I am sitting here on a Friday at 4.23PM in…
“Digitization is reviewing the rules of competition,” write Martin Hirt and Paul Willmott in McKinsey & Co Quarterly’s May 2014 review while reflecting on the impact that digitization is having on established and new companies alike. The article ends with 6 critical decisions that CEOs need to answer in order to react to the advent of digitization. This article will expand on the fourth decision.
Click here to read about the introduction and first decision.
Click here to read about the second decision.
Click here to read about the third decision.
Decision 4: Diversify or double down on digital initiatives?
As digitization increases opportunities, it inevitably also increases challenges. Yes, more start-ups than ever before have a shot at becoming the next Fortune 500 company, but that doesn’t mean that all of them will. With faster and easier access to market comes an increasing possibility to start a business without being ready for it. Think about the importance that having a good website plays in promoting your business and how easy it is to create a simple website without needing to know anything about coding. A prospective investor, especially if they are part of a traditional company or a company that doesn’t have a sound digital presence, may very well be blinded by a start-up’s beautiful website and invest in it only based on appearance. Investing is meant to give a company a competitive advantage where they don’t have one, and if the advantage the investing company is seeking is in the digital realm, they may very well be tricked by a beautiful website. Additionally, nowadays it’s easy to feel pressured to enter the digital market, but that doesn’t mean that your company will profit from any digital initiative out there.
So what strategies can investors undertake to reduce the risk of investing in the wrong digital initiatives? One alternative is to invest in digital initiatives and set up a deadline after which kill them off if they are not profitable. If your company takes advantage of the availability of data, it can easily monitor the success rate of such initiatives. Another alternative is to set up a business incubator. If your company has the resources to set up an incubator, the latter option may be the most profitable. This has been the case of global venture capital firm Highland Capital Partners, who, in 2007, started one of today’s most successful business incubators, Summer@Highland, with the aim of both helping young tech entrepreneurs and building a profitable relationship with them.
Answer: unless you have the resources to diversify through start-up funding or investment, carefully assess which digital initiatives align with your long-term business goals, focus on those areas, and constantly monitor your ROI to motivate possible divesting.
How Summer@Highland works
It doesn’t take long to understand why Summer@Highland is the business incubator of the future. Its cutthroat application process starts online and is accessible to everybody. That is, everybody who is in college or just graduated from it. Indeed, one of the things that makes Summer@Highland different from other successful tech incubators, is that it only accepts application coming from college students or recent graduates. That’s because, as expressed by Michael Gaiss, senior vice president at Highland, “When we launched it was all about ‘let’s just connect earlier with really interesting people coming out of universities.’ That was sort of the DNA going in and for the most part it really hasn’t changed.” Another factor that sets Summer@Higland apart from its competitors is that it gives $20,000 to each startup without asking for any equity stake in the business in return. Instead, as Summer@Highland’s website explains, “each team is paired with a Highland investor with expertise in the startup’s field.” The firm also provides mentoring through other resources like partner law firms.
Why Highland Capital Partners benefits from Summer@Highland
Highland Capital Partners is a traditional firm. As such, it can benefit from new ideas, which are prone to come from young entrepreneurs. It’s true, those ideas may be raw because they come from students who are not as experiences as seasoned entrepreneurs. However, through making its knowledgeable employees available to work alongside the young entrepreneurs, Highland Capital can make those ideas into feasible business models and invest in them before anybody else can. A successful example of this process is the case of Gemvara, a custom jewelry website. The idea for the company was first developed by a Babson College student at Summer@Highland and, with the help of the program, it grew into a profitable company. At the end of the program, Gemvara was backed up by an investment of $25 million which came from Highland Capital itself. Highland’s digital investment has proven successful so far. Gemvara was selected for Inc’s 2011 30 Under 20 list. Additionally, as pointed out by this recent New York Times article, the company has raised $51 million in venture capital and is now growing into becoming the leading online jewelry retailer. Gemvara founders saw something that Highland couldn’t have predicted and, thanks to a small initial investment through Summer@Highland, Highland will now capitalize on its growth.
However, funding is not the only way the venture capital firm will profit from Summer@Highland. Another important outcome of the program is building relationships with the young entrepreneurs. These relationships may bring about two main benefits to Highland. On the one hand, if they don’t pursue their start-up after college, Highland could benefit from hiring them. The fact that the the young entrepreneurs’ ideas were chosen for the summer program must mean that they are smart and diligent candidates and, on top of that, thanks to the program, they are already acquainted with the dynamics of Highland’s workplace. On the other hand, if the young entrepreneurs end up pursuing their start-up, chances are they will go back to Highland rather than their competitors if they need any of their services. Once again, the latter phenomenon is shown by the Gemvara case. As Gemvara’s founder, Matt Luzon, said to Inc., “Rarely a week goes by when I’m not in touch with someone there.” In March 2011, Matt Nichols, a principal at Highland who helped the Gemvara team during their Summer@Highland experience, left his venture capitalist job to join the jewelry company as a board member and executive vice president of operations. Matt Nichols is now the CEO of Gemvara. Some may think that the fact that Nichols left his job Highland is a negative thing, but, in reality, it isn’t. Having an ex-Highland employee in such a successful firm will only intensify the relationship between the venture capital firm and Gemvara.
When digital initiatives are so easily accessible, it’s easy to be tempted to invest in them indiscriminately. However, as the case of Summer@Highland shows, companies must be aware of both the types and mode of investment that are most suitable to them given their resources and the areas in which digital investment is needed most.