The adoption of corporate venturing has expanded globally. These are external innovation activities undertaken by corporations to help them gain insights into non-core markets and access to capabilities including investments in startups (CVC), acquiring other businesses (M&A), partnering with accelerators/incubators, or building their own opportunistic ventures.
Not only has the number of companies involved in some of the mechanisms increased fourfold but also mechanisms, such as corporate venture capital, have increased start-up investments by a multiple of three— from 980 in 2013 to 3,232 in 2019—and investment continues to rise.
Yet, besides this adoption growth, around three-fourths of corporations failed to get the desired results (IESE Business School, 2020). So, there is still a need for a better understanding of how to properly implement this practice.
There are many ways to get engaged in ventures, but let’s highlight the most common types and compare some of the benefits and drawbacks of choosing to run one or multiple activities.
South Korean Samsung Electronics is investing US$200 million a year in about 60 start-ups. Yet, the company has also used a fund-of-funds strategy when scouting in the Israeli market by investing in private venture capital funds.
Pros: This not only strengthens its access to a regional deal flow of start-ups but may also increase its due diligence capability with regard to local start-ups and enablers.
Cons: CVC is often tasked with investing in companies so as to learn more about what’s happening on the outside rather than make a dent on their employer’s P&L by generating returns. As a minority investor, most corporations lose control and end up losing money.
For instance, the manufacturer Volvo decided to join forces in the Swedish Lindholmen Science Park with other corporations in the same value chain, such as the manufacturers CEVT and Veoneer. Volvo’s initiative— mobilityXlab—offers start-ups the opportunity to accelerate through the support of these corporations by receiving mentorship, access to professional networks, industry insights, and workspace.
Pros: Improve their deal flow, not only in terms of quantity and quality but also in terms of anticipation, reducing innovation costs by sharing them with other enablers and strengthening the value proposition offered to start-ups because of the group’s aggregated value.
Cons: Good option to meet short-term targets, but incremental and adjacent innovations are insufficient for long-term sustainable growth. When in almost every category large brands are losing market share to smaller incumbents, a corporation cannot focus on continuing, improving, and extending the current business lines alone if they want to remain relevant.
Cisco is a good example of a company that invests in communications technologies that it later acquires and deploys internally. Since 1993, the company has made over 180 M&As. Failure is inevitable (Cisco shut down Flip Video within 2 years after its $590 million acquisition), but they managed to develop a playbook, and ⅔ of their acquisitions are still alive. About 1/3 of their top leadership came from acquisitions.
Pros: A far speedier growth strategy than any other corporate venturing option; Acquire new competencies and resources that could save you years of R&D and money; Access to new market sector and/or increased market share.
Cons: You can only buy what is available / not always a perfect fit with strategic requirements; Integration issues (both technological and cultural);
In a former interview Cisco’s Chambers admits that “as the pace of innovation accelerates, and top talent joins startups rather than large companies, startups might become threats faster than you can buy them.”
Xerox’s internal venture capital fund, Xerox Technology Ventures started as a $30 million fund in 1989 and grew to over $200 million in the next 7 years. It launched companies like Documentum and Document Sciences out of Xerox’s fabled Palo Alto Research Center. This financial performance was extraordinary and put XTV in the top quartile of all VC funds launched in 1989. XTV’s success created lots of internal dissatisfaction within Xerox and the company eventually chose to shut XTV down in 1996.
Pros: A higher degree of control over inputs, increased visibility over the process, economies of scale, synergies among units or processes
Cons: High volume of activity is required, large investment needed, dedicated equipment/resources have limited use, problems with supply chain integration.
As a corporation, there are four aspects to evaluate whether building yourself or partnering with an enabler?
Tesla could not have been built by General Motor. It required $19bn investment over 16 years of losses – it would have been shut down in Y1, Y2, Y3, etc
“Disruptive distractions” are almost always shut down for the same reasons; leadership moves on, strategy changes, budgets are reallocated. Same as with XTV, the core always (rightly) takes precedence in decision making, strategic focus, budgeting, careers, etc
BNP Paribas, Volvo, Mastercard, and many other brands have long complemented their efforts with a corporate venturing enabler to de-risk the innovation process.
External venture building counters longer-term growth stagnation & loss of market share, where corporations can’t respond from within their core business or through startup collaborations. This type of innovation gives them an edge, and a head-start, in areas where new entrants and competition will emerge.
A corporation running venture building activities, especially at the beginning when those have to be built, may lack the required skilled team, proven process, or anticipated access to opportunities. It may also find that the cost for building, testing, and learning what is the right strategy may be too high. Having a strong corporate venturing ecosystem with enablers can boost the company’s ability to compensate for these characteristics.
The market is highly volatile and its fluctuation makes it more difficult to know what is coming next. To account for both short and long-term gains, corporations will have to develop a portfolio of investments that may include a combination of the above. Partnering with entrepreneurs and ecosystem enablers is becoming more important than ever at estimating future trends and spotting opportunities before competitors do.