Creating a promising internal venture capital fund is increasingly seen by large corporations as a way to stimulate innovation and growth. While the track record of corporate VC funds has been rocky at best, in 2015, it’s almost certainly a necessary initiative for the survival of Fortune 500 organizations. In order to avoid being disrupted, corporations realize they need to be involved at the ground floor of promising new ventures.
For entrepreneurs that have found a problem or market opportunity and need investment for prototyping and scaling their business, a forward-thinking corporation with deep pockets may just be the right partner.
Collaboration will become a priority
Corporate Venturing has been around for a long time, but is increasingly seen as one of the instruments within the Open Innovation funnel. Over time, the focus of corporate venturing shifted from solemnly realizing financial return to the importance of the network effect and strategic return. It is a way to keep up with Moore’s Law, because if we can’t follow the pace and don’t innovate, not only the company on its own will encounter severe damage but due to reliance and importance the speed of innovation in the whole value chain will be tempered. Increasingly corporate venturing gains ground from R&D projects and merger and acquisitions as an innovation instrument to adopt chain risk and create effective alliances.
A company is part of an ecosystem and tightly linked to the practices of the other stakeholders. This made Corina Kuiper and Fred van Ommen, authors of the just published book Corporate Venturing, state that we are currently riding the 6th wave of Corporate Venturing. A time that is eye marked by co-creating ecosystems: “It is all about building crazy quilts, starting with your means and imagined ends (vision) and combing it with the means and ideas of your partners. Together think big, act small and accelerate fast (p.200)”. An observation that confirms my approach of seeing this decade as the Co-era –shift to a more collectivist and shared approach through the amplified possibilities of COmmunicating, COllaborating, COworking and COcreating. Key characteristics are sharing and having access to, instead of private owning.
Being involved in the ecosystem creates two types of benefits:
- ‘window on the market’ to spot emerging trends and grow sensitivity. It ensures the corporate to be on top of unstoppable trends
- ‘mirror’ to test the competitive position and consequently influence money allocation for internal projects to stay competitive
Corporate Venture Capital (CVC) is taking a larger part in the evolving investment landscape, which is a diverse mix of banks, crowdfunding, incubators and accelerator booth camps, EU funds like Horizon 2020 and ESF, private equity firms, investment agencies and the big alternative Venture Capitalists (VC).
An added value of Corporate Venturing above Venture Capital is the possibility to provide broader support. Where VC’s are considered to be very good in offering capital creating lean mechanisms to deliver returns, corporates are often the industry leader in a certain sector and through CVC can help the new venture with various interaction options like it’s distribution network and market channel access, giving it a leapfrog in the value chain and paving the way to the customer. More and more the venture and the customer “enter into a co-creation cycle, discovering the optimum solution iteratively (p.62)” and in this way finding the best proposition for customers gains and pains. Business model innovation (BMI) – the ability to innovate something more core than core; so innovate the theory of the business itself (Seizing the white space, Mark W. Johnson) is becoming increasingly popular and seen as a key strategic priority for firms, but also startups are stimulated to create horizontal growth. Together with disruptive technologies, BMI is the key driver for industry change.
Another advantage of CVC is the possibility to experiment with different types of innovations, based on an existing platform. Although sometimes, the platform needs to be reinvented itself. During the seminar of CVNN Peter Struik, President Fujifilm Manufacturing Europe, shared a compelling story on the corporate transformation his company went through – from film to gas- and water membranes by acknowledging the key competence of creating high quality thin layers and operational excellence in the coating process.
Partnering has become one of the key mechanisms applied in venturing, often based on shared financial exposure. However, sometimes the corporate doesn’t necessarily take a stake in the venture, the ‘in-kind investment’ might also be in competencies, knowledge sharing, facilitates and tools. Other times it exceeds equity stakes by also doing business with the venture through joint development agreements and commercialization. A corporate leverages a range of instruments from internal and external venturing to direct and indirect control.
Pushing value chain innovation
A company can base its decision to invest in corporate venturing on strategic objectives – to leverage what it has, leverage new spaces, play a different role in value chain – or on financial objectives – maximize financial return. Innovation at a large corporate can be pursued at different levels:
- in existing product markets (product/ process, eco-system and business model)
- through incubation of new business
- by external venturing, which is often considered if disrupting technologies enter the market or new applications pop up that enable higher performance and lower cost (cloud storage, connected devices, wearables)
Each corporate makes an assessment on which level(s) it wants to be active. Nonetheless, it is acknowledged that in all levels they need the ecosystem. Only through leveraging the network, the value chain will be enhanced and hence, the corporate will succeed. Therefore partnerships with academia, customers, advanced research centers, technology partners, and suppliers from immersion technology to volume-manufacturing are key. A mix is developed of manufacturing- and development competence. Main characteristics in the process become: serviceability, testability, manufacturability, operational excellence, cost-productivity, uptime timely delivery, customer intimacy, roadmap alignment, performance and continuous feedback loops.
Key Success Factors for Corporate Venturing
DSM has a long tradition in CV and is active in internal, direct external and indirect external venturing. Ian Freelance, Sr. Investment Manager DSM Venturing, shared his KSF to create future value, since ‘it’s not about today’s profit, it’s about tomorrow’s profit.’
- long-term vision required – investment periods are often longer than corporate cycles (and might even be anticycli: how should you manage the portfolio if it won’t be strategic anymore); ensure sponsors are in place and actively manage multilevel relationships
- each investment has an impact on your reputation – credibility is built through responsible and consistent investment behavior. Safeguard the corporate reputation is a key consideration if you are to be invited into the most promising investment opportunities .This also means that one should behave entrepreneur friendly, be trustworthy and when a joint project is agreed upon, show commitment.
- having a well-connected venturing unit in place – able to reach out and leverage external networks to make the necessary connection to internal stakeholders . At the same time, active engagement and management of the key internal stakeholders is essential. The spectrum extends from the businesses and R&D communities up to senior management and board levels. Longevity of corporate venture capital units is intrinsically linked to senior management appreciation of the strategic value that can be created as well as the investment risks or early stage investing. Remember: interaction won’t happen naturally
- always begin with the exit in mind – where do we want to be 10 Years From Now? What do we (the corporate and the venture) want to achieve together? What kind of positive interaction exists? A strategic/ technology relationship? What will be the timeframe and exit point of the investment (financially and otherwise)? An financially motivated exit is a key consideration if you are to co-invest with financially driven investment partners.
The venture of life
Kuiper and Van Ommen refer to the venture stages as to a family, making a matrix based on disruptiveness and market life cycle; growing from baby, teenager to adult. They stress that it is important for the corporate’s portfolio to have the whole family in-house. It’s a delicate play between balancing and leveraging, but also having patience. The cute factor of babies results in protection, some small financing and a lot of nice baby pictures, which give the firm an innovative image. But when the baby grows up and wants to play outside, examine new things, the parent is reluctant to give permission to experiment, because it is uncertain what it will deliver. But new business development takes time to mature. The message: don’t kill teenagers, otherwise you won’t get grown-ups.
This article is based on visiting the 50th Corporate Venturing Network Netherlands meeting and the book “Corporate Venturing – Managing the innovation family in a dynamic world” by Corina Kuiper & Fred van Ommen. CVNN is focused on where will future business come from and strives to bridge the gap between the corporate need of influx of new business ventures and spin outs of (university) techno starters.