This article reviews important lessons learned by corporate venturers that have been operating for many years and over several economic cycles, and best practices being used by newer corporate venturers. These lessons would be of value to corporate venturers looking for best practices and corporate leaders whose companies have already established venture organisations or are considering doing so as part of enabling innovation.
During the past few years, as corporate innovation initiatives have been multiplying, the rate of corporate venturing growth rivals, and maybe even exceeds, that of the dot.com era. As a result, while the venture investment pace continues to increase, a larger percentage of the total invested capital is coming from corporate venturers. In addition, based on the data that consultancy PwC and US trade body the National Venture Capital Association (NVCA) have collected the proportion of investment contributed by corporate venturers has increased.
It is only natural to consider whether the cohort of corporate venturers established during the past five years will have more staying power than the dot.com corporate venturing group, many of which closed during the economic downturn of 2001-04. This raises three questions:
- Will the newer corporate venturers shut down when the next economic downturn arrives, or will a larger percentage endure and flourish in the long term?
- How can a company set up and operate a corporate venturing organisation for long-term success?
- Are there lessons these newer venturers should be learning from those with proven staying power?
In an attempt to answer these questions, I looked at two corporate venturing groups.
Group 1: Incumbents, including five firms that have been operating continuously for the past 15 to 20 years – SAP Ventures, now called Sapphire Ventures, Qualcomm Ventures, Dow Venture Capital, BASF Venture Capital and Siemens Venture Capital. By analysing the data collected from the first group, I tried to understand the lessons they have learned over the years and how they impact their current investment and operating approach as corporate innovation enablers.
Group 2: New entrants, including two firms that have been established in the past five years – American Express Ventures and USAA Ventures. I selected these because I consider them to be among the best in their class and most likely to be operating for years to come. By analysing the data from the this group, I tried to understand whether recently established corporate venturers were considering lessons from older corporate venturers when forming their investment strategy – particularly as it relates to the parent’s innovation needs and investment risk profile – organisational structure and operating approach.
I focused on these two groups of venturers because their parents focus on different industries, such as high tech for SAP and financial services for American Express, they invest in different sectors, such as software and services for USA Ventures, and materials for BASF Venture Capital, they come from different geographies – the US and Europe – and they invest globally.
My goal was not to establish statistically-driven conclusions but to take a case-based approach to how certain corporate venturers have succeeded over a long period and how newer corporate venturers are setting themselves up for success. These cases will prove an important companion to the methodology I presented.
Lesson one: the three questions to prepare for success
Several factors led to the demise of the dot.com cohort. However, the root case was that, first and foremost, each corporate venturer must be set up for success. There are three questions corporations must ask to ensure a corporate venturing unit is prepared for success:
- Is the CEO ready to lead the corporation’s innovation goals over the long term?
- Has the corporation determined the mission of the venture unit and how it will complement the overall mission of the other innovation-enabling organisations the corporate is using?
- Has the corporation considered all its innovation-seeking investment options?
The corporate venturers in the sample:
Gain and maintain support from senior leadership: In all seven cases the CEO and the corporation’s board of directors set up the corporate venturing organisation. In the process they reached three important conclusions. First, they recognised that innovation was not only important for achieving short-term corporate objectives but it was a long-term corporate goal. Second, startup-driven innovation was an important ingredient for achieving the long-term corporate innovation goal. Third, the corporate venturing organisation was one of the innovation enablers but its formation did not automatically imply that the corporation was innovating.
Nino Marakovic, CEO of Sapphire Ventures, pointed to the importance of maintaining CEO support throughout leadership changes. He explained that over its 20 years of operation, the venture group “had to earn the trust of each of our CEOs”. Kevin McElgunn, managing director of Dow Venture Capital, also stressed the value of a long-term outlook, saying it contributed to the longevity of his group’s efforts. “Our senior leadership recognised that to be successful, our investment activity had to be sustained over a long period of time.”
Recognise their missions: Interviewees indicated that the missions of the group 1 corporate venturers each adapted over time. This ability to adapt is a crucial characteristic when combined with the corporate leadership’s long-term commitment to innovation. It means that even though the mission may change in order to take advantage of a new set of circumstances, the corporate leadership’s support remains unwavering.
Mike Majors, managing partner of Siemens Venture Capital, explained how the organisation’s mission had evolved over its 20 years of operation. “We have learned that investing close to our fields of corporate expertise provides us with the ability to conduct more thorough due diligence, provide better investment results and be a stronger value-add investor to our portfolio companies.”
Björn Heinz, investment manager at BASF Venture Capital, summarised his group’s mission as “identifying and supporting startups that are developing disruptive innovations which can be of great long-term benefit to BASF’s business units or R&D [research and development] units, and providing adequate financial return to the corporation”.
