by Dr. Patrick Flesner
Establishing a Corporate Venture Capital (CVC) unit with a corporation-centric mindset leads to misaligned incentives and eventually failure. Instead of focusing on what startups can do for the corporation, executives should establish CVC units with a startup-centric mindset concentrating on what the corporation can do to help startups. With this startup-centric mindset and a 360 degree “Give First” approach to CVC, the chances that a CVC unit successfully navigates the Venture Capital Industry and generates both long-term strategic and financial value for the sponsoring corporation can be significantly improved. In this article, I have tried to translate the “Give First” approach into four 4 guiding principles executives may observe when entering the wonderful world of CVC.
Corporate Venture Capital is still on the rise
The number of corporations investing in startups reached record levels in 2018. 264 new corporate venture capital (CVC) units invested for the first time in 2018 (CB Insights Stats). The CVC ecosystem is expanding far beyond the likes of Google and Intel and spans across all industries. There are industries in which many of the most relevant companies already conduct venturing activities. Good examples are the automotive industry with e.g. BMW, Renault-Nissan-Mitsubishi, Porsche, Daimler, Volvo, Toyota, General Motors and Volkswagenbeing active CVC investors and the insurance industry with e.g. Allianz, AXA investing in startups. In other industries, some companies have already engaged in venturing activities, while others remain under the radar. For example, while H&M is already an active venture capital investor, Inditex has not yet significantly engaged in venture capital activities. While AB InBev is very actively engaged through its global growth and innovation group ZX Ventures, Heineken has not yet taken a material step in this regard. However, even venture-backed companies like Airbnb see the strategic value in becoming a venture capital investor and do minority investments in high-growth companies (Crunchbase — AirBNB).
CVC units are often established with a corporation-centric mindset that leads to misaligned incentives and eventually failure
Corporations usually pursue venturing activities in order to detect potentially disruptive industry trends, new technologies and digital business models early. They want to tap into external innovation opportunities, complement their internal R&D efforts and capture strategic value. Given these strategic goals, executives may be tempted to establish CVC units with a corporation-centric mindset focusing on how strategic value can effectively be extracted from the venturing activities and essentially what the startups can do for the corporation. But this CVC approach leads to misaligned incentives. Other stakeholders, like founders and traditional VCs, which are already invested in a startup, do not really care about what the startup can do for the corporation. Rather, they care about what the corporation can do for the startup. Can the corporation accelerate the startup’s growth? Can it facilitate international expansion or help develop the product, product features or achieve product-market-fit? What is the tangible value-add? The most attractive startups, who can choose among potential investors, are bound to only accept investments from highly differentiated CVCunits that can credibly answer these questions and create unparalleled tangible value by leveraging the corporate assets.
Many of the most active CVCs have established their CVC units with a startup-centric mindset
Having realized this, many of the most active CVCs have established their CVC units with a startup-centric mindset. Good examples of corporations that seem to pursue a “Give First” approach are Comcast, Microsoft and AB InBev. Comcast states on its website: “We flip the corporate venture model. Instead of focusing on what portfolio companies can do for us, we concentrate on what we can do to help startups (Comcast Ventures).” At M12 (formerly Microsoft Ventures), the CVC unit helps foster the growth of its portfolio companies by serving and supporting visionary entrepreneurs and acting as a connector between the startups and the Microsoft ecosystem with its unparalleled resources and relationships (M12). ZX Ventures, the global growth and innovation group within AB InBev, stresses: “We provide our portfolio companies with access to AB InBev’s vast network of subject matter experts, unparalleled supply chain capabilities, route-to-market expertise, and marketing properties and partnerships to their supercharge growth (ZX Ventures).”
What a given corporation can do to help startups differs significantly
What a given corporation can do to help startups differs significantly. Some corporations can boost sales and fuel growth by becoming a sales channel partner or by becoming a lead generation partner connecting the startups with the corporation’s customers. METRO Group successfully leverages its international store network and access to millions of independent hospitality businesses and connects portfolio companies with its international customer base of independent restaurateurs (LeadX Capital Partners). At Salesforce Ventures, startups gain an inside track for building credibility and relationships with Salesforce customers and partners (Salesforce Ventures). Other corporations grant access to their supplier network and allow portfolio companies to source products and material cheaper or have great R&D facilities and offer access to laboratories. At SR One, the venture fund established by GlaxoSmithKline (GSK), portfolio companies are granted access to GSK research, development and commercial resources (GSK).
Portfolio companies benefit in many ways. Being associated with renowned brands creates credibility. Getting access to cutting-edge marketing and sales capabilities, strong distribution channels and international reachmay reduce customer acquisition costs, accelerate growth and facilitate international expansion. Eventually, these advantages increase the probability that the startups scale successfully and that founders and VCs can sell the company on attractive terms, a fact that makes an investment from a CVC also attractive for founders and traditional VCs.
The “Give First” approach has been translated into the following guidelines executives may observe when establishing a CVC unit.
