Corporate venturing units are often thought to service primarily the strategic needs of the corporate parent – technology learning, platform shaping and the like. To achieve this objective it seems logical to embed corporate venturing activities tightly within the parent company.
Our survey of 25 corporate venturing units, covering a cross-section of industries and geographies, revealed a more nuanced picture – corporate venturing units that emphasise financial rather than strategic objectives and operate as independent subsidiaries encountered fewer operational challenges, found it easier to secure long-term parent commitment and enjoyed greater autonomy. Key highlights include:
- Strong correlation between corporate venturing goals and structural design. Of the corporate venturing units that emphasise financial as opposed to strategic goals, 83% are independents. Of the corporate venturing units emphasising strategic goals, 63% are organised as embedded corporate units (ECUs). Furthermore, 82% of independents operate closed funds, compared with only 18% of ECUs.
- Financially oriented units and Independents enjoy significantly greater decision autonomy. Only 33% of financially oriented units and 58% of Independents require corporate approval over investment decisions compared with 94% of strategic units and 100% of ECUs.
- Performance-related compensation is far more prevalent among independents and financially-oriented units. They also enjoy greater freedom, with 92% of independents and 100% of financially-oriented units choosing “attracting and retaining top talent” over “avoiding antagonising internal executives” in their compensation policies. This compares with 50% for ECUs and 61% for strategic units.
- ECUs and strategic units perceive risks and challenges more acutely than independent and financially-oriented units. Strategic units exhibit significantly higher concern in respect of measuring strategic value, the threat of change in corporate priorities, and balancing strategic and financial objectives. Other notable challenges included access to relevant dealflow, the threat of information asymmetries, and the potential for parent-imposed control requirements to deter entrepreneurs and other investors. More demanding observer and veto rights and longer portfolio holding periods are likely to be a contributing factor.
- Strategic units find it significantly harder to establish relevant performance metrics. In conflict with their strategic orientation, they place higher importance on financial rather than strategic metrics. Difficulties in measuring strategic contribution may explain why “direct financial return” receives undue prominence as an individual goal – above all but one strategic objective).
- Independents and financially-oriented units find it easier to secure long-term parent support and management resources. However, financially-oriented units also find it significantly harder to secure marketing and sales support, which was deemed the most valuable form of strategic contribution that corporate parents can bring to the table.
Even with these challenges, it would be unwise to suggest corporate venturing units abandon their strategic ori-entation. Independent structures do not suit all situations, and the governance structure of the corporate venturing unit needs to be compatible with its service role within the parent. We therefore recommend: - Corporate venturing performance metrics should be defined by their objectives rather than diluted by them. Finding the right measures for strategic contribution is critical – and difficult. Financial performance metrics should complement strategic metrics in strategic units, but they should not be the tail that wags the dog.
- An independent structure insulates against changes in corporate strategy. Detachment also reduces entrepreneur and VC concerns regarding confidentiality and conflict of interests. Where the quest for strategic value rules out independent structures, corporate venturing units could introduce governance protocols that mimic an independent structure – for example, closed funding commitments and autonomy over key investment and compensation decisions.
- ECUs should seek to do more limied partner investment to occupy more central network positions and thus increase their dealflow. Focusing on complementary rather than competitive venture investments, reducing exit and veto provisions and adopting shorter holding periods would also help increase dealflow, although such practices must be balanced against their potential to undermine strategic value.