BrazilThe A to Z of corporate venturing and start-ups
With disruption accelerating the need for rapid innovation, corporates are increasingly venturing into alliances and strategic partnerships with start-ups. In a long read series, experts from SparkOptimus outline what corporate venturing exactly is, its benefits versus in-house innovation, and how to build ventures – from strategy through to execution.
Article 1: What is corporate venturing?
To start with, it is important to define ‘corporate venturing’. In our view, corporate venturing is when a (large) established organization pursues innovation by either building, partnering with or investing in a start-up company.
The goal of corporate venturing is commonly to explore new (digital) business models or invent new products that are further outside a company’s core and often are not expected to become a core activity for the next 5-10 years.
From a strategic perspective, such non core activities typically lie in addressing completely new customer groups (e.g. a B2C proposition for a traditionally B2B-focused company) or in significantly different business & operating models (e.g. a digital service offer for a CPG company, or a B2B ecommerce business).
One example of a venture that is exploring a radically new space is Heineken’s Beerwulf. Together with the international brewery, SparkOptimus built, operated, and scaled a new digital-first start-up for craft and variety beer. Before Heineken started this project, digital retail had not been part of the company’s business at all. Today, Beerwulf is the largest European digital beer platform where beer lovers and enthusiasts can discover and buy the best beers from the best brewers in the world.
Consultants from SparkOptimus helped Heineken get from idea to reality and built an independent venture team consisting of Heineken employees and new hires. Through Beerwulf, Heineken is establishing a direct relationship with its end consumers. The data generated by the platform enables the team to improve continuously and achieve growth quickly.
The benefits of corporate venturing
Although some believe corporates aren’t suited to venture into the agile, fast-paced venturing world themselves, our experience tells otherwise. Contrary to popular belief, corporates can and do beat start-ups at their own game when building ventures from scratch – acquiring them definitely isn’t the only option.
If done properly, corporates can enjoy all the advantages start-ups have, while leveraging typical corporate assets:
The scope of a corporate venture
While many companies are booking great successes with their corporate start-ups, not every company should launch a venture. The overarching corporate strategy dictates if building a venture really makes sense. In the process multiple factors and alternatives should be considered.
We define three kinds of corporate venture initiatives:
- those that optimise current operations (Optimization);
- those that transform the way you sell to your customers within the existing business model (Transformation);
- those that create new business models and disrupt the old (Disruption).
To achieve sustainable long-term growth, you need to have active initiatives on all three horizons because they generate value on different timelines. Skilled management requires a careful division of time across the horizons.
To illustrate this, let’s have a look at Hely. Together with the Dutch Railways (NS) we designed and built a one-stop-shop for all public transportation and shared mobility (e.g. bikes and cars), called Hely. At Hely you can hire cars, e-bikes and cargo bikes through one app.
While the new venture offers mobility – like NS’s core business – it explores a completely separate service that has nothing to do with the core business; it could even have a cannibalising effect on it. Hely can therefore be classified as a “third horizon” initiative. But while building Hely, NS has not stopped concentrating on activities closer to their core. Instead, while working on Hely, NS is continuously improving its (digital) core services of train travel.
Partnering or buying?
A classical decision in the corporate venturing space is: should we build or buy? Depending on your strategy, investing in or partnering with an existing player may actually be a better choice that growing something from scratch. A great example is Henkel Beauty Care, who, rather than creating their own competitor, invested in the successful scale-up eSalon.
However, keep in mind that acquisition comes at a price – beyond just the financial investment. Next to the market price, you may have to settle for a less-than-optimal strategic fit and the cost of integration after the acquisition.
Building a corporate venture, on the other hand, ensures 100% strategic fit. It’s also a great way to develop internal capabilities. Considering that a start-up’s value is often largely built on its people & technology, building these capabilities from the ground up can be extremely valuable.
As an example, Pepsi Lipton worked with us for the build and launch of WeDrinkwell, a subscription for healthy (novelty) drinks. Already in the first weeks after the launch of the D2C platform, we were able to gather data-driven insights for the Pepsi Lipton on consumer preferences, assortment, and new drink formats from hundreds of paying customers. Moreover, the venture gave Pepsi Lipton critical experience in a new set of digital skills like building a product recommendation engine.
Article 2: When to build a corporate venture?
Corporate ventures aren’t for every company. They should only be built in certain situations, under a strict set of circumstances. Based on our experiences, we have identified three ‘checks’ that leaders need to pass before going full steam ahead and building a venture.
Check #1: does building a venture fit well in your overarching corporate strategy?
It only makes sense to build a venture if it fits in well with your overarching corporate strategy. That is, if doing so maintains the right balance across the three horizons discussed above (‘Optimization’, ‘Transformation’, and ‘Disruption’). Developing new business models (i.e. ventures) is only one of the three horizons, and to achieve smooth growth, you need to spread initiatives and management time across these horizons in a way that upholds the equilibrium.
