How start-up collaborations can jump-start digital transformation in PE

Other challenges to navigate might include misalignment on the speed of decision-making and different communication styles. In a survey by Oxford Research, 58% of Nordic C-suite executives said that bureaucracy within their own corporations created an obstacle when they wanted to partner with start-ups. 

The right preparation can ensure a mutually beneficial and successful partnership. PE firms should consider establishing a small, specialized internal function to actively manage and facilitate the relationship between the two entities. Alternatively, they can employ an effective external mediator to do the same.

An effective intermediary can facilitate a start-up collaboration by sourcing and vetting potential partners and helping reconcile strategic goals and cultural differences. EY recently advised a PE firm on potential routes to digitizing a portfolio company in the health sector when the pandemic had closed their treatment centers. By identifying key areas of leakage, “burning platforms” and processes that would benefit from digitization, a suite of potential start-up partners capable of delivering the needed solutions was identified.

Scalable innovation at a speed that suits PE time frames

Despite potential challenges, the benefits of collaborations often outweigh the risks when it comes to the rapid delivery of scalable innovation capabilities. In order to use digital solutions as a value-creation lever at a pace conducive to exit time frames, PE firms must embrace new approaches and portfolio companies will need assistance. 

A well-managed start-up partnership model can be highly scalable when the PE firm itself is the partnering entity rather than a stand-alone portfolio company. With this engagement structure, the resulting digital solutions can be more easily rolled out to create value across the portfolio. There are significant economies of scale for a PE firm if they can embed themselves in the right start-up ecosystems and learn to identify opportunities in key areas that can be leveraged across the portfolio as opposed to assessing each company’s maturity level and appetite on an individual basis. 

As PE investors define value-creation opportunities at the onset of acquiring a company, they must think about digital from the start and what the right pathways and levers are to accelerate those capabilities within a two- or three-year time frame. In the article How private equity can define a business strategy for a digital world, author Richard Bulkley asserts: “Activating [digital] transformation — while already important before the pandemic — has now become a core component of the value creation agenda. The time has come for PE to embed a digital strategy throughout the deal cycle — from origination and due diligence, right through value creation and exit — as well as within the infrastructure of the firm itself.”

It is also important to note that, while the agile testing and iterating approaches that start-ups can bring to the table can be a great way to usher innovative techniques into an organization, engagement should not end there. In order to realize a path to scaling, companies will still have to take a close look at obstacles such as talent, operating model, governance and funding, and find approaches that make start-ups real partners in growth.

Whichever approach PE firms choose, it is a clear that in a world of increasing complexity with rapidly accelerating rates of digital transformation coupled with scarcity of talent, in-house development strategies are neither always the best nor the only potential solution. By engaging in start-up collaborations with the right approach and mindset – and an effective mediator – PE firms can realize rapid and effective digital transformation in their portfolio companies.