by Tom Allen
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The impetus for corporate venturing is obvious: a corporation’s investment in startup companies can create new means to drive growth, financial return and advance strategic priorities.
Generating valuable growth for shareholders, whether in the present or future, requires that companies clearly understand their strategy and operational capabilities. Clarity in these areas, and a demonstrated commitment to them, improve the likelihood of both financial promise and participation in startup investments that will provide innovation and new market knowledge. This helps corporates bring fresh models and solutions into their existing businesses. In addition, corporate venturing can provide an affordable and rapid means to test or participate in disruptive activity, tackle riskier ideas or access top talent without over-committing internal resources or derailing existing initiatives.
While pioneering new services, models and markets is attractive, it is also time and resource intensive. The rapid pace of change and emergence of innovative technologies all over the globe are stretching corporate venturing teams’ sourcing and due diligence capabilities. While the scope of efforts differs, corporate venturing is an increasingly substantial effort; Google Ventures, for example, has participated in 300 investments with over $2.4 billion under management.
Delivering meaningful success, regardless of size, means the evaluation of hundreds of targets per year. Having a defined acquisition strategy and knowing how to effectively evaluate deals is essential to corporate venturing activity that will deliver in a timely, profitable and additive way to the business.
Key Focus Areas
For corporations trying to mature corporate venturing capabilities, key focus areas must include:
- Defining strategic objectives and connecting them with a repeatable process
- Improving initial screening cycle times
Deciding on strategic intent is one of the most impactful early steps companies make to maximize the benefit of corporate venturing. For interested companies, IESE Business School highlights stated example objectives of successful global corporate venturing teams:
- Explore new technologies and/or business models to gain strategic insight
- Renew corporate culture to foster a broad entrepreneurial mindset
- Access entrepreneurial talent and energy
- Use external innovation to promote an existing corporate innovation (i.e., a platform)
- Marketing and public relations
- Develop big brands to attract customers, partners and talent (digitization, etc.)
- Solve business problems more quickly and cost-effectively and at lower risk
- Expand into future markets by accessing new capabilities, channels or emerging technologies
- Leverage new and/or faster routes to market
- Improve corporate social responsibility
- Develop potential acquisition targets
- Earn a financial return on venture investments
While motivations for corporate venture activity vary, clearly defined objectives become guideposts and provide cohesion between discovery, due diligence and actually deploying deals.
Once objectives are set, companies can organize processes in a way that, when followed, consistently deliver on stated goals. If process is disconnected from objectives or strategy, each step will produce results inconsistent with targeted outcomes. And, likely, messy, distracting and expensive mistakes.
To support such an approach, Midaxo has created the Guide to Corporate Venturing. This 78-page guide reflects industry best practices and offers a sequenced guide to corporate venturing process flow. The guide offers insight into everything from Strategy Development and Deal Sourcing, to Deal Evaluation, Risk Management and Post Close activities. With this guide, deal teams can now calibrate internal efforts against an industry-anchored sample approach.
A minimum requirement for healthy investment-velocity is screening speed and efficiency. In corporate venturing, deciding no is just as helpful as yes – so getting to either answer confidently and quickly is critical. To do this, adopting “stage-gates” is a helpful practice. Stage gates are essentially points of planned evaluation where a target is “killed” or eliminated from the pipeline, the same structure that many organizations use to manage their M&A pipeline. The ultimate aim of this practice is to move target opportunities through progressively more rigorous review and due diligence. Evaluation is designed to start broad and general (i.e. - ensuring target contributes to overarching strategy, has a healthy, non-toxic culture, etc.) in a way that is neither time or resource intensive. Targets that are green-lighted move deeper into more precise and intensive diligence phases. The process culminates in fewer, but more richly reviewed opportunities ready for offering.
How to Approach Evaluation
Approaching the evaluation of venture targets in a systematic and repeatable way supports companies in overcoming the chaos and inefficiencies associated with pursuing deals that aren’t within a strategic context or that lack the promise of delivering in ways that truly matter.
Strengthening internal corporate venturing capabilities starts with defining corporate intent - it extends to opportunity review efficiency and culminates with full-process development and execution. To achieve desired outcomes in corporate venturing initiatives, companies need to ensure they have a systematic and repeatable approach to delivering in each of these areas, just as they should for M&A pipeline management. This approach is not just a series of tasks to check off, but an organized method of assessing a target’s likelihood of furthering previously decided business outcomes and contributing to financial success in some predefined way.
Companies that do this well can expect to create startup ecosystems that compress time to innovation, exploit new technology and improve existing business models – or creates new ones – more quickly than could ever be done inside the existing, traditional structure.