As many large organisations are trying to navigate a current market context that is characterised by unicorn-style start-up competitors increasingly eating everyones lunch in a “winner takes all” world, we are seeing a new kid on the innovation block: Corporate Venturing or Corporate Venture Capital (CVC).
Even though some commentators are surprised by the rise of CVC, the folks at CB Insights have been documenting the rise of this innovation model over the last years.
What is also encouraging for us that are active in this space, is the rising number of large corporates that are giving this approach a try for the first time.
So let’s unpack the drivers behind these developments in order to extract some insights for how to get value from Corporate Venturing.
It's still early days for these kinds of offerings in Africa, but I think many of us in the local innovation game have seen this movie and can relate: you go on an inspiring innovation journey and come up with some really disruptive new ventures - only to realise that you have been to a different planet than your colleagues back home and the new concepts die a slow "death by committee".
This has many reasons as any real innovation radically challenges the status quo, key assumptions and established business playbooks - which might also mean that someones job is on the line.
Also we have often seen that an innovation business case sometimes needs to compete for funding with very established offerings - not easy to get the "green light" for innovation in most cases under theses circumstances. The final problems is the that the risks associated with innovation are also too much too handle for many large organisations - even though sometimes the risk of not doing anything to change the status quo is the greatest risk of all.
This leads to a situation where we see that most innovation projects don't see the light of day and many great ideas get watered down as they move through the bureaucratic system. One way to counter this is to run innovation projects as under-the-radar "skunkworks" within a strategic corporate venturing framework.
This model requires some senior aircover, but helps to prove the business case in a real-time environment, because as we know people don't fall in love with PowerPoint decks anymore.
It also becomes key to recognise a key premise of the lean start-up movement which encourages us to “leave the office.” And indeed the desk is a dangerous place as John le Carré famously said about the world of espionage and often the voice of the customer does not drive innovation decision-making in large organisations that are constructed to keep customers out as the mess with efficiencies.
This is where Corporate Venturing offers a solution in taking innovation outside of the corporate machine into a less risky "sandbox" experimentation environment. This means taking corporate innovation concepts a step further so they can demonstrate more impact and realise their potential by running them as real-life experiments in order to provide a proof of concept layer to a prototype.
From our work in this space, we have discovered the following four factors crucial to Corporate Venturing (CV) success:
1. An appropriate CV structure
It is above all crucial to CV success to find the strategically correct balance between structural proximity to and distance from the core business and thus between the necessary latitude for Corporate Venturing activities e.g. investment in start-ups to unfold, and the best possible exploitation of the potential for cooperating with the corporation as a whole.
CV funds that are dedicated to assuring optimum leverage for strategic investments in start-ups should be organised centrally by being placed directly under corporate management ideally directly under the CEO with the division formally included in the process of investment selection.
2. Selective CV process
By being closely linked to the senior leadership layer, the CV team ensures “big bets” alignment with the long-term corporate and innovation strategy. This also informs the deal origination process, as well as the integration of mature start-ups into the hosting organisation – if possible.
The collaboration between start-ups and corporates is becoming a finely tuned artform with many corporates still finding their feet in this “clash of cultures” scenario. But if applied correctly, the creative tension between the “Business of Today” and the “Business of Tomorrow” can unlock many fruitful innovation journeys – see also here for more on the Corporate / Start-Up collaboration issue.
3. Appropriate remuneration for CV management
In order to maximise the rate of return of investment, the management of independent VC companies will receive a fixed percentage of capital gains, the so-called carried interest. However, it will be difficult to justify such generous profit-sharing schemes to the staff of the parent company.
For this reason, in strategic CV programmes (including the innovation type) remuneration is frequently equivalent to that in the parent company. This carries the risk that top staff may leave the company, while experienced VC managers from elsewhere are hardly prepared to work for such modest pay.
It is, therefore, advisable for strategic CV funds to install a hybrid pay system that contains certain elements of a classic VC profit-sharing scheme, for instance in the form of a bonus corresponding to the performance of the investments, combined with the basic pay rate of the parent company.
4. Classic VC success factors
If they intend to be successful, corporate venture funds should also observe certain basic rules that have proved their worth in classic VC business.
First of all, the focus of investment activities requires clear definition. A CV fund should concentrate on attractive and strategically suitable market segments.
Disposing of investments that do not meet up to expectations or fulfil the criteria set and thus focusing on potential winners is one of the features of pro-active portfolio management and one of the key factors to VC success.
It is also important to give specific thought to the exit period and to the manner in which exits should take place even before investing in a company. In some cases during the past years investments were made in companies with very little exit potential (Trade Sale or IPO).
Furthermore, successful VC companies or funds are characterised by extremely flat structures and short decision-making processes. Next to well-conceived evaluation, time and speed are essential criteria for success if one wants to hold one's ground in the international VC market.
Conclusion
By injecting a venture capital “Founder” mindset into a traditional corporate innovation effort e.g. through creation of “sandbox-type” experimentation environments, the old elephant might just start dancing at some point.
We are also convinced that through the right governance framework, the advantages of Corporate Venturing outway the perceived risks and this approach to innovation has indeed proven more successful than many other more organic state-gate models in the current market context.
One of the ways to manage this new duality of growth between the “Business of Today” and “The Business of Tomorrow”, is to become an ambidextrous organisation that continuously balances experimentation with exploitation.
We have assisted many organisations on this growth path, so let us know if you want to start a conversation.
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