At this year’s Global Corporate Venturing & Innovation Summit in California, we organised and led a workshop on best practices for starting and running a corporate venture capital program. This workshop was based on our extensive collective experience organising, operating, and advising a significant number of CVC programs across industries and stages of development. We focused on bringing into the open the various alternatives for structuring a corporate venture practice as well as steps and considerations for implementation and execution of an effective CVC investment program.
The goal for the presentation was not only to provide a general framework and guidance for companies considering launching an internal corporate venture program, or expanding an existing program, but also how to articulate to senior members of an organisation the strategic benefits of corporate venture investments.
A brief summary of the presentation and a few of the key takeaways follow. As we noted in our presentation, this is a generalised summary and analysis – creating, structuring and implementing a CVC investment program is much more complex due to the need to develop and align the particular strategic elements of a CVC program with the needs of a complex parent organisation.
Selling CVC internally
Every industry is threatened and affected by disruption. This is evident from the fact that the average life-span of companies listed on the S&P 500 decreased by 66% since 1960, according to Innosight and Standard & Poor’s. As a result, nearly all executives believe innovation is a top priority for their corporations, with the vast majority dissatisfied with the performance of their innovation programs, according to surveys by consultancies PwC and McKinsey.
As the need for rapid innovation has increased, corporate venture capital has emerged as a leading tool because it allows companies to explore external opportunities and partner external innovators, while preserving the flexibility to bring such innovations in-house at the appropriate time via R&D, business development and acquisition. Companies across diverse industries have increasingly embraced active corporate venturing programs, resulting in corporate participation in $66bn of venture investments across nearly 1,500 deals in 2018, based on data from US trade body the National Venture Capital Association and data provider PitchBook.
Corporate venture capital is primarily about innovation, competitive advantage and survival. The 10-year-plus growth trend in CVC deals and investment dollars is not a reason to build or expand a CVC program, but such growth suggests that corporations increasingly look to CVC to participate in the innovation and disruption facing their respective industries.
For those seeking to obtain internal alignment and support for a new or expanded CVC program, following the herd is, of course, not an adequate business rationale. But understanding the underlying reasoning for the growth in CVC, the strategic benefits corporations seek and obtain by operating dedicated CVC programs, and the different ways in which a CVC program could be structured to provide strategic benefits to an organisation, are entry points for gathering support for launching or expanding a program.
Building it strategically
In determining the appropriate corporate and operational structure for any new corporate venture fund, we discussed the importance of defining objective and quantifiable strategic goals and balancing them against certain structural considerations. Building the appropriate structure for a CVC fund requires balancing financial returns and strategic alignment with the company’s business needs, as well as determining how closely the corporate venture fund will coordinate with business units. These structuring considerations provide a framework for answering many of the important questions that define the appropriate CVC fund structure.
Operations and decision-making: Key considerations include who will have ownership over investment processes, who will run the fund operations on a day-to-day basis and the level of autonomy the fund will have relative to the parent organisation. Certain funds are structured with oversight from upper management or a specific business unit, while others balance strategic and financial decisions with a dedicated corporate venture team along with participation from other stakeholders from the parent. Similarly, on a day-to-day basis, certain funds assign management from the parent, while others either hire an external team or have a combination of internal and external managers. Autonomy also varies along a similar spectrum, with some providing full autonomy subject to defined parameters and thresholds, while other companies provide more limited autonomy with a separate investment committee providing final approval.
Size and funding commitment: Determining capital allocation and parameters for the number of investments and the investment period helps determine the size and structure of the program and team. While considerations vary based on the goals of the parent, it is important to align size with the expected stage of target investments. For example, earlier-stage investments generally require less capital and thus a smaller investment budget, whereas later-stage investments generally necessitate larger cheques and thus a larger fund is more appropriate for building a diversified portfolio.
Compensation and performance metrics: Compensation structures are important for attracting, retaining and motivating an effective investment team. Compensation for corporate venture teams is traditionally tied to achievement of return-on-investment objectives or other strategic metrics. Defining key performance metrics is critical for strategic alignment between the corporate venture fund and the parent. In addition to financial return, other metrics include number of targeted investments within a defined industry, development of new commercial relationships between portfolio companies and parent business units, and acquisitions of portfolio companies, either by the parent or third parties.
Legal structure: Each of the above considerations contribute to determining the appropriate legal and operational structure for a corporate venture capital fund. There are three common CVC fund structures:
- Single limited partner – a traditional venture capital structure, with the parent as a single limited partner with limited governance rights and obligations. This fund can be structured to require investments within defined parameters that align with the parent’s corporate strategy, but typically operates with greater independence than other structures.
- LLC subsidiary – the fund acts as a wholly-owned subsidiary of the parent entity. Typically the investment team has some autonomy in sourcing, evaluation and execution, but will typically report to and seek approval from a separate investment committee or executive team for certain investment matters.
- Fully integrated – the team consists of investment professionals working directly for the parent, with each investment requiring support from a specific business unit.
Running it effectively
Running an effective program requires the implementation of best practices seen at long-established successful corporate venture capital funds. This includes:
- Setting up a program with a clear investment thesis aligned with the strategic objectives of the parent.
- Building the investment infrastructure of team members plus internal and external support structures.
- Developing a robust deal pipeline and process to evaluate, close and manage investments.
We also discussed the importance of effective internal and external communication.
Internal communication, regardless of fund structure, incorporates day-to-day contact with the investment team as well as periodic but consistent communication with the parent, both through an investment or advisory committee and the executive team. Successful funds develop a cadence of weekly internal meetings to discuss management of the deal pipeline, execution and portfolio management, as well as monthly or quarterly meetings with the investment committee or the executive team to discuss strategies and goals for transferring key insights to the parent’s core business.
External communication includes promotion of the fund’s practices as well as active involvement with portfolio companies. Successful funds develop a comprehensive external messaging plan, including an investment mission and outreach plan to connect with startups and other members of the related ecosystem. Creating and delivering a comprehensive outreach plan will add credibility to the fund, reinforce support from the parent as well as drive dealflow and key relationships. Successful funds also strive to be a valuable investor to their portfolio companies, including board meeting attendance, advisory roles and help with internal and external business development.
Running an effective program requires incredible discipline in developing and managing a quality deal pipeline. We discussed how different programs network in a particular industry ecosystem, develop a deal pipeline, complete the vetting process for potential investments and then compete to win deals. We also discussed the importance of programs positioning themselves for success in winning deals by adopting best practices for venture investments and by ensuring their organisations can move through the deal process at customary venture speed.
A final thought
A final thought we discussed at our workshop is the often-overlooked strategic assets that CVC programs bring to their portfolio companies vis-à-vis their venture capital peers. These include a broader depth of non-financial resources, the ability to be a customer or other collaboration partner, and often a longer investment time horizon. The best programs use these strategic assets to the benefit of their portfolio companies, which can help derisk investment opportunities and bring greater strategic benefit to the parent. When building a new program, begin with the paying-it-forward mindset. This approach can help build trust and support – critical elements for success, both strategically and financially.
The authors would like to thank Mike Devlin, Ryan McRobert, Scott Lenet and Selina Troesch for their contributions to this article