are interested in increasing sales, while others are interested in reducing costs and improving the efficiency of their processes. Therefore, essentially, any head of a function, service, or business in the company can be a venture client. Therefore, this tool is quite flexible. Everyone has different requests, and for each request, if it is clearly formulated, companies can be found that promise they can help. Of course, this is a conveyor job: finding not just one, but a dozen, conducting pilots with all of them, understanding what is real and not just pictures and presentations.

Here’s a work situation, for example. I am the head of the sales department. I need to, let’s say, increase sales to a certain volume, and I want to test new customer retention and management methods. I go to the R&D department and say: I have this task, offer me a choice of ten technologies that are currently being developed by startups for us to conduct pilots with. Then the guys go off and find those companies that promise they can influence the desired metrics. Next, a joint pilot is conducted, and in the end, it becomes clear whether it works or not.

Then there are three scenarios. The first simply involves a short-term contract for work, like any other supplier. The second option is that the startup can be “handed over” to the innovation department, which can buy a stake in the startup. The third format is the complete purchase of the project, that is, M&A. If you understand that the startup has a real core feature and you want to move with it into the markets, you want it to be yours and no one else’s, then yes, you should think about buying it. The main thing is that in any of these three scenarios, you already have experience working together, and therefore the risks are always lower.

If we look at venture clients from the perspective of startups, there are two key benefits when working with a large company. The startup receives investments, which provide more time to find the right product. This can be seen as a healthier way of obtaining investments. You receive them from your activity, which is what you were created for, essentially.

For example, you can charge your phone with some super-fast method, or you can charge it properly through the right port and with the default voltage. In the long run, it’s still better for the phone’s battery to be charged correctly. In our case, it’s the same thing – healthy business relationships between two entities, two companies, where everyone understands what to expect from each other. One declares, “Here’s what we’re going to do,” and the other pays for it. That’s it! Crises begin when the number of variables, expectations, what the company should or should not do – whether it’s about profit or growth, a strategy for exit, or something else – increases in these relationships. Here, all of this simply fades into the background.

The second important point is that all clients are the main source of feedback. Big or small – that’s secondary.

In conclusion, I want to answer one common question. When, for which company, does it make sense to look at this type of R&D work model?

The answer is very simple – if you want to survive in the next decade, then your company must have this function. Right now, it may be something new, but in a short time, it will be a must-have. If the company is large, such a department can be created in-house, and if the company is smaller, it makes sense to resort to the services of an agency that will cover this function for it. There are fundamentally no limitations. This is a basic task of any self-respecting company that doesn’t want to die and wants to grow. If there is no development task, and you just need to stay afloat, maintaining the status quo as it is, then of course, you can do without it. But again, there are no guarantees.

If you have any comments, thoughts or insights, please, let me know via email. Or you can visit my personal blog at Maxv.tech for more info about startups, VC and corporate R&D.