Not all ‘ventures’ are ventures
When determining your innovation portfolio across the horizons, first make sure the ideas you consider “disruptive” actually belong in that category. Although certain ideas may feel very disruptive, they may not be ventures at all and shouldn’t be treated as such.
The goal of a venture is to explore new (digital) propositions or invent new products that reach further outside a company’s core. They generally aren’t expected to become a core activity for the next 5-10 years. What’s more, they often cause friction with existing business and may even cannibalize on it.
An example is a project we worked on with Heineken to develop a B2B platform, which felt quite disruptive to their industry. But it was in fact very much intertwined with their existing business and allowed them to serve their current clients better, faster, and cheaper. After a number of pilots, the platform became part of the core business within a few years.
The above-mentioned Beerwulf example, however, was a disruptive idea that extended far beyond the company’s core. It was built completely separately, caused natural friction with existing business (e.g. by also offering non-Heineken partner products), had a separate P&L, and should not be expected anytime soon to be integrated with Heineken’s core activities.
Another example is Kramp, a supplier of parts and technical services for the agricultural sector. We supported them in setting up a digital-first direct-to-consumer channel. This was transformative to their business but not disruptive, and it was fully capable of running inside the existing organisation. As such, we don’t consider this D2C channel a venture.
But we also built a disruptive B2B platform with Kramp that goes beyond their current categories and which we definitely would consider a venture. On this platform, farmers can find everything they need; not only parts and technical services, but also farm feed, seeds, and even financing. This venture causes natural friction with the existing business and perhaps even cannibalization thereof, and needs to be managed separately – at least for the foreseeable future.
Check #2: is building a venture the best option versus buying or partnering?
You don’t always need to build a venture yourself – depending on your strategy, buying or partnering may be a smarter option. If there are interesting disruptive players in your industry, it often makes sense to first better understand if they could be potential acquisition targets for you.
Building a venture is great if you want to develop internal capabilities for digital business, achieve 100% strategic fit from day one, and don’t want to pay the premium you otherwise would with mergers & acquisitions.
But there are times when buying a venture is the better choice, especially when there are already proven players in the market. Watch out and check the strategic fit, and be cautious that not all staff leave after straight after buying it. Partnering to (further) develop a venture mixes elements of the first two approaches and is a great choice if you feel you need to learn from best-practices and adopt new ways of working, while keeping investments manageable.
As an example, instead of building or buying their own venture, supermarket chain Jumbo created a partnership with grocery delivery company Gorillas. This allowed Gorillas to leverage synergies from Jumbo’s immensely broad product range and strong bargaining power, while Jumbo gained access to both speed and (digital) capabilities that would have been difficult to acquire themselves.
Check #3: can you set the venture up for success from the start?
So you have a great disruptive idea that fits your strategy and you've decided that building it yourself is the best option. As you know, success it not guaranteed for a venture because it’s a high-risk endeavor. So to have any chance of achieving your goal, you must be prepared for success from day one. This depends on two key factors.
1) Are there synergies with the ‘mothership’ you can leverage?
There needs to be a real strategic match with current overarching corporate. Take Daimler, for example, which started Car2Go. It offers the obvious benefit for the venture that they can supply the (capital intensive) vehicle fleet, while the mothership also benefits from acquiring a whole new consumer group for their product.
Another example is Vipps, the payment app by Norwegian financial services provider DNB. These ventures could leverage synergies with the corporate ‘mothership’, giving them a much larger chance of succeeding.
Meanwhile, LeasePlan had hundreds of thousands of used cars coming back from lease every year. This offered them a good starting point for establishing CarNext: a sales platform for used cars that effectively leveraged synergies with the parent organization. CarNext sells LeasePlan’s post-lease inventory and is now the biggest pan-EU platform for the second-hand car market. It built on LeasePlan’s funds, tooling, processes, networks and people.
2) Are you ready and willing to do what it takes?
In the venturing space, you need to be willing to make unconventional decisions and act under uncertainty. You need to test, learn and adapt quickly, and fail fast to eventually find a sustainable model to create customer value and succeed. This requires a different way of working than most corporates are accustomed to.
In order to thrive in the venturing space as a corporate, you need to build a separate venture team and give that team all the freedom it needs with a reporting line to a senior stakeholder within the corporate.
Furthermore, investments will be significant – once a venture gains traction you often need to invest more, not less. It’s vital to employ stage-gated funding, where you invest more as the venture shows progress and results. You can only pull this off if you are absolutely ready and willing from the start to do what it takes.
All in all, deciding when to build a venture is by no means a simple task. However, with the right checks in place, you can significantly mitigate risk and move ahead with confidence. It’s certainly not simply a luxury to do your homework first in order to understand whether a venture fits well into your corporate strategy, and whether building, buying, or partnering is the best option. And that whenever you do decide to build a venture, you are set up for success.
