Professionally I have had the opportunity to work both for start-ups and for large and established companies. More recently I have experienced working in a start-up which became one of the most successful companies in history.
I have learned that size matters, and what is right to do and makes sense in a start-up, is absolutely not compatible with the dynamics of a large company. This is for 3 main reasons:
- The attitude to risk / return / innovation of a start-up must inevitably be high, while in an established company it is undeniably low;
- The skills of the people needed in the 2 “structures” are usually very different, if not on occasion incompatible;
- In the best case, the law of large numbers obliges large companies to focus on a few projects able to produce great returns and abandon experimentation on smaller projects.
The potential innovation engendered by many small projects represents the ecosystem in which start-ups proliferate.
The same dynamics can be observed in Venture Capital. Large Funds are more “efficient”, able to grow in size and focus on a limited number of transactions on paper, and produce returns compatible with the size of the fund.
In a scenario such as the current one, in which the “exit” (the fund’s exit from the financed companies), offers less opportunity for listing on the markets and more for M&A activity, it obliges the funds to prolong their stay in the companies until achieving compatible valuations with the return expectations of the funds.
The structured Angel investing is vice versa, and has emerged in recent years as an ideal structure to make efficient investment in start-ups, starting from an unavoidably greater risk attitude, it can afford to support more initiatives with a lower demand for capital and with expectations of returns in line with the dynamics of the current market.
If the market for these start-ups is mainly represented by large companies that outsource the innovation process, provided they know how to combine entrepreneurship with a quantitative and structured approach, the size of equity and return expectations play in favor of structured Angel investing, compared to the dynamics of the traditional Venture Capital investment funds.
This is particularly true for the Italian situation, where the opportunities to make a few large transactions are scarce, while the conditions do exist for supporting a large number of initiatives that see the potential exit market in the need for innovation of established companies. In addition to market demand, support for new business development also plays a social role. In my view, it will be possible to rely on an economic recovery and the creation of new jobs, especially for new generations, only if companies can concretely respond to the need for innovation that our society articulates. Creating a climate favorable for the emergence of new businesses which tangibly develop innovation, should be placed at the top of the priorities of an economic policy agenda.