The need for growth has led companies to identify and acquire disruptive opportunities and protect against the rapid innovation faced in many industries.
Firms established in the market have confronted the threat of becoming obsolete by opening their innovation strategy to increase their exchanges with the startups ecosystem. Collaboration between corporations and startups has become crucial to innovate and accelerate disruptive and changing products and services; Corporate venturing is a rout to incorporate innovation into an organization in a relatively fast way.
According to the Business Dictionary Corporate Venturing is the “practice where a large firm takes an equity stake in a small but innovative or specialist firm, to which it may also provide management and marketing expertise; the objective is to gain a specific competitive advantage”
The current increase in Corporate Venturing activity is a fact and there are many reasons that explain this growth: Cyclical improvements in the balance sheets of corporates since the financial crisis of 2008, Faster cycles of innovation and technology adoption have led to the rapid demise of certain incumbents in various sectors and, the growing awareness that commitment and external investment in R & D activities and open innovation are key to innovation in companies due to the fact that often R &D internal initiatives can be slow. Google, BMW and General Mills among other corporations, have complemented traditional R & D activities with their own Corporate venture capital funds by joining other investors to invest in promising startups.
Companies that have the objective of acquiring new capabilities and agility in their innovation processes through Corporate Venturing can obtain many benefits from this activity. Some of these potential benefits are:
Corporate Venturing can allow a firm to respond quickly to market transformations. It is likely that developing new technological capabilities on their own could take companies for longer and more expensive. In a study of 71 venture initiatives by biopharmaceutical firms from 1985 to 2005, Hyunsung Daniel Kang and Vikram K. Nanda of Georgia Tech found that companies that made financially successful investments also experienced greater success in drug development.
Better View of Threats
A Corporate Venture Capital fund can serve as an intelligence-gathering initiative, helping a company protect itself from emerging competitive threats. Create a venture program to invest in competing technologies with the goal to gather strategic information at relatively low cost could be a tool that favors the business value of the company.
It gives executives a faster way to disengage from investments that seem to be going nowhere. Many companies find it difficult to abandon the not-quite-good-enough innovations that sometimes come out of internal labs. The arm’s-length relationship between companies and their venture funds offers advantages in this regard: The best funds tend to be quicker on the trigger than their corporate parents. Even if a corporation is unwilling to terminate an unpromising initiative, the presence of co-investors may force the decision.
A bigger bang
By combining its own capital with that of other Venture Capitals Funds, a corporate venture capital fund can magnify the impact of its investments. This is particularly beneficial when technological uncertainty is high; In 2008, the $100 million fund iFund and VC firm Kleiner Perkins Caufield & Byers co-invested in companies developing games and tools, on the day when outside developers were first allowed to begin working on apps for the iPhone. In this way, Apple rapidly built a critical mass of applications for its new phone while spending very little.
By encouraging the development of technologies that rely on the parent corporation’s platform, venture investments can help increase demand for the corporation’s own products. Intel Capital took this approach in late 1998, when it established a fund that would help speed the entry of Intel’s next-generation semiconductor chip into the market. Fund managers invested in many software and hardware makers (often Intel competitors) whose products capitalized on the new chip’s power. Those investments accelerated the chip’s adoption by several months, according to Intel.
For corporate venture capital funds, gaining strategic benefits is usually the main goal; historically, profits from venturing typically haven´t been significant enough to matter to the parent company’s bottom line; Many of today’s leading CVCs are structured with the clear objective of maximizing financial return. CVCs have been structured with a critical set of features – returns-orientation, independent decision-making, strategic relevance and evergreen capital – that foster longevity for the CVC and trust with the start-up community.
Although the CVC have been operating for several decades, the today´s value proposition a CV offers to a corporation who wants to innovate is undeniable. CVCs develop a stronger network of business leaders, greater credibility and deeper domain expertise in focus areas, serving as a bridge between the startups ecosystem and corporations and acting creatively and strategically by leveraging corporate assets to capture innovation outside the corporation.
This post is based on the article Corporate venturing published in the HBR https://hbr.org/2013/10/corporate-venturing