Out of many types of corporate open innovation, Corporate Venture Capital (CVC) is one of the most immediate ways to gain access to ground-breaking technologies and trends. Though not cheap, CVC can attract ecosystem’s attention, expose corporations to new business models and technological partnerships, and solve the issue of the “shrinking market share” – if done right. And all this in addition to investment-related perks, such as the possible financial returns.
Roughly speaking, we can distinguish between three main types of corporate open innovation*:
- Business partnerships – they are either a result of scouting activities or systematic innovation programs, where the corporation invites relevant startups to apply. A few examples of such programs include CITI Accelerator, SAP.IO program, IBM Accelerator, The Builders by Coca-Cola and others.
- Community presence – many companies decide to become a major player in the innovation and startup ecosystem by creating and sponsoring events, offering various perks to startup founders and leading the (informal) conversation with startups. Google, Microsoft and AWS embrace these sorts of activities on a large scale, together with more “traditional” players, such as Barclays, which introduced their co-working and event space Rise, VISA introducing their Innovation Studio in several places around the world and Enel Innovation Hubs worldwide.
- Investments – investing in relevant startups in order to achieve technological edge over the competition, interact on a deeper level with relevant startups and create value for both sides from day one. Examples of CVC activity in Israel (and worldwide) include: Intel Capital and Cisco (very active corporate investors), Singtel, Microsoft, BOSCH etc. This blog post is going to specifically focus on corporate investments.
There are obviously many factors to think about when deciding on the best corporate investment model for corporations. I discuss some of these considerations here. There is no one-fits-all in corporate investing. But there are best practices and it helps a lot to learn from the experiences of others.
The factors I will consider include:
- Strategic vs. financial investing
- Becoming LP vs. creating a CVC
- Independent CVC vs. off-the-balance-sheet activities
- “Old” vs. “new” VC models and what works best.
Strategic vs. Financial Investments
The first question that needs to be addressed has to do with the purpose of investing – does the corporation invest because it wants – similarly to traditional VCs – get financial ROI (return-on-investment), or because it wants to attract strategically relevant technologies for their business, or maybe both?
Financial investing is HARD. Even global, experienced venture capitalists who focus exclusively on financial investing and even specialize in specific niche, are often unsuccessful. It is a highly competitive market that does not necessarily bring expected returns. It is also a very risky business – the more early-stage bets you take, the more difficult, yet more lucrative investing becomes.
MNCs (Multi-National Corporations) are not investment experts, but they do not necessarily invest in order to hit this 10X exit. They have a huge leverage in the market and can often “create” new markets. This is where strategic investments come into play. If an MNC can leverage their market position and decide that their VC activity will focus on strategic and not financial goals (though it’s always a nice bonus), they will get value from day one and make the best out of this hard business.
Value from day one means that when investing in an interesting technology that is relevant for your market, you can learn from the startup, create a joint pilot or a business partnership, or develop any other type of win-win collaboration between your organizations.
Many MNCs create models to combine the two goals, e.g. I once heard from Intel Capital exec that the ratio in Intel’s case is ±70% strategic vis-à-vis ±30% financial investments to allow leveraging Intel’s funds in interesting bets, but primarily to focus on the verticals that are relevant for their market. Many other CVCs follow similar ratios.
Limited Partner vs. Corporate VC activity
As an MNC you also have another option – you can become a limited partner in an existing VC fund. This means that you will be able to enjoy the professional VC expertise and will not need to become an investment-expert overnight. You will also often be able to learn from the VC work, decide on relevant deals and possibly enjoy collaboration with portfolio companies.
But there is a downside as well: LPs follow the VC’s investment cycle and goals, which may not be the right goals for you. VC’s lifecycle ranges from (on average) 7 to 12 years. At the beginning of the funding cycle, VCs make many bets and in the later stages of the fund they mainly focus on follow-up investments. By the end of the fund’s lifecycle, they want to see as many good exists as possible. They will close the fund and redistribute returns.
As a corporate investor, you have the privilege of having more time and being much more focused on strategic gains and not only direct financial returns. Therefore, if you control your own destiny in the form of a VC fund, you will be closer to your specific goals and not follow a traditional VC fund lifecycle.
This is why so many MNCs prefer to establish their own activity as opposed to (or in addition to) becoming LPs in other funds. For instance, Singtel, Innogy, Volkswagen, BOSCH and many other focus on their own ability. Others become a part of a VC fund, but will often choose those funds that give special attention to MNC needs, e.g. the Israeli i3 Equity Partners has what it calls the Partner-Investors (PIs) such as TATA, GE Ventures and Qualcomm Ventures.
Independent vs. Balance Sheet
There is one more structural question when establishing the corporate investing activity. You can either create a separate entity (usually a subsidiary with 100% equity belonging to the parent company) or devote a certain amount of profits “off-the-balance-sheet” to invest.
In the first scenario, the entity – with its own board and decision-making power – has more independence and speed of operations, which may be helpful when competing over deals with other VCs that are not burdened with complicated corporate structures. Also, the independence makes it easier to develop a strategy that will be more focused on fund-specific issues.
On the other hand, investing from within the corporate makes it easier to establish a strong link between the Business Units (e.g. by having to secure the buy-in from them based on what they believe is relevant) and foster closer relationship with innovation champions inside the company. This ensures that once you invested, the startup will have more chances of bringing value to the corporation early-on.
Old vs New VC
Last but not least: there has been a bunch of “new” VC models that are sometimes referred to as “Platform VCs”, which operate a bit differently from more traditional venture capital firms.
A Platform VC is a fund that puts a lot of effort into supporting the portfolio companies AFTER investing. Such VCs would create a larger team inside of the fund to give services to the portfolio companies, e.g. marketing and PR support, systematizing connections with potential customers, actively supporting BizDev and technological activities. They’d go as far as employing a designer to support UX and brand, or Chief Technology Officer to support startups’ technological development.
Now, most VCs are trying to support the portfolio companies. Platform VCs simply put more systematic effort into it and create an internal team that does exclusively that.
The “Platform VC” model has also entered the CVC world. For example, companies such as Innogy (the German Utilities company) operates in Israel in a similar way – the team consists of an MD, Investment Director, Business Development Director, CTO, Office manager only in the Israeli office. On the other side, the CVC office of another Germany market giant, BOSCH, follows a rather traditional scenario with partners and principals employed to source and close relevant deals.
The Bottom Line
In the corporate innovation world, including the corporate investments world, there is never a one-size-fits-all. The most important consideration is to understand what are the goals for YOUR organization and how they can best be served with your specific company structure and capabilities in mind.
The list above is one way to analyze different factors that may help you choose a more suitable model for your organization. But at the end of the day, the investment performance will be measured by the ROI relating to your specific goals and needs. Therefore, the structure of your investment activities is only a starting point. The implementation of the investment model (followed by the right Key Performance Indicators – KPIs – reflecting your goals) is much more important to its success. Good luck!
* Obviously there are many classifications of open innovation activities. I’m sharing this simple distinction here as it illustrates various activities well for the purpose of this blogpost.