Corporate Venture Capital

Featured Insight Report : Designing Corporate Venture Capital Successfully

EXECUTIVE SUMMARY

Corporate and innovation terms are not an oxymoron. Corporate companies have been innovating for decades but have more competition from various fronts today. Corporate innovation is an evolving concept. During more than a century, corporate innovation has evolved with six critical milestones in this journey. The current juncture is the innovation era of business platforms like Amazon, Apple, and Google. Corporate venture capital(CVC) is the outcome of corporate innovation’s evolution and one of the essential instruments in the toolbox. In Startup Intellect, our corporate innovation taxonomy covers six pillars, and corporate venture capital is included in external corporate venturing.

• R&D and innovation labs
• Internal corporate venturing and intrapreneurship
• External corporate venturing
• Open innovation

The evolution of CVC is the history of boom and bust cycles. Corporations typically enter the corporate venture capital market after the independent sector showed signs of success. All too often, however, corporations overbuilt capacity without carefully thinking out the implications. This strategy invariably leads to retrenchment. We have been in the fourth cycle since 2000 globally.

CVC investment has been growing globally and is very attractive for new entrants. On the other hand, the majority of the newness indicates that the CVC life span is not very long. CVC is increasing its presence in venture capital investment, with 25% of the entire VC space. CVC’s focus goes to invest later stage and mature startups. 60% of CVCs make ten or less investment in their whole life span. Banking and insurance is the most attracted industry to establish a CVC unit. IT and software industry is the second one.

After reviewing numerous CVC cases and academic research, we suggest four critical success factors for CVCs.

• Manage the forces of CVC cycles
• Focus on strategic objectives with the balance of financial ones
• Align the structure to the objectives
• Build a mutually complementary relationship with startups

Starting an independent venture capital has its challenges. Corporate venture capital may have less difficulty in some areas. However, for a CVC, there are problems to tackle in identifying and sticking long term objectives, developing collaborative governance, and mutual value-adding terms between the startup and the parent company. This challenge is the main reason for the short life span of most of the CVCs. They should not imitate an independent VC’s investment focus and operational processes. Otherwise, encountering negative consequences of CVC cycles is inevitable. In our CVC foundation approach, we suggest four design circles;

• Design Circle 1 – Objectives: A robust strategic focus with necessary financial objectives
• Design Circle 2 – Structure: An aligned structure to the objectives
• Design Circle 3 – Operation: An operation design that makes collaboration, synergy, and due diligence process effective
• Design Circle 4 – Performance: A performance monitoring that allows improving short term performance in a long term horizon