The group 2 corporate venturers also have a well-defined mission of investing in innovative startups that provide value to their respective business units. The requirement to provide value to business units may necessitate rejecting some tempting investment opportunities. Vic Pascucci, head of corporate development and managing director at USAA Ventures, said: “Over our years of operation, we have passed on investment opportunities that could have easily returned multimillions of dollars to our corporation because our business units were not ready to integrate the technologies of the companies in which we could have invested.” Staying true to the corporate venturer’s core mission – despite appealing options – is crucial to success.
Understand the spectrum of corporate investment options: All seven of the corporate venturers operate with the understanding that, in addition to their activities, the corporation may be investing in companies through other vehicles in order to access more mature, and therefore less risky, innovations that address shorter-term needs. For example, the group 1 venturers recognise that their corporate business units may also work independently to form joint ventures or invest directly in certain private companies.
Majors said this was because each such investment alternative allowed the corporation to employ different risk profiles, return expectations and timelines to success. “Siemens knows that the time horizon for business unit-led investments to produce a positive return is one or two years, whereas the horizon of the venture investments is three-plus years and most frequently five-plus years.”
The corporate venturers in group 2 did not start by establishing a fund and then consider its best investment use. Instead, they use their ability to invest in conjunction with the other innovation enabling organisations – R&D, corporate development, business development and strategy – in order to provide their business units with access to important innovations that can address short-term and long-term corporate needs. This allows them to maintain their global leadership, or, like Sapphire Ventures from group 1, provide significant financial returns to the corporate parent.
Under certain conditions, in addition to investing directly in startups through a corporate venturing unit, corporations should also consider investing in institutional venture capital firms (VCs) as limited partners. Sapphire Ventures invests in VCs to meet investment objectives not covered by its strategy and risk profile. Siemens Venture Capital has done so in the past but now focuses exclusively on directly sourcing investment opportunities. It also advises the Siemens Pension Trusts as they invest in private equity and VC firms.
Lesson two: avoiding the mistakes of the dot.com era corporate venturers
There are five factors responsible for the problems of the dot.com corporate venturing cohort – culture, success timelines, talent, objectives and a lack of enduring strategic relevance to the corporate parent’s business units. Examining how the sample corporate venturers are handling these five factors reveals more valuable lessons.
Corporate venturers must reflect an overall culture of continuous innovation: The corporate parents of the venturers in group 1 realise that innovation must be part of the corporate culture. In addition to internal R&D, startup-driven technology and business model innovation are important contributors to achieving corporate innovation goals.
BASF, SAP, Siemens, Dow and Qualcomm all incorporate the venturing unit in the overall innovation strategy. The chief technology officer – and by extension the R&D organisation – is intimately involved with the BASF, Siemens and Qualcomm venturing units. For example, Dow Venture Capital always collaborates with the company’s technology, corporate development and business development organisations in establishing investment strategy and evaluating investment opportunities. This is consistent with the innovation model I presented.
Corporate venturers must align the right success timelines with the corporate innovation goals: Qualcomm Ventures provides the best example of how venturers in group 1 are establishing timelines and aligning them with different corporate innovation goals. For its robotics initiative, Qualcomm associated innovation goals with short, medium and long-term timelines, and addressed the goals strategically.
It first started a new internal R&D effort. Next the corporation acquired KMel Robotics to address its short-term market opportunity. Qualcomm Ventures invested in 3D Robotics to address its medium-term goal, expecting a return in four to six years. To support its long-term robotics innovation goal – expected return in seven to 10 years – Qualcomm, in collaboration with Techstars, founded the Qualcomm Robotics Accelerator, which is currently incubating 10 robotics startup teams.
Other organisations, such as Dow Venture Capital and Siemens Venture Capital, make sure each portfolio company can provide significant results to their corporations at least every three years, even when they realise that an investment may require significantly more time to provide sufficient returns.
Corporate venturers must include talent with strong investment experience: The organisations I surveyed fall into three personnel categories. The first draws on strong investment expertise from other corporate venturers and VCs. SAP Ventures and Siemens Venture Capital have moved from harnessing investment professionals from internal technology, corporate development or business development organisations to hiring professionals with strong investment expertise from other corporate venturers or VCs. These professionals are also responsible for connecting with the business units in order to understand the problems that need to be addressed and to communicate the value portfolio companies are providing.
Though not included among the venturers I surveyed, Citi Ventures and Intel Capital are also long-term corporate venturers that have moved to employing managing directors with strong investment experience.
