Corporate Venture Capital: Avoid the Risk, Miss the Rewards

Corporate Venture Capital: Avoid the Risk, Miss the Rewards

          
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Corporate Venture Capital: Avoid the Risk, Miss the Rewards

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    Five Priorities Guide Corporate Venturing’s Winners

    As valuable as quantitative analysis can be, it cannot tell companies how to do venture investing well. That knowledge is the product of experience, which The Boston Consulting Group has gained from extensive participation in designing and establishing CVC units in a variety of industries. On the basis of that experience, we have identified a set of best practices intended to help companies realize the full potential of venture investing while sidestepping the possible pitfalls. These practices can benefit companies preparing to enter the venture capital arena for the first time as well as those seeking to improve their existing operations.

    We find that the most successful CVC units follow a set of distinct and well-defined ground rules. (See Exhibit 5.) Those ground rules dictate how those units define both their operating principles and their strategy, how knowledge is captured and transferred, how corporate assets are leveraged, and how venturing teams are staffed.

    exhibit
    Operating Principles

    The most successful CVC units adhere strictly to the basic ground rules of corporate venturing.

    They have the full backing of corporate leadership, which plays an active role in designing the units, formulating their strategies, and implementing processes to monetize the innovations they fund. Leaders of business units play a role on investment committees and have input into investment decisions.

    Leading CVC units also have clearly defined investing parameters. They have designated the industries they will search for targets, specified the geographical regions where they wish to invest, and quantified their risk tolerance, establishing ceilings on the amount committed to any single venture and the duration of investments. Corporate leadership has committed to venturing for the long term, with the understanding that venture investors, by definition, take risks, and that the occasional failure is the cost of doing business. In fact, as a general rule, experienced CVC players expect that roughly three of ten investments may fail, approximately five should perform acceptably, and the rest may exceed expectations.

    These business realities raise questions for corporate leaders considering a move into venture investing or seeking improvements in their existing venture operation. Does your organization have a detailed charter for its venturing operation? Has it clearly spelled out its investment strategy, and is that strategy aligned with overall corporate objectives? How is success defined, and what performance metrics are in place? Do the metrics encompass both financial returns and strategic gains such as technological insights and improved deal flow? Perhaps most important, does executive management know the odds that a given investment will succeed, and is it prepared to accept the consequences of the occasional failure?

    Strategies

    Befitting their key role in the innovation management effort, successful CVC units are tightly aligned with their corporate parents’ overall business and innovation strategies. The knowledge the units gather from their target investments feeds directly, by predetermined routes, into the larger corporation-wide innovation pipeline. The top corporate players also position their investments with the competition in mind. They keep a close eye on emerging innovation trends in their own and adjacent industries and monitor where the competition is focusing its attention and capital.

    When launching a CVC unit, therefore, corporate leaders should ask themselves a few key questions: How can our venture portfolio complement and support internal R&D, and should our parent company cooperate strategically with companies in other sectors that face similar R&D challenges? What can be learned from studying our competitors’ venturing activities? Is promising work going on below the radar that could offer us an opportunity to get ahead of industry innovation trends? Can venturing give us access to a technological advantage that industry rivals have overlooked?

    Knowledge Transfer

    To keep the innovation information flowing, successful corporations often designate specific business units to serve as “guardians” of individual investment targets, responsible for transferring knowledge from the target to the corporation. That requires gaining buy-in from the unit’s R&D and innovation managers—not always an easy task, given the tendency of managers to protect their turf. It may take time to convince them that the CVC unit is not a threat to their own efforts but a valuable complement. By drawing lines of accountability for knowledge transfer, corporations ensure that innovations developed by investment targets find their way into the corporate information stream without delay or slippage.

    Before a CVC unit is up and running, corporate leaders need to ensure that the organization is set up to embrace innovation and collaborate across functional boundaries to extract the full value of new technologies and knowledge. Is there accountability for integrating information into the corporate knowledge base? Do the parent company’s internal structures—including governance structures and knowledge networks—facilitate innovation and idea creation? Are there processes in place for operationalizing and monetizing innovations developed by portfolio companies?

    Leverage of Existing Assets

    Successful CVC units are adept at leveraging corporate assets. Some corporations, for example, give researchers from target companies access to their laboratories. Others contribute manufacturing expertise, offer broader distribution of the target company’s products, or provide administrative support for such functions as patent applications.

    Google, for one, takes the process an additional step. Hands-on teams from Google Ventures work with portfolio companies full-time on design, recruiting, marketing, and engineering. Google has also set up a dedicated Startup Lab where, according to the company, people from fledgling initiatives can meet representatives of other start-ups to learn, collaborate, and share information.

    The ability to leverage corporate assets is, in fact, part of the value proposition that successful corporate investors make to potential targets, and it can prove a crucial differentiator during deal negotiations.

    It is important, therefore, for corporate leaders to ask what their organization can provide to its portfolio companies to maximize their chances of success. Does it have core strengths it can leverage to add value to innovations emerging from its investments? Can it partner with investors from other industries that bring complementary strengths to the table? Can it provide access to markets or customers that are beyond the reach of its portfolio companies?

    Staffing

    Proven corporate-venturing performers pay close attention to staffing issues.

    They carefully choose team leaders who combine broad familiarity with the VC landscape with specific understanding of the corporation’s strategy and processes. Rather than recruit from independent VC firms, they populate their teams with CVC veterans. These professionals are familiar with venture investing’s fast-paced business style and are comfortable making quick decisions on the basis of incomplete information, while remaining mindful of their role within the larger enterprise. Their informal networks and knowledge of the marketplace keep them abreast of new developments and give them access to a robust deal flow.

    Joining these professionals is a smaller group of people skilled at working with internal networks and enlisting the resources of the corporation. They provide a vital link to the parent corporation and help keep the lines of communication open.

    What is your organization’s staffing strategy? Is the unit capable of creating strong links to target companies as well as to the parent corporation?