For the motion: Growth and innovation are two critical challenges faced by all corporations. Corporate venturing is a powerful tool that can stimulate and support access to external technology-driven innovation.
The growing number of appointments of chief innovation officers with full responsibility for corporate venturing activities within the corporation is evidence of where current priorities lie.
DSM is one such example. Other corporate venturing programmes, such as that of Dow Chemical, have evolved from being financial return-driven to being primarily focused on creating strategic opportunities for the corporation.
Many independent venture capital (VC) funds have shifted away from early-stage deals, considered to be higher risk, in favour of later-stage investments.
Corporates have stepped in to help fill the shortfall, with start-ups accounting for 64% of all corporate venturing deals over the period 2007-11, as opposed to 50% of all VC fund deals over the same period, according to trade body the European Private Equity and Venture Capital Association.
This is not a reflectionof corporations becoming voracious financial risk takers – it is recognition of the importance of securing early access to technologies and companies of potential strategic value to the corporation.
Against the motion: The level of corporate venturing activity has waxed and waned over the past 40 years or more. In the current strong wave, more than 200 new programmes have been announced in the past two years, bringing the global total to around 750, according to Global Corporate Venturing.
A further 9,000 companies are considering launching corporate venturing units, according to fgures from Boston Consulting Group.
The longevity of corporate venturing groups is increasing and average assets under management are expanding.
Corporations can no longer support burgeoning corporate venturing capital budgets in the absence of acceptable fnancial returns.
Strategic value created may be important, but how it is measured, by whom, and when, is interpreted differently in each and every corporation.
A signifcant number of corporate venturing units report to the company’s chief financial offcer, including new operations recently announced.
The discipline imposed by financial return targets must shape the corporate venturing operation, including deal selection, portfolio management and exit strategy.
In the absence of tangible performance results in the form of financial returns, the current surge in corporate venturing activity will not be sustained.
So, would you cast your vote for or against the motion?
The reality, of course, is that this oft-debated and complex subject requires considerably more time and space than is available for this brief article.
The balance between strategic goals and financial return is the single most important question to be addressed by any fledgling corporate venturing operation.
Over the years, many battle-hardened venturing veterans have debated this issue in small rooms at great length. There is no right or wrong industry answer, but there is most certainly a right answer for your particular company.
Why?
The strategic-financial balance will underpin the key goals, objectives and performance measurements for the corporate venturing operation.
It shapes how the unit staffing is balanced between internal appointments and external hires. It will dictate where to focus the hunt for dealflow, which external organisations to interact with and how and when to syndicate investments.
It will determine the desired internal relationships with research and devel-opment, business units, new business development, and mergers and acquisitions (M&A).
Exit strategy for a key strategic holding is likely to differ significantly from that of an investment seeking primarily financial return.
Some corporate venturing leaders have stated that, for them, strategic and financial goals bear equal weight.
l Their corporate venturing activity is expected to stimulate strategic external interactions that will ultimately generate new operational cashflow for the parent’s existing or new business units.
l However, the corporation does not want to see investment capital disappear into a black hole, and thus an agreed financial return on capital deployed is required.
The desire to balance the two goals equally appears pragmatic. In reality, there is a trade-off.
Attempts to balance the sometimes conflictingpriorities of strategic and financial considerations have led to corporate venturing units falling short on both counts.
Here are some situations in which the level of strategic importance of the portfolio company, or lack thereof, may materially affect your actions.
l The corporate venturing team of company A includes an external hire with extensive experience in investing in battery technologies. He has found an investment opportunity that has the potential for a high-multiple exit within five years (this is hypothetical – I am aware that some may struggle with this returns assumption) with a proven management team and strong syndicate partners.
Company A has technical competence in battery technologies and a certain level of resource could be made available to support any interaction with the investee company. There is some interest in future battery technologies within the company but this is not high on the priority list.
Do you invest?
l Company B is in discussions with an early-stage company in China which has been unable to secure new funding. Its existing investors are reluctant to provide additional capital.
The Chinese company has a novel concept for carbon sequestration but needs $10m and two years to get to a key validation point. Several more years and considerably more funding would be required to reach commercialisation.
This concept fits well with an early-stage internal research project which has a high priority rating within company B.
Do you invest?
l Company C invested in a software developer three years ago at a post-money valuation of $10m. The adoption of a new product from the software company, due to be released next year, could provide company C with a significant competitive advantage.
The board of the software company is about to initiate a search for a trade sale acquirer.
Inviting the two main competitors of company C into a competitive bidding process is expected to produce a best bid of around $50m. The M&A group of company C values the software company today at no more than $40m.
Company C cannot block a trade sale to a third party but has some limited rights to the software that might have an adverse impact on the valuation.
What action do you recommend?
l Company D is conducting due diligence on a start-up medical diagnostics company. The target company is developing a test which, if approved, would fill a strategic gap in the product range offered by company D.
There is considerable technical and approval risk involved, significant capital required and the management team would need to be strengthened.
The corporate venturing team at company D is competent, enthusiastic but relatively inexperienced in making and managing this type of investment.
The relevant business unit at company D wants to work in stealth mode with the diagnostics company and does not want other VC funds or strategic investors involved.
An early acquisition, on achievement of certain milestones, would be the target. The corporate venturing head would prefer to syndicate the deal, bringing in experienced VC investors with resources to fund the company through to commercialisation and a high-multiple exit.
What investment strategy do you adopt?
The answers to the four questions above may be very different from one corporate venturing unit to another.
The correct answer is always the one that aligns best with the investment strategy that has been approved by your internal paymaster. Get this wrong, as many have in the past, and it may be your last investment.
The corporate venturing landscape is littered with the corpses of failed and discontinued corporate programmes.
However, in the past three years there have been far more entries in the births column than in its deaths counterpart.
From a personal perspective, having interacted with a great many corporate venturing units over the past 15 years, there is indeed a subtle but tangible increase in the importance of strategic value-added compared with financial returns generated.
Some corporate venturing leaders would capture this as follows. I have an annual capital investment budget of, say, $50m – less than one-tenth of 1% of my corporation’s annual revenues.
Which of the following two results are more likely to make the greater impact on the corporation?
l An outstanding internal rate of return (a measure of investment performance) of 15% on capital deployed.
l Access to enabling technologies, through strategic investments, that help drive future revenue growth for business units within the corporation.
Both would be nice to have, but a corporate venturing unit must have clearly defined goals which prioritise, when necessary, between financial and strategic options.
The beauty of corporate venturing is that whatever rule or guideline you might identify, there are always exceptions.If you have had the vision, skill and tenacity to build a corporate venturing operation of the magnitude of that of Intel, investment returns can have a very material impact on overall company results – even though the prime driver may remain strategic.
Companies such as IBM, Microsoft and GE have run successful programmes with a strategic focus that circumvent the financial-versus-strategic issue.
Under such initiatives, the corporations offer help and support to young companies of interest but do not make traditional cash investments in the start-ups. This is an attractive model as it obviates the need for a capital investment budget.
The viability of such programmes is underpinned by the brand equity and global presence of the corporations involved. Unilever took a novel approach when it launched its corporate venturing activity in 2001. It set up three distinct funds, one purely strategic, one purely financial and the third somewhere in between.
Will the perceived shift in favour of strategic objectives help extend the life expectancy of the current crop of corporate venturing units? See Global Corporate Venturing in about four years’ time.