by Tom Allen
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When thinking about corporate venturing, the world of venture capital is a good place to start. The two disciplines overlap to a large extent when it comes to the skills required, some of the objectives pursued and the people involved. Put simply, venture capitalists (VCs) invest in companies to generate a financial return (usually within a pre-defined exit-window). Corporate venturers (CVs) also look towards financial returns (achieved via the nurturing of early-stage companies) but are typically also pursuing access to research and development initiatives, innovative technology and other, more strategic returns.
VCs generally operate in a limited partnership structure, while CVs are run at the corporate level of a company, within individual business units, or as part of an independent division outside of traditional corporate walls – operating according to a firm set of guidelines and objectives, but free from day-to-day oversight of the parent company.
Why Corporate Venturing?
The attractions of corporate venturing are numerous. Not least of which is the potential for seismic financial returns, as traditional VC funds such as those run by Sequoia and Lowercase Capital will attest. A management team looking simply to augment its returns through investing in early stage companies would have a solid case for doing so, but corporate venturing offers other benefits to the investor that can be difficult to access if pursued via more traditional means.
Corporate venturing can facilitate the exchange of ideas and research & development initiatives - helping both the corporate venturer and target company leapfrog the competition.
Research and development can be a time-consuming and capital-intensive process, but with a well-functioning CV division, companies can cherry-pick the most promising technologies in a chosen field. Done correctly, companies following a corporate venturing initiative can gather proven innovations ready to be integrated into their core operations. In 2016, technology giant Microsoft completed its full-acquisition of UK software start-up SwiftKey, saying at the time it aligned with its “vision for more personal computing experiences”. This point is crucial, since many companies are striving towards similar ends (SwiftKey was itself competing against Swype to innovate in third-party keyboards for smartphone and tablet application) – therefore, well-executed investments (or indeed full acquisitions) can help both the CV and target company leapfrog the competition.
The same is true for talent. The term “acquihire” has become a common part of tech-industry lexicon, denoting a company that has been invested in (or acquired) for access to its people-talent, rather than necessarily for its underlying business operations. In October 2017, TechCrunch reported Google’s parent company, Alphabet, had made its latest acquihire of podcasting start-up 60dB, shutting down the company’s operations but while bringing the team in-house.
The benefits of corporate venturing go both ways – the investor gains spirit and insights via access to the new team, while those invested in gain a wealth of institutional knowledge and resources from a large, successful counterpart – therefore improving their capabilities exponentially. The corporate venturer can, for instance, facilitate access to larger scale R&D initiatives, distribution channels and new markets, in addition to providing sales and marketing expertise.
As an example, following Hewlett-Packard’s recent division into two companies (Hewlett Packard Enterprise and HP Inc.) HP Tech Ventures was formed – with the objective of helping to “power the next generation of technology innovation”. The venture team will focus on five areas, including: 3D printing and the broader ecosystem that supports it; immersive experiences, including both augmented reality and virtual reality; smart machines, including home and commercial robots; and the Internet of Things (TechCrunch, 2016).
Companies such as HP are using corporate venturing as a means to power the next generation of technology innovation.
On a more fundamental level, the process involved in corporate venturing can be invaluable in maintaining a competitive edge. The pursuit of acquiring talented teams and technologies forces companies to engage with their marketplace and look at how the competitive landscape is shifting. Taking a measured approach to corporate venturing, multiple investments can be pursued in tandem, allowing diversification to account for shifts in volatile industries. Owing to the freedom a company affords CV teams, multiple investments can be managed at an arm’s length from the core company until they are ready to be integrated or divested of if things do not turn out as planned. Conversely, corporate venturers need not be bound by the same strict exit windows and short-term profit targets often faced by traditional venture capital funds – the staying power of a CV therefore provides more flexibility to reap the greatest value from a portfolio.
Having clear pipeline stage gates promotes good governance and informed decision making when prospecting investment targets.
Despite the many benefits on offer for those who can pursue corporate venturing correctly, it is by its nature a risky area. Companies looking to take part should adhere to strict rules to minimize their risk of making bad deals.
Clearly Identify Your Target
Starting a company has never been more popular and the dangers posed by over-hyped start-ups, hungry for capital and looking to become the next billion-dollar unicorn, should never be far from an investor's mind. Corporate venturers should therefore have clearly defined criteria for making potential investments to help them quickly eliminate – or “kill” – targets that are unsuitable (before committing significant resources to a due diligence process, for instance). Corporate venturing teams are ultimately looking to boost their parent company’s performance and so should be immune to pressure to dabble in a wide range of speculative areas. This also dovetails into the second principle of corporate venturing success.
Ensure Goals are Aligned - But not Too Much
The day-to-day operations of an established company and its potential venture target can be radically different. This is an inevitable result of the differing maturity and sizes of the respective companies, but does not mean they should be incompatible. It is important to ensure the target’s goals are aligned with those of the investing company. It is acceptable - as in the case of SwiftKeys and Microsoft - for the target to be working on something that forms a small part of the investor’s overall vision, as long as both parties are ultimately pulling in the same direction.
A word of caution on this, however. The purpose of corporate venturing is not to pull small teams into the larger corporate structure of the investor. Furthermore, a corporate venturer should avoid cannibalizing the existing operations and culture of any company in which it invests (such operations and culture likely formed part of the initial attraction). The way to avoid this is to have a clear process for involving the relevant business units or both the investor and target across the venturing process. In some cases, this means granting a corporate venturing team autonomy to pursue their own investments, though it can simply mean keeping open lines of communication and inviting feedback at various stages of the venturing process.
Allowing a corporate venturing team to pursue their own investments - outside of traditional corporate walls - can help create a well-oiled venturing division.
Treat CVs Like VCs
The risk-hungry world of venture capital can sit uneasily in the often-cautious corporate world, so steps must be taken to allow for the differences in culture between the venturing division and the parent company. The CV team should be structured in a similar way to VCs, with as little red tape as is practicable and the compensation of those comprising the CV investment team aligned with the performance of the venture portfolio.
Furthermore, differing cultures can be a crucial factor in closing investments with target companies, as successful smaller companies are often fearful of being stifled by a large investor. Corporate venturing teams can act as a go-between to maximize the mutual benefits while minimizing culture clash.
Establish Clear Communications & Don’t Be Afraid to Walk Away
Sharing knowledge across teams can be as much part of the benefit of corporate venturing as any financial return. Clear processes for sharing innovations, resources and insights between the venture division and parent company should be set up, improving the chances for all involved to flourish. This can take the form of a distinct unit separate from the venture division - with this unit's core operations dedicated solely to shepherding smaller companies into the fold.
Communication must be a two-way process, allowing portfolio companies to benefit as well, but part of the challenge of corporate venturing is its uncontrollable nature. No matter how well managed the process is, some investments will not deliver the value originally envisioned. Companies pursuing corporate venturing must acknowledge their fallibility and be willing to walk away when they are unable to nurture an investment to its full potential.
What attracts many to corporate venturing is the potential for seismic financial returns. What the best companies recognize, however, is that entering the venture field can provide benefits far beyond those enjoyed by traditional VCs. This can arise from improving R&D capabilities, accessing innovative technology, bringing in the best minds via acquihiring, or via gaining advance warning on emerging competitors. Perhaps companies not considering some kind of corporate venturing initiative should be asking themselves why not, and whether they can afford not to in the long term.