Why create a Corporate Venture fund?
Innovation + Corporate Venture = value creation
As our world becomes more competitive, corporations have to adapt themselves to the ever-changing markets.
As Peter Thiel mentioned in Zero to One: “Unless they invest in the difficult task of creating new things, companies will fail in the future no matter how big their profits remain today.” That’s what happened to Kodak, which missed the digital shift. Blockbuster which mocked at Netflix and disappeared a few years after. This firms presumed that thanks to their respective monopolies and significant profits, they were untouchable.
Start-ups have surged globally and started to disrupt entire industries and our lives. Airbnb or Uber have revolutionized how we travel or book rides and Deliveroo or Doordash, more recently, with food delivery. New business models need to be fueled by Venture Capital to take ownership of their respective markets. As a result innovation is highly valued by financial markets. The technology sector which heavily relies on its value-added services and products has experienced a surge of valuation of their biggest actors. The table below shows how market cap leaders have dramatically changed in less than two decades.
Value creation has allowed them to become global monopolies and they have seen their stocks booming over the last years. Apple being the first company with a market value exceeding $1Tn in August 2018 following with Amazon. Or the latter’s stocks increasing at +80% year-to-year since October 2017.
Corporate Venture Capital (CVC) has been surging since industries need to take into account how innovations are more impactful than ever. Corporate Venture Capital deals in 2018 were worth $180Bn (1), an increase of 55% compared to 2017. Today, three quarters of the Fortune 100 are active in corporate venturing and 41 of them have a dedicated CVC team (2).
So, why create a Corporate Venture fund?
The main goal of Corporate Venture is to create strategic value for the parent company and to a larger extent, having a long–term vision in order to become and/or remain a leader in its market.
When security and flexibility are brought by Corporate Venture
Corporate Venture units create opportunities to innovate and to be agile by developing and testing new technologies through partnerships with innovative companies. These startups can safely launch a new product/service and support the parent company’s beta services and products into a new market, analyze the effects and adjust conditions after receiving a first feedback. For instance, an Insurance company has invested in a startup qualifying Facebook profile in order to adjust insurance price (with user consent). This would have been too risky in terms of image to launch this product under the Insurer brand. However, this technology may have a strong impact on the way an Insurer reinsure itself.
Corporate Venture allows to secure the important deals and the most impactful in the long run. Wendell Brooks, president of Intel Capital, mentioned an interesting case: “we invested in more than a dozen different startups to help create the groundbreaking Intel RealSense™ technology”.
CVC allows to reduce the risk of M&A operations by evaluating startups over a long period, both quantitatively (financial statements etc.) and qualitatively (complementarity of the team, quality of relationship etc.). For instance, we observed that some big companies were obliged to depreciate financials assets after startups acquisitions. Acquiring a minority stake early can favors synergies after effective acquisition when both businesses are complementary. Effective due diligence has been going on since the parent company entered the capital of the start-up. As a result, such a thorough evaluation before acquisition increases the chance to succeed for both parties.
Corporate Venture enables the parent company to accelerate its digital transformation by being part of the open innovation ecosystem and generating a strong deal flow. Acquiring a minority stake within a start-up is an opportunity for the parent company to partner with the start-up and be part of its ecosystem. Insightful exchanges with similar start-ups, incubators, accelerators help monitoring trends and not miss opportunities. Many bright start-ups are capable to co-build an ecosystem for a parent company. For instance, French company Banque Postale which initially owned 10% of fintech KissKissBankBank decided to entirely acquire the firm in 2017, “a first step in creating a Fintech ecosystem around Banque Postale” as mentioned Olivier Lévy-Barouch, Vice president of Strategy and Development of the bank.
It is crucial to give an innovative image by displaying the efforts of a CVC program towards key stakeholders. An enhancement of the firm’s brand by proving the firm can think out of the box by promoting future key areas of interest and being active in the ecosystem.
When Corporate Venture helps creating and extending relationships …
A Corporate venture unit creates partnerships with complimentary start-ups to the parent company’s business. Fruitful collaborations lead to “multipliers” of innovation when both parties pool together their resources and competencies to create a viable solution to answer a problematic in a new or common market. Google with Nest is a clear example. Google was exceeding in software but lagging in hardware. The tech conglomerate was eager to enter the smart home technology so decided to partner in 2011 by being an investor within its series B. The partnership expanded with another investment of Google Ventures (GV) in 2012 as part of its series C. GV being confident the technology could bring a real value added to its parent company’s product (Google Home against Amazon’s Alexa) acquires the company. In 2018, Nest still operates globally, under the helm of Google and Google Home allows voice to command Nest products. Within the same year, according to Slate, “Google Home devices are rapidly catching up to Amazon Echo devices in worldwide sales and may have already surpassed them.” This partnership allowed Google to first monitor the start-up’s activity and progress and make a strategic move by acquiring the scaled business and therefore having an exclusive access to Nest’s products and technology and combined it to its development of Google Home. This has notably led to a strong position for Google products.
Partnering with a start-up is a path to source talents from start-ups and hire them at a later stage. Regarding the example with Nest, Google not only acquired the cutting-edge of smart home innovation but also recruited innovators, two ex-Apple engineers, Tony Fadell (also co-creator of the iPod) and Matt Rogers. On top of that, an innovative image helps recruiting smart young graduates instead of them going to the competition. It’s a more natural and convincing way to recruit them instead of having job offers on trendy platforms such as “Welcome to the jungle”, hiring a communication agency or setting up convivial evenings.
… which are also financially profitable
Not only the parent company beneficiates from value creation but can also perceive financial gains. Exits are always available for the parent company especially when the number of VC deals and exits are surging globally. Venture capital-backed exits in 2018 worldwide nearly doubled to a record $165 billion (3) than last year in which “more than 95% of CVC units reported positive returns” (4). The sale of a stake after misdoing a strategic move is more of a “getting paid to learn” (as CEO of Intel Capital mentioned in the forewords of the World of Corporate Venturing 2019 guide) than a failure.
Lastly, in a market where innovation is prime and contenders are many around a coveted start-up, existing relationships favors you to acquire at the expense of other contenders. The start-up will typically have a broad choice between Angel Investors, VCs and CVCs.
VCs and Angels can provide cash and personal or external expertise. Whereas Corporate Venture programs can, on top of that, provide the brand (notoriety of the parent company) as well as “an access to leadership, and a portfolio development manager who can personally help you on a daily basis, which is a huge advantage” (Dan Source, VP of business development of WhiteSource). CVCs are favored. Furthermore, external advisors work for VCs but in CVC branches these advisors are experts from the parent company who have a better idea in knowing if the start-up would be a great fit or not.
To conclude, Corporate Venture enhances and secures external innovation. It broadcasts a positive image of the parent company, brings top talents while having positive returns.
(1) Global Corporate Venturing 2018
(4) BCG Report: “How the Best Corporate Venturers Keep Getting Better”