Gary Dushnitsky is an associate professor at London Business School who researches and teaches entrepreneurship, with a focus on early-stage startup funding models. He described his job as trying “to bring in an academic, data-driven approach” to looking at different ways of raising money. In an interview with tech.eu, Dushnitsky talked about crowdfunding and corporate venture capital as alternatives to traditional VC funding in Europe. We're publishing a few fragments of the interview edited for clarity.
“These days most practitioners will tell you there are an art and a science to it,” Dushnitsky said. “Increasingly the science part is taking more and more shape, people who are trying to bring AI tools and otherwise. The body of knowledge that myself and others have built might be viewed as a way of, at the very least, filling up the science aspect. There's now also a realization that the data-driven answer to many of the fundamental questions can actually help, if nothing else, in increasing the likelihood of success.”
Crowdfunding as part of the growth strategy
“If you look at the landscape these days there are four broad types of crowdfunding,” Dushnitsky said. “You can talk about equity crowdfunding (like Seedrs, Crowdcube, or Syndicate Room), then there's lending-based crowdfunding (like Funding Circle, Lending Club, and others), then, of course, you also have the reward-based crowdfunding platforms like Kickstarter and Indiegogo, as well as donation-based ones.”
Crowdfunding, said Dushnitsky, is a vehicle for entrepreneurs to acquire funding — but it could also be something that drives the business needs of a startup.
“One example I like to give is Monzo, for which crowdfunding is rather an integral part of each funding round that it has put in place. It raised £1 million in 96 seconds, which is a record, but even in later rounds, it carved out £2.5 million in funding on CrowdCube in addition to some £20 million that they raised from institutional investors.
“When you look at the reason for this, you see that Monzo is increasing the network. It's more than funding; it supports the growth strategy, which is interesting when you contrast them with another fintech rising star, Atom Bank. The latter did not actually go with crowdfunding, instead opting for corporate investors. This is because their business does not supply checking accounts or grow through a social network but provides loans for a much smaller group of people. But when you provide loans, the key to unlocking that business is having access to an ability to manage cheap sources of capital. So they went to the corporate investor BBVA because that brought them what they needed.
“When I talk about innovation and the funding of innovation, I’m not looking at funding as something separate to the business, but something that really bolts in, integrates with, and drives the business growth of the startup.”
“Smart” corporate venture capital
“One thing that I'm saying that's true about corporate accelerators and corporate venture capital is that people are either very excited or very disillusioned by it.
“In some work that I've done, I’ve found that having a corporate backer significantly improves the startup performance and also has positive benefits for the corporate. In one analysis, when we look at biotechnology, for example, if you compare a corporate-backed biotech startup to a venture-backed biotech startup, the former has a higher output of scientific publications and a higher output of patenting.
“The other thing that we found is that beyond science it's just the business scale-up advice. If you have a corporate with expertise in compliance and FDA approval processes, that helps the startup in a way that doesn't relate to the technology but relates to the go-to-market strategy.
“If you are operating in an industry with these kinds of assets, either technological or whatever else the corporate has that are useful for you, then having a corporate investor can be quite beneficial. I think the trick is to ask yourself: a) does the corporate possess these assets, and b) does the vehicle that you interact with, be that the corporate venture fund or the corporate accelerator, have people in place who know how to unlock those assets?”
What to choose
“Fundamentally, from an investor’s perspective, there are three main actions. You need to source the deals and close the deals, need to win; once you've invested, you need to help company be the winning one, and those are very different skillsets.
“As soon as the cost of capital decreased, more people were able to participate in startups, but those people often need more support to gain a comprehensive set of skills, allowing them not just to have a hunch, but to build an organization that can monetize that hunch.
“That's why I think there's an emphasis on the winning.
“In the context of biotech, it could be that a large corporate with all these spectrometers around is the way to provide you with that support. In other sectors, in other domains, maybe what you need is those so-called “cloud VCs” or “platform VCs” that now have not only an in-house investment team but also a that can help you avoid unnecessary mistakes along the way.”
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