### Guiding Principle 1: Deliver on the Promise to Provide more than Money
Delivering on the promise to leverage the corporate assets and providing more than money is often easier said than done. In fact, what has begun as a potential great complimentary partnership between a startup and a corporation often ends up a non-performance disaster leading to frustration on either side where founders and co-investors realize that the CVC team has overpromised and underdelivered. While it seems easy on paper to provide startups with access to the corporation’s marketing and sales people or to connect the startups with the corporation’s customer base in foreign markets, the actual implementation often fails because the employees that could make the cooperation work lack the incentives to do so. Corporate employees often have their own agenda, their own priorities and their own incentives. If a country manager is incentivized by top line growth she may think twice before allocating sales and marketing resources to a startup that wants to expand into the respective country. If a R&D manager is supposed to grant a startup access to research and development facilities this might mean that these facilities cannot be used by the corporation’s research and development team.
### Guiding Principle 2: Create Strong Incentives for Working with Startups
As it is not the organization that can help startups but its employees, a secret sauce to making corporate venture capital work is to create strong incentives for employees to leverage the corporate assets in favor of startups. However, helping startups — in addition to or instead of focusing on the day to day business — means change. And humans are usually not very prone to change. Incentivizing employees to help startups anyway, especially if such startups do not provide immediate benefits to the respective employees, is therefore first of all a leadership and communication challenge. And this challenge can be approached successfully if executives understand that people look for meaning in what they do. With a strong tone from the top, executives should therefore communicate clearly the benefits that the corporation and the employees can derive from helping startups. It is not only about giving first, but also about getting back later. For example, if venturing activities are pursued in connection with a broader digital business transformation journey, executives may explain how helping startups may facilitate this long-term journey. Another way in which executives can promote startup collaboration is through adjusting performance metrics and demanding that successful work with startups be embedded into the overall incentive system, at least for employees and executives that work on the long-term innovation and digitalization journey and those that have access to relevant corporate assets. The respective incentive structure may not only consist of a revised bonus scheme but may also foresee that key employees and value creation teams that help startups succeed participate in the venture fund success.
### Guiding Principle 3: Create Alliances between CVC unit and Corporate Employees
Despite continuously communicating the “Why”, “What” and “How” and rewarding and promoting employees who have successfully helped or cooperated with startups, CVC investment teams will still encounter situations in which the corporate assets generally exist but cannot be leveraged because the relevant decision makers cannot be identified in a timely manner, lack the respective resources, do not want to defocus employees from their “core” responsibilities or are simply unwilling to cooperate for political reasons. A powerful tool that can solve this problem is the creation of strong alliances between the investment team and corporate employees. Some corporations have therefore created dedicated bridge roles and value creation teams that can work on creating value for startups. At M12 (formerly Microsoft Ventures), a portfolio development team has been built to help support and scale portfolio companies by leveraging the expansive power of Microsoft. Since navigating the Microsoft ecosystem can be very complex, each portfolio company is assigned a relationship manager who proactively works on behalf of the startup and connects it with the right people and resources at Microsoft (M12 Portfolio Development Team). At Next 47, a venture firm backed by Siemens, a catalyst team of business development professionals around the world is dedicated to helping startups and especially brokering partnerships between portfolio companies and existing Siemens customers (Next 47 Catalyst Team). LEGO Ventures has been established with a similar mindset and created a “head of value creation” role dedicated to speeding up innovation by connecting entrepreneurs to the resources, relationships and industry expertise they need to succeed (LEGO Ventures).
### Guiding Principle 4: “Give First” also internally
Pursuing a “Give First” approach implies giving now but harvesting later on. Unfortunately, harvesting later on is often difficult, especially for executives of publicly listed corporations that are usually required to report to analysts a return on investment fast. In order to be granted the time needed to successfully pursue a longer-term “Give First” approach, investment teams are therefore well-advised to give first also internally and to secure early wins in the sense of first making investments into startups that can immediately solve pain points the corporation is facing and where the return on investment can be measured and reported. Early wins build credibility and initiate virtuous cycles where the investment team creates immediate value for the organization (Give First internally), where, in turn, corporate employees see meaning in helping the CVC unit and its portfolio companies (Give First vis-à-vis startups) and where, eventually, executives candemonstrate to external stakeholders that the venturing activities will eventually pay off (Get back).
Making Corporate Venture Capital work, “Give First”
The combination of a CVC unit which is established on VC-industry best practices as a traditional VC fund and its ability to leverage the corporate resources has the potential to work as a strong differentiator for a CVC unit (Making Corporate Venture Capital Work). A secret sauce of the most active CVC units seems to be their startup-centric approach. Many are established and run with a 360 degree “Give First” mindset focusing on what the corporation can do for startups rather than on what startups can do for the corporation. At the same time, this”Give First” mindset is not an altruistic mindset. If this “Give First” approach allows the CVC unit to invest into the best startups it simultaneously increases the CVC unit’s chances to generate great financial returns and to provide the sponsoring corporation with relevant strategic insights. As famous venture capital investor Brad Feld once said: “Consider adopting a give before you get approach. It might surprise you what you’ll get!” (Feld Thoughts).
Please feel free to reach out to me if your corporation intends to engage in venturing activities, considers stablishing a CVC unit or wants to invest in the METRO Group investment fund LeadX Capital Partners in order to join CVC forces in the same industry or adjacent industries.
About LeadX Capital Partners: LeadX Capital Partners has been established as a single-LP independent investment fund focusing on investments in the retail-tech, hospitality-tech and food-tech industries. LeadX Capital Partners successfully leverages the METRO Group assets in favor of portfolio companies and strives for generating both financial returns and strategic insights. LeadX Capital Partners has been established on VC-industry best practices, can act as fast as a traditional VCs and does not ask for strategic rights.