The second category relies on those with a technology, business or corporate development background. Dow Venture Capital and BASF Venture Capital are in this group. However, these personnel have been with their organisations for years – many more than 10 years – and have become seasoned investors through on-the-job experience. In my opinion, this approach typically provides comfort to the corporate leadership since they are working with individuals they know and trust.
Judging from how long it takes to train a junior investment professional in an institutional VC firm, it would probably have been necessary for these transplanted executives to be in their roles for a considerable period to become experienced in venture investing. During that period, these two corporate venturers made few investments, which might have been appropriate in a historical business climate. However, now that innovation is accelerating in every industry, this approach of long on-the-job training may prove problematic, particularly for corporate venturers aiming to lead investments in startups.
Hearst Ventures is another long-term corporate venturer employing investment professionals who originated within the Hearst Corporation.
The third category could be described as those employing strong investment experience with a good appreciation of corporate operations. The group 2 corporate venturers have been staffed with such people.
Corporate venturers must set clear objectives: A common characteristic across the investors in groups 1 and 2 is that they know under what conditions they will invest, the type of VC with which they will syndicate and under what conditions, and the stage of startups they will fund. Most of them tend to work with VCs that have high-calibre deal flow and a portfolio of investments relevant to corporate business goals and needs. Nino Marakovic of Sapphire Ventures sums it up by saying: “Always know why you are investing.”
Corporate venturers must maintain strategic relevance to business units: Six of the seven surveyed corporate venturers cited the importance of working closely with business units. Heinz (BASF), Pascucci (USAA) and Harshul Sanghi of American Express also said they looked for investments in companies with business models and solutions that enable them to start working with the business units immediately following the investment.
Siemens Venture Capital’s approach differs. It requires business unit commitment around each investment. However, it also has access to a $100m “opportunity fund” to invest in early-stage companies developing important and disruptive technologies that do not immediately match the current product roadmaps but open medium-term innovation opportunities. For these investments Siemens Venture Capital has less stringent requirements for the participations of its business units.
In recounting his organisation’s evolution over the years, Majors said that during the dot.com period, Siemens Venture Capital “did not collaborate as strongly with the corporation’s divisions as it does today. These days the majority of the investments are made with the support of at least one division”. Dow’s McElgunn recounted a similar experience with Dow Venture Capital. Even Sapphire Ventures – now a strongly financially-oriented investor – said that during the early years, when it was called SAP Ventures, the investment team at that time tried to balance investments supporting the work of business units with investments exposing the corporation to new technology areas and business models, such as mobile technologies and software-as-a-service business models.
Lesson three: consider the shared characteristics
Group 1 corporate venturers share several characteristics.
The corporate leadership has a strong and enduring commitment to innovation, recognises the role of startup-driven innovation to achieving the longer-term corporate innovation goals, and acknowledges the critical role of the corporate venturing units in accessing this type of innovation. The leadership also realises that establishing the corporate venturing unit does not automatically imply that the corporation is innovating. Corporate venturers are innovation enablers.
The corporate venturing units have a well-stated mission but are willing to evolve as the corporations adapt to market realities. The corporate leadership team fosters a culture of continuous innovation throughout the corporation. The corporate venturers collaborate closely with the business units as well as with other innovation enabling organisations, but they are isolated from day-to-day business unit politics and objectives. Autonomy of the venturing unit is important.
They employ experienced investment professionals who understand the organisation’s mission. They syndicate investments with good partners and show commitment to their portfolio companies. The corporate venturers have stable leadership. Their approach to hierarchy reflects their corporate parent’s philosophy on hierarchy.
By investing in startups, the corporate venturers adopt long-term timelines to investment success but couple them with three-year milestones. They realise failure is a likely outcome of investing in startups, so they look to learn from each failure. They are investors driven primarily by a specific strategy but will consider investment opportunities that align with the strategic objectives of their business units.
They facilitate continuous knowledge transfer through the partnership between business units and each portfolio company. Through such partnerships, the venturers remain relevant partners adding value to business units during any type of financial environment.
Summary
Our research and analysis show that corporate venturers with a long track record as well as those newer corporate venturers set up with a well-defined innovation mission operate quite differently from the dot.com era corporate venturers that had closed down by 2004.
In an environment where startups can disrupt entire industries through technological and business model innovations, and where such disruptions may come from around the corner or around the world, corporate venturers must have more than money to invest and the desire to invest it.
They must see their role as innovation enablers, be ready to adapt continuously as the circumstances warrant but stay true to their mission, and to incorporate best practices of other corporate venturers. As USAA’s Vic Pascucci said: “Being a corporate venturer requires constant hard work.”
This article was first published by the NVCA.