BrazilThe innovation objectives and risks of corporate venturing
With disruption triggering the need for faster and more innovation, a growing number of companies are turning to corporate venturing as a means to fuel their innovation agenda. Tim Vellema, a Consultant at The Next Organization, outlines the benefits and risks that come with corporate venturing.
Corporate venturing is the concept of larger companies either developing, sponsoring, or investing in startup companies, such as taking minority equity stakes or providing growth funding.
The approach is most often used to quickly and impactful invest in complementary technology or capabilities that solve specific problems and help a corporate with accelerating its innovation. In return, the start-up receives strategic advice and funding to accelerate its own growth.
The objectives of corporate venturing
Corporate venturing can have both financial and strategic innovation objectives. Strategic innovation objectives are most often focused on learning and/or transforming.
Learning organisations grow their capabilities along the dimensions of what they already do. If learning and adapting is the main goal of a corporate venture, there is often a close link with current operations and the acquired resources and capabilities build on the current business model. While this approach carries low to medium risk, it will not lead to disruptive innovation.
Transforming is when a corporate uses corporate venturing to adapt or even pivot its business model. Leveraging the innovative minds of a startup, corporates can continue to focus on their current operations, while the startups are tasked with exploring the ‘next big thing’ in the market.
This way of thinking and doing business nourishes innovativeness. Although this approach carries high risk, internalising this way of thinking enables a corporate to respond to disruptive industry developments or, one step further, become an industry disruptor itself.
Although uncommon, some corporate ventures invest in startups for financial gain. This is less common since the profits from venturing are most often not significant enough to have a noticeable impact on the corporate’s overall profit. However, with the right exit strategy, strategic and financial objectives can be combined to generate high returns.
Further reading: Bain: Venture capitalists flocking to technology to start-ups.
The risks of corporate venturing
Research from Harvard Business School shows that alignment of goals between the startup and corporate parent is paramount. Without the alignment, knowledge is less likely to flow from one entity to another, which limits the potential of the venture and synergies for both parties.
Furthermore, one of the main risks of working with outside parties and generating external knowledge is the ‘not invented here’ syndrome. While combining knowledge might be a great accelerator for performance and innovation, teams are sometimes reluctant to accept outside knowledge and perceive it as less valuable. This might compromise cooperation between the startup and corporate parent and limit valuable knowledge transfer.
Lastly, the term ‘corporate venturing’ has been coined for a reason. There is risk involved in investing in startups and it might take a while for the investment to pay off. This also means that certain investments in companies will not succeed.
In order to make investments successful, a clear management cycle is a prerequisite, with interim performance reviews. In addition, a corporate parent should give a startup sufficient time to prove its added value and review its overall performance afterwards.
Setting up a corporate venture
First of all, corporate venturing is complex and should be done by people who have extensive experience. Managing the partnership, utilising synergies, and safeguarding knowledge transfer is complex and requires experienced managers to achieve the best results.
Secondly, for corporate venturing to succeed, the most important aspect is, of course, the partner company, the startup. To invest in a startup with the right assets and capabilities, commercial due diligence is key. Industry analysis, target selection and detailed company analyses, is therefore, something that should not be taken lightly. And lastly, short but sweet: patience. Innovation does not happen overnight.
