Pittsburgh’s old industrial companies are paying attention to startups and Mike Matesic thinks the surge in corporate venture funding bodes well for local M&A activity.
“If you’ve got a major Fortune 500 company that’s now a customer and investor in you, other investors take notice of that,” says Matesic, who led and invested in multiple startups before creating Idea Foundry to foster and invest in innovative startups.
As president and CEO, Matesic has assisted more than 200 regional startups with funding and growth. Now, he’s excited to see more established Pittsburgh corporations investing in startups and seeing their potential.
“Instead of pure, ‘Let’s buy it when it is something,’ it’s ‘Let’s start investing in it before it is something,’” he says.
In this week’s Dealmakers, we spoke with Matesic about how corporations and startups are working together to grow Pittsburgh’s economy.
Launching new products
Corporations are waking up to the fact that startups can launch a product just as easily as incumbent established entities — and sometimes even more easily.
“If they can launch products, why not invest to gain access to that innovation, gain access to that product, and then, maybe access to the company?” Matesic says.
Larger, established corporations are naturally risk adverse. Their structure, and responsibility with regard to profit and loss, budgets and capital expenditure planning, limits their ability to be nimble and disruptive, especially when failure is such a real possibility, he says.
Pitchbook reports that while M&A activity remains high overall, corporate venture capital is investing larger amounts. In a December blog post, the private equity data company stated that “for 2018, the median pre-valuation of early-stage startups with corporate backing sits at $32.3 million, a 29 percent increase from 2017 valuations and 30 percent valuation premium over startups that received financing without CVC involvement.”
Increase the capital base
Corporate venture capital spending is good news for the region because it’s another way to attract more capital and buyers, which has been an ongoing struggle.
When Idea Foundry started in 2002, startups were told they had to move out of the region to get capital, Matesic says. “That, fortunately, is long gone because we have investors investing that don’t have any operations here.”
When outside companies buy startups, it can lead to them opening an office. For example, Amazon bought a small Pittsburgh startup and now has more than 100 employees in the region. Autodesk bought two Pittsburgh companies and had a sizeable team in the area before it pulled back in 2017, Matesic says.
“That’s how we’ve gotten some of our best brands to move into the region, is through acquisitions,” he says.
Entrepreneurs should remember that every time one of their peers gets funded by a new investor, whether it’s an outside company or corporate venture capital, that opens opportunities. Those investors will come for board meetings, and they’ll attend events and look around while they’re in town.
Of course, it can be a double-edged sword, Matesic says. When the startups don’t perform well, those investors aren’t going to be happy with Pittsburgh.
That’s why organizations like Idea Foundry try to make things as easy as possible. And while it hasn’t always been easy to interest industrial-era businesses — and the investments haven’t always come as fast as Matesic would like them — the signs are encouraging.