The landscape of corporate venture capital in 2017
Corporate investment has increased radically in the past decade, with total corporate venture capital (CVC) investments growing more than 500% between 2009 and 2015, propelled by the rise of social media and mobile technology in contemporary markets. Unsurprisingly, most CVC dollars are put into the technology sector, which accounted for 63% of CVC activity in 2016. Tech companies, it seems, are devoting their profits to invest in smaller companies’ research and innovation. As Forbes Magazine notes: “It’s a strategy that allows [large corporations] to test ideas at immense scale — Google Ventures, for instance, the largest corporate venture investor in the world has invested in more than 300 startups — and discover synergies with their existing businesses.” Also, other sectors are also benefiting from corporate investment. Healthcare is climbing rapidly as a share of CVC investment dollars, and worthwhile market opportunities still exist in consumer as well as retail.
Moreover, CVC investment has become smarter. There are more sophisticated investors with a history investing in venture capital; they have learned more about what works and what doesn’t work. Corporations are beginning to understand startup culture and embrace open innovation: two contemporary modes of business that appear at odds with traditional corporate culture. Furthermore, they have learned how to work strategically and actively, taking a specific corporation’s strengths and adding to them, picking startups that are more in tune with a corporation’s assets.
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The core problems that develop when creating CVCs
However, there is still a long way to go to effect maximum success in corporate venture capital. If done well, CVCs can yield long-term benefits and assets — the issue is that they are not often done well. While of course corporate investment projects have had varying levels of success, most CVCs have run up against a specific set of problems.
Often CVCs are not independent from their corporations usual business practices, then they won’t be able to adapt to the market nor could they act on their long-term vision. Being tied to business units in regards to the investment decision making process usually limits the CVC’s ability to act quickly and negotiate market terms when co-investing with other VCs. Being dependent on corporate management from a financial perspective is another risk that doesn’t allow a CVC to position it as a reliable investor. Not only does such a dependency create tensions around a CVC’s long-term goals and their partners executing on them, but can even more lead to conflicts at an investment’s board level and misalignment in exit scenarios.
CVCs are often non transparent and inconsistent. Due to a direct or operational link to business units, CVC activities tend to be influenced by quarterly or annual operational changes. Besides, the change of responsible teams leads to problems like missing trust and commitment in portfolio management and co-investor relations with other VCs. Most importantly, the lack in a dedicated leadership team driving the CVC’s strategy and deal closings makes decision making processes inconsistent and non transparent.
Often CVCs are inexperienced and without a long-term vision. If a CVC does not operate separate from corporate management, it will operate at cross-purposes. Investing venture capital is a full-time role, requiring a team’s full attention, commitment and responsibility. Similarly, it cannot primarily be a marketing and sales operation either. A CVC will, of course, be accountable to the business’s larger concerns, but it needs to be detached from the company’s other operations. Business units can be more interested in quarterly results than long-term investment cycles. From outside of the CVC, such corporate investment operations look unpredictable.
Creating a real CVC for long-term success
Aim for longevity from the start: The CVC must be imagined as a long-term entity; in other words, it must be flexible and able to adjust focus, while still holding true to is core goals. In this way, the CVC needs to use the advantage that the larger corporation provides. By using the corporate base a stabilizing force, it can outperform its VC competitors, which are more firmly tied to a ten-year structure for instance. This allows the CVC to make real, long-term investments alongside the corporation’s long-term model approach and design strategic investments that a financial-returns-focused VC cannot do because of its determined life cycle. By imagining longevity from the inception, the CVC can plan for the future without sacrificing to a business unit’s immediate needs or falling prey to market volatility.
Create a strong brand and culture: The CVC needs to have its own identity. It must strategically build up its own culture and brand apart from the larger organization. In this way, it should be active in the market and industry under its own brand, even though that brand is somewhat linked to the larger company making use of it’s strengths and core values. Moreover, it should cultivate its own relationships through dedicated partners with key investors. By creating its own network, the CVC can develop its own opportunity pipelines and be understood as the vanguard innovator associated with the corporation.
Adopt a core strategy: A CVC must be tied into the corporate strategy and be directly linked to the company’s CEO, research, product development, and marketing. On the other hand, it must be disentangled from the larger corporations business hierarchy. This is the fine line that will define the CVC’s success or failure. The CVC’s partners must have real decision-making authority, and simultaneously have access to corporate resources. By creating a strong, core scaffolding to interact with the larger corporate strategy, the CVC will be able to operate autonomously and take advantage of corporate stability.
Consistency — Transparency — Clear Communication
There’s obviously not one specific way to make a successful CVC. Given distinct corporate cultures, fields, and strengths, there are a myriad of ways to make a successful CVC. However, there are some crucial elements that tend to prove successful. Importantly, the larger corporate structure must allow a CVC to embrace innovation and collaboration. In turn, a CVC should exhibit consistency, transparency, and clear communication about its purpose, goals, and values. By being clear with both investors and the larger corporate structure, a CVC can successfully deploy the strength of a corporate background with the dynamism of a startup. In so doing, a CVC can maximize its ability for long-term market success.
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