Joint ventures, alliances and corporate VCs help fuel innovation in energy sector

Our exclusive survey reveals that for many fast-growing energy companies, alliances and joint ventures have been an even more intrinsic part of their growth strategy than full-blown M&A

More than half (52%) of fast-growing energy companies say alliances and joint ventures have been important factors in their growth over the previous three years, and 48% expect this to be true over the next three years.

One common emerging theme – particularly for large businesses working with smaller and more entrepreneurial firms – is that the former do not want to swamp the latter in their corporate culture and risk destroying the spirit of innovation.

A related issue for many larger businesses is their desire to spread their bets. With technology evolving at pace and no certainty about future winners and losers, it makes sense to work with a wide range of different partners.

Minority stakes on the rise

These arguments make the case for minority stakes in particular, a form of alliance favoured by 81% of the fast-growing energy businesses in this research. Setting up corporate venture capital arms allows larger firms to explore new ideas in areas such as storage and grid optimisation.

But elsewhere in the sector, energy companies are also working with the state through public-private partnerships. Licensing or franchising deals are commonplace too, and many firms have embarked on equity joint ventures.

There are, of course, downsides: arrangements such as minority stakes leave the acquirer lacking full control of the target business. Governance arrangements for joint ventures and alliances can also be complicated. Businesses embarking on these deals need to agree clear objectives and operating mechanisms upfront.

In areas such as renewables, where operational risks are significant, many investors are reluctant to take full control. Acquirers are often unwilling to take on all that risk – joint ventures and minority shareholdings make more sense, particularly for financial buyers.

Some informal arrangements do lead to outright acquisitions – in fact, 86% of fast-growing energy companies that have announced an acquisition had previously considered an alliance with the target company instead. It is less likely that businesses announcing alliances had looked at acquisitions first, but their partnerships may eventually proceed in that way.

Ultimately, inorganic growth is not the only option for fast-growing energy businesses prioritising innovation as they seek to further increase revenues. Many fast-growing energy companies report excellent results from their in-house work.

In-house teams promote growth in the energy sector

Almost one-third (30%) of fast-growing energy businesses say that alliances have produced positive innovation results. Almost as many (27%) say the autonomous R&D teams they set were most important in securing benefits from innovation. Techniques such as accelerated prototyping have worked well for many businesses, underlining the importance of speed-to-market for fast-growing companies in the sector.

There is no one-size-fits-all formula for innovation. Many of the businesses in this research are pursuing several strategies for evolving their value proposition and business model, managing these tracks simultaneously. Their ability to execute is an important part of what drives their rapid growth in the first place.