Insights: How investors are unintentionally stifling innovation
Andy Challis, Barclays’ Head of Strategic Investments, shares his thoughts on the complex and sometimes counterproductive relationship between startups and investors – and how the bank is giving startups “space to innovate”
The global startup economy is booming, generating US $2.8tn in economic value according to the 2019 Global Startup Ecosystem Report. Around the world, new incubators and accelerators are emerging – brim-full with new businesses looking to rewrite the rules.
Global investor appetite to find the next big thing remains keen, and Barclays plays a key role in the stories of some of the most exciting innovators to have started life in the last few years – like rising stars Cutover, Crowdz and Simudyne.
Conventional wisdom is that funding a startup is a commendable way to make investments. It’s a simple idea where everyone is supposed to win: the investor gives fledgling new businesses the money they need to grow and continue to innovate, and somewhere down the line the investor makes their money back if the startup becomes a success – often by buying out the startup and reaping the rewards of its profits.
But this investment model has led to the emergence of a phenomenon which is actually stifling innovation and could threaten the potential of the thriving startup economy. It has introduced new questions over the value of financial investment in startup businesses, and whether it is really a force for good.
We call it the ‘investment paradox’, and it typically plays out like this: an investor is attracted to a new, cutting-edge startup with a bright future. It gives the startup funding, and the startup begins to become successful.
Encouraged by the startup’s success, the investor takes over the company prematurely, and ultimately cuts short innovation and the company’s promising future. Counterintuitively, the investor has limited its own potential reward, and the startup’s journey is over. In this paradox, everyone loses.
The inescapable truth is that as an investor you can’t buy innovation, you have to cultivate it. Knowing this is why Barclays views itself as a strategic investor, not motivated primarily by financial returns. We are far more interested in forming long-term partnerships with startups whose ideas could change the way that both the partnership and the market as a whole do business. Agitating to take over the companies does not enter the equation.
Don’t stifle your startup
That’s why we look for clear opportunities to collaborate and partner with startups that can evolve our business model. We're not looking for control. We're not looking to limit their capability. And we recognise that the speed and dynamism that a young business can bring, coupled with a partnership with us, will lead to outsized benefits for the market.
Giving startups the space and resources they need to embrace innovation is the best way of helping them avoid giving up a stake in their business to investors who may stifle their innovation. Our approach is to provide hands-on support, to encourage innovation and new ideas.
That includes mentoring and feedback, as well as access to the bank’s customer base – so our startup partners can test their business propositions in the real world. For instance, the Barclays Accelerator powered by Techstars programme opens up unprecedented access not only to a world leading bank, but also to Techstars’ international mentor and investor relationships.
The proof is in the pudding. Although conventional ‘cash for equity’ investments remain the dominant model in global startup investments, our alternative model, which involves the investor taking only a small minority holding, is already paying off.
Justin Lyon, CEO, Simudyne:
“Barclays’ feedback was pivotal. All too often in the corporate environment it's really hard to actually understand what you're doing well and what you're not doing well. When you talk to customers directly, they might want to be polite and not say they don't like it, but they just don't buy it. And you never really understand where you fell down and what you were missing.
The innovation team understand when they can push, but also when they need to be a little bit more chill and recognise that they need to give us a bit more time.”
From mentoring to market-ready
Take for example the partnership between Barclays and Simudyne, a software company that helps banks to build artificial intelligence simulation – pioneering technology that is an increasingly important competitive edge in the financial services industry.
Today, Simudyne’s AI simulation platform plays an important role in Barclays’ banking strategy. But the partnership started when Simudyne joined the Accelerator Programme in 2017, as a fledgling company with a big idea to change how banks manage strategic decisions, in both their risk and their money-making business areas.
Over the course of the programme they received mentoring from senior leaders across Barclays, such as then Group Strategy Officer, Ben Davey, as well as honest conversations with Barclays’ customers on their product’s viability. Simudyne CEO Justin Lyon credits this uncompromising feedback from senior leadership and potential clients as a crucial catalyst – accelerating the development of their product and helping it to become market-ready.
Barclays recognises the importance of acting as a mentor and a sounding board, but also considers it imperative to trust startups with the space and time to innovate, without interference. Ultimately, the decision to choose the right investor lies with startups themselves.