Corporate venturing has evolved from a fringe activity to an important strategy that companies use to gain access to new technologies and accelerate innovation. Although corporate venturing—which includes investing corporate venture capital (CVC) as well as running innovation labs and incubators—has matured, there is still much room for improvement, according to a new report by The Boston Consulting Group (BCG) titled How the Best Corporate Venturers Are Getting Even Better.
In a clear sign of how popular this strategy has become, the percentage of CVC investments as a share of global VC investments grew from 20% in 2012 to 26% in 2017. Fortunately, that stepped-up investment coincided with strong VC returns in Asia, the US, and Europe, and more than 95% of CVC units reported positive returns in 2017.
Moreover, the benefits of CVC investing have flowed both ways. According to a BCG and Hello Tomorrow survey of more than 400 technology startups, respondents preferred to partner with corporations, as opposed to pure financial backers. Of the possible alliances, startups preferred partnering with corporations to gain market access (43%), technical knowledge and expertise (26%), and business knowledge and expertise (19%).
Michael Brigl, a BCG partner and coauthor of the report, said: “Corporate venturing is a proven strategy for large companies that want to tap into new technologies and new ways of working. And their involvement benefits startups substantially, both in terms of capital and domain expertise.”
Helping Startups Grow Faster
Despite strong CVC returns, some senior leaders question the value of CVC investments because they rarely deliver meaningful top-line revenue. One way that CVC units can address this concern is by using their domain expertise and company resources to more actively help startups scale their businesses faster. More revenue and earnings more quickly are a boon for both sides.
For example, in 2008, Coca-Cola acquired a 40% stake in Honest Tea, an organic tea company. Coca-Cola’s corporate venturing and emerging-brands unit leveraged its distribution network and scaled Honest Tea’s business from $38 million to $75 million in three years. That success led Coca-Cola to buy Honest Tea outright in 2011, and by 2015, revenues had more than doubled, to $180 million.
“It’s absolutely vital that CVC units demonstrate their value to senior leaders in order to win their ongoing support,” said Alexander Roos, a BCG senior partner and coauthor of the report. “Leaders need patience when it comes to corporate venturing, but they also need clear evidence that their patience will be rewarded.”
The report highlights best practices for building an effective CVC unit, including the following:
- Set a clear objective. A company must decide if the principal objective of its CVC unit is financial or strategic. This decision guides the optimal organization structure, incentive scheme, and people mix.
- Define search fields. A company must also determine where a CVC unit should look to find potential investments. Having the right prospects will keep senior leaders engaged and supportive.
- Hire the right mix of talent. Staffing a CVC unit with internal talent can facilitate good working relationships and collaboration with the company’s business units; hiring external talent can provide access to new networks and expertise.
- Ensure independence. To give a CVC unit room for innovative, disruptive thinking and activities, it should be separate—physically and operationally—from the company’s daily activities.
- Enable lean, agile governance. A company should put lean and agile decision-making processes in place so a CVC unit can keep up with startups.
- Provide consistent financing. A company needs to fund its CVC unit throughout economic cycles to retain experts and maintain credibility in the VC market.
Integrating Corporate Venturing into the Corporate Framework
Not all corporate venturing activities involve CVC. Rather, each type of corporate venturing tool—whether CVC or an accelerator or incubator, for example—is geared toward one or more of the various types of innovation: process, product, service, or business model. Companies need to carefully choose which tools to use depending on their innovation strategies or goals.
Also, to be effective, companies must integrate corporate venturing into their overall approach to innovation in a way that clarifies how these tools complement the traditional R&D function. Otherwise, the R&D team may see venturing activities as competitors for resources. As part of this integration, corporate venturing should be hardwired into the budgeting process. “Corporate venturing can’t be seen as a pet project or side project of a senior leader,” said Roos. “To win support across the enterprise, these activities need to be integrated into the corporate framework.”
For example, Tencent, a global provider of internet-related services and products, telecom services, and technology, has three innovation goals: to build up the ecosystems around social network platforms WeChat and Qzone by acquiring additional content, to give companies in various industries access to Tencent’s customers, and to support regional expansion in Asia. To achieve its goals, Tencent is leveraging CVC and M&A investments, as well as incubators and innovation labs. In exchange for an equity stake of 5% to 10%, startups are allowed to access Tencent’s internet platforms from more than 20 locations in China. In turn, Tencent’s mobile internet group uses these startups to test and incubate ideas when it lacks in-house knowledge. Meanwhile, Tencent also has an artificial intelligence innovation lab with 250 employees.
Using Venturing to Accelerate a Digital Transformation
Few companies have yet to use their corporate venturing activities to accelerate a digital transformation. A successful digital transformation requires employees to develop new skills, understand digital technologies, and learn new ways to work and make decisions. It also requires companies to attract and develop digital talent. This is precisely the sort of expertise that many startups have in abundance. Tapping into startups’ know-how in these areas can help a company accelerate a digital transformation and get more bang for its corporate venturing buck.
“Corporate venturing provides a critical way to tap into the kind of innovative thinking necessary to keep up with the rapid changes in the marketplace,” said Brigl. “The companies that integrate corporate venturing into their broader innovation approach to drive growth and digital transformation will have a leg up on the competition.”