Company Creation with Large Corporations - Open Innovation from the Demand Side
This article was machine-translated from Japanese by AI (Claude). It may contain errors. Read the original Japanese article.
Vargas Holding, the Swedish "impact company" builder we covered recently, has launched a new textile startup, Syre, which came into the public eye with a funding round in March 2024.
Syre is a company that aims to realize a circular economy by recycling polyester fiber on a large scale. Compared with virgin polyester made from petroleum, it can reduce CO2 emissions by up to 85%, and it is said that quality can also be assured.
It was founded in 2023, but it is scaling up early: a factory in North Carolina in the United States is scheduled to start operating in 2024, and it plans to have 12 factories around the world by 2032.
What deserves special mention is that the Swedish apparel maker H&M is Syre's first investor. And it is not only an investor: as one of Syre's early customers, it has signed an offtake agreement worth a total of 600 million dollars (about 90 billion yen) over seven years.
In other words, this startup has a large corporation as both a buyer and an investor from the very beginning.
This follows the model Vargas has used until now, in which an early customer makes an advance investment and a purchase agreement at the same time.
For example, Volkswagen is in as an early buyer and investor in Northvolt, a battery startup created by Vargas, and Scania (a Swedish heavy truck maker) is in as an early buyer and investor in H2 Green Steel, a green steel company.
By bringing in the early customers of a new product not only as customers but also as investors, and having them get on the same boat, those early customers can not only use an innovative new product but also earn an investment return if the company succeeds.
Having a large corporation come in as both a buyer and an investor in this way, and doing so from the seed stage, can be seen, depending on how you look at it, as a large corporation and a VC working as one to carry out demand-driven company creation.
And I think this way of launching startups shows the possibility of a new form of "startups born from large corporations," and of "demand-driven company creation" as a new kind of open innovation.
- Past Efforts on the Supply Side
- Past Efforts on the Demand Side
- What Is Different This Time
- Demand-Driven Company Creation in Japan
Past Efforts on the Supply Side
In open innovation so far, especially in the context of large corporations and startups, I think there have been many moves that focused on the supply side.
For example, when it came to startups from large corporations, the mainstream model was to "spin off" from the existing assets and technologies lying dormant in a large corporation, with VCs investing in the result. This is an idea from the supply side, that of technology seeds.
In the context of open innovation, CVCs and corporate accelerator programs also started from the premise that startups already exist as a supply, and were about how to work together with them.
However, a weakness of such supply-driven efforts was that they often amounted to "putting something out first and thinking afterward." A survey published in 2021 found that 60% of corporate accelerator programs fail within two years, and in Japan, too, I don't hear all that many stories of them going well1.
If you put too much emphasis on the supply-side way of thinking, risk arises on the demand side.
Past Efforts on the Demand Side
On the other hand, there were also efforts on the demand side.
Among open innovation programs, there were also many that called for "what the large corporation wants," in somewhat abstract areas.
There were approaches like NineSights, which specifies the problem in considerable detail but invites solutions widely, and models such as the Venture Client model, which focuses on the demand of a single company, have also emerged2.
However, when programs called for "what the large corporation wants," the problem was often not clearly defined and the call was often made in rather vague areas, and in many cases, even if a startup joined the program and got as far as running a PoC, things did not progress beyond that. Identifying a company's own problems takes considerable effort, so this may be unavoidable.
On the other hand, even when the problem was clearly identified, if the effort was small in scale, it sometimes ended up as mere contract development, I think.
Focusing on the demand side was a good thing, but the problem was not identified well enough, or the demand was not large, so it was hard for startups to work with. You could say that this was the difficulty of demand-driven open innovation.
What Is Different This Time
What Vargas is doing is a rather strong form of demand-driven startup creation: it starts from the large and reliable demand of large corporations for going green, and the large corporations go as far as committing to that demand.
First, there is the innovative demand of a large corporation as the foundation, and the startup promises to build what is wanted there. If it succeeds, the large corporation can get an innovative product ahead of everyone else.
In addition, the large corporation commits to the demand. This is not a vague demand that would not even result in a Letter of Intent. And it also differs somewhat from contract development, in that the commitments often seem to be large-scale.
Once that demand is committed, trust in the technology and the business is built, and the startup can attract new investment. That raises the probability of winning.
The large corporation also commits to demand and invests at the same time. By doing so, it gets upside beyond the demand itself. Compared with running the business on its own or through a subsidiary, it can earn returns as an investor while keeping risk down.
As a result, both the startup as the supplier and the large corporation as the buyer can ultimately earn returns, which means a kind of win-win relationship can be built (at least in theory), and I find this point interesting.
Demand-Driven Company Creation in Japan
In the startups Vargas has created, large Swedish corporations such as H&M and Scania have become the early buyers and investors. It may be that these are close to national policy.
In fact, it would not be strange if they were national policy. If a company that wins in the green field emerges from one's own country, wealth can be drawn from it, and jobs can be created as well. If both supply and demand can be created and honed among domestic companies, they can go after demand around the world.
Japan is a country that still has a relatively large manufacturing sector, and depending on how it is done, it also looks like a country where this model of demand-driven company creation could be pursued with relative ease.
To do this, it is necessary to coordinate well not only between large corporations and startups, but also with the government and investors. Investors are probably the ones for whom it would be easiest.
On the other hand, if an investor tries to do this on its own, it comes close to the Startup Studio model, and it would have to take a large share of equity to match the effort, and as a result it would also become harder to gain support from many stakeholders.
So we are wondering whether people like us, who stand in a neutral, public, and non-profit position at universities and the like, could take on the early activities of building the companies and products that the next generation needs, while coordinating in this way, and then hand things off from there.
I have already consulted with several people, but if there is anyone interested in company creation with large corporations like this, especially in the green field, as a large buyer and investor, please get in touch with us. I hope we can build together the businesses and companies that Japan will need in the future.
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