Follow the money : How are Big Tech and venture capital influencing innovation in the new model?

If you want to know who’s driving the explosion of tech innovation, follow the money. Global venture funding increased 83% year over year from $392B to $718B in 2021, and it’s the tech giants and venture capital firms who are the main sources of this investment.

Their role is not limited to being a source of funds. They are having a major influence on the culture and direction of innovations. Indeed, Big Techs positively encourage the creation of startups to develop new products and services that enhance their vast product ecosystems; being one example among thousands, Salesforce has recently acquired the business communication platform Slack in order to integrate it into their own offering. But, for now, let’s focus on how Big Techs are deploying their capital to enable young startups to grow.

The deep pockets of Big Tech

It’s no surprise that the tech giants are at the forefront of startup investment and acquisition. The world’s biggest tech companies – Facebook, Amazon, Google, Microsoft, Intel, and Apple – were startups themselves not long ago, and they have grown rapidly on the back of innovation and disrupting the marketplace. In many ways, they still think like startups and have an understanding of startup culture that traditional investors cannot match.

These are also the companies that have done well coming out of the pandemic and have capital to burn for M&A and investment activity. Alphabet, Amazon, Apple, Facebook, and Microsoft had a combined total of $472B in cash in May 2020. Big Tech is hungrily eyeing the next innovative business models, and they are in the driver’s seat as startup valuations are exploding again across the board.

So, which startups are catching their eye and their investment? The answers provide strong insight into where Big Tech sees growth coming over the next decade.

1. Automotive. While traditional auto manufacturers struggled during the pandemic, Amazon, Intel, and Google invested heavily in startups developing the new software-driven mobility ecosystem: notably, electric, autonomous, and shared vehicles as well as mapping, augmented displays, EVTOL, and system integration.
2. Developer tools. Google, Microsoft, and Amazon are investing in crowdsourcing platforms, code marketplaces, data training and modelling, automated testing, and database tech to empower developers.
3. Data. Google, Intel, and Apple are all buying into AI/ML and big data analytics startups in areas such as automated monitoring platforms, AI/ML, predictive analytics, NLP and voice tech, and data governance and visualization.
4. Computing technologies. Intel, Google, and Microsoft lead in powerful computing technologies, including quantum, cloud, edge, AI chips, and semiconductors.

A global phenomenon

US-based companies are not the only players in town. Big Tech players in China and India are also flexing their financial muscles, making the scramble for startup investment a global phenomenon. Chinese companies such as Alibaba, Tencent, Xiaomi, Huawei, Baidu, and ByteDance are on the acquisition trail and are rapidly gaining ground in new markets, especially in South Asia. They are not the only ones expanding in this region. For example, India’s local ecommerce giant, Flipkart, backed in early stages by Microsoft, among others, was finally acquired by Walmart, and Google has announced a $10B India Digitization Fund to provide their own funding for Indian startups[SP2] . Africa too has its own emerging startup culture, and in October 2021 Google announced its Africa Investment Fund, with plans to invest up to $50 million in African early- and growth-stage startups.

The venture capital boom

VCs have been an equally vital pillar of the innovation economy, and VC money is flowing at unprecedented levels – in 2021, they invested a total of $718B (+83% YoY), making for a record year. There were more than 1,556 mega deals (defined as deals of more than $100M, +147% YoY), accounting for $414B in investment, and there are now no fewer than 959 unicorns (privately owned startups with a value of over $1 billion, +69% YoY)[SP3] . If we’re following the money, the path leads directly to VCs.

VC investment is flowing into startups in two different ways – from the traditional venture capital firms who invest their capital in exchange for equity for a return on investment, and from corporate venture capital (CVC) funds, which are set up specifically to give big corporates access to promising startups. Most big corporates today, including Capgemini, have created a CVC or are in the process of doing so. Today, there are more than 1000 CVCs in operation, and in 2020 they were involved in over 3,000 deals valued at a total of $120B.

VCs as a primary source of innovation intelligence

As we have seen, VCs are much more than just investors; they bring their own unique perspectives to the collaboration paradigm and are a valuable source of qualified market intelligence of emerging trends. They can analyze the market differently, bringing an outside-in perspective with the ability to take risky bets. This gives them unique expertise in identifying the most promising young companies. It’s worth remembering that without the belief that VCs displayed in emerging payments trends, the fintech and payments revolution might not have happened at the speed that it did – large VCs like Andreessen Horowitz and Sequoia Capital invested early in firms such as Stripe and Klarna.

Capgemini as part of the open innovation ecosystem

If startups are providing the disruptive innovation and corporates are offering the go-to-market opportunities and augmenting delivery capabilities, Big Tech’s and VC’s financial firepower are key enablers in the new model. They help drive the innovation economy by supporting high-potential startups, spotting trends early, and giving startups the freedom to experiment, innovate, and disrupt while staying afloat.

At Capgemini, we closely track the changing dynamics of the open ecosystem, giving our clients unique access to startup innovation and disruptive technologies. We are a growth partner for promising startups in the B2B space, providing them with access and penetration into markets and clients, insights and data, and our army of practitioners, experts, and thought leaders. With our ISAI Cap Ventures fund, in partnership with ISAI, Capgemini Ventures can on the one hand leverage rich sources of market intelligence and generate co-investment opportunities, and on the other hand can help shape partnerships between selected startups and Capgemini for joint market opportunities. For more information on how to incorporate startup solutions into your innovation model, look out for forthcoming blogs and vlogs in this series. Meanwhile, you can catch up on the previous blogs in the series here.

---