Wednesday, 05 June 2019
Corporate venturing (CV), also known as corporate venture capital (CVC), can help organisations experiment with cutting-edge technology, find faster routes to market and allow R&D to be carried out externally.
At a time of unprecedented disruption throughout the global business ecosystem, corporates and larger businesses are actively searching for any competitive edge to succeed.
“CV is essentially one means of how an established company can gain ‘new DNA’ via a close trade or investment association with usually a smaller and younger company in order to strengthen the entrepreneurial and innovative vigour of the host company,” explains Professor Gordon Murray OBE, emeritus professor of entrepreneurship at the University of Exeter Business School.
When a larger firm is considering making an equity investment in a start-up with high ambitions and strong growth potential, it’s vital for them to have a comprehensive vision of what they want to achieve from this cooperation.
The relationship between both companies engaging in CV can be mutually beneficial, but it’s important that the junior business is treated with a high level of independence and left to focus on what it does best: innovate.
“Corporations can offer resources and often have hugely valuable market and product experience. However, their intrusion can easily kill or harm the young firm. An ‘arm’s length’ relationship is key,” says Professor Murray.
Corporate expectations of CV will differ dramatically depending on the exact reason for the initial investment, with some deals prioritising product-line expansion or new talent acquisition and others focusing on technological diversification and innovation.
“For CV to be successful, there has to be alignment between a company’s objective for engaging in it and the type of corporate venturing activity it does. For example, is it best to have corporate venturing incubators or engage in corporate venture capital?” says Luke Pittaway, a professor of entrepreneurship at Ohio University.
Patience is required with most CV projects because the timescales required to fully benefit from such investments are typically longer than larger companies usually work towards. It is, of course, relevant to consider short- and medium-term measures of financial success, but many of the benefits of CV come in the form of more effective collaboration and uncovering solutions to existing business problems, which can be difficult to fit into financial calculations.
“For CV to be successful, there has to be alignment between a company’s objective for engaging in it and the type of corporate venturing activity it does”
As almost all organisations now see innovation as a core operational requirement, companies in a diverse range of industries are becoming aware of the attraction of CV. According to a report published by CB Insights, global CV investment reached $53bn in 2018, a year-on-year increase of 47%.
Emerging industries such as digital healthcare, artificial intelligence and cyber security have been some of the most attractive sectors for CV over the past year.
Dr Richard Tunstall, associate professor for enterprise and entrepreneurship at Leeds University Business School, says:
“Normally it’s those industries that are experiencing significant change, through new technologies, political change, changing customer types and demand and economic change, that have been most likely to engage because CV provides the avenue to become more responsive to external change and create new solutions.”
There are countless opportunities to pursue innovative R&D strategies through the CV approach. Not only can experimental ideas be tested out in the partnership but prevailing corporate attitudes that may have become too focused on orthodox solutions can be challenged.
Staff members, too, have the chance to expand their skills base in the collaboration by working with new talent from the firm on the receiving end of CV. Says Dr Tunstall: “Where it goes well, whole new forms of value are created and all parties develop new core expertise.
“Where it goes badly, conversations revert back to contractual expectations, litigation and damage limitation. Often this is because of a failure to fully engage, listen and learn.”
Making the choice to establish a corporate-venturing arm is no overnight decision. New forms of collaboration and working relationships are vital in this process, which necessitates a willingness to learn, often through mistakes, to drive forward innovation.
“To enable innovations in CV to flourish requires senior management support and an organisational culture that sees innovation as positive to the aims of the firm, linked to core strategy and those original goals that led the business to engage in CV as part of a focus on creating and sustaining competitive advantage,” concludes Dr Tunstall.
Orange, one of the world’s leading telecommunications operators, took the CV route with the launch of Orange Digital Ventures (ODV) in 2015. The corporate venture capital fund is dedicated to minority early-stage investments, from Series A (the first round of venture-capital financing) onwards. ODV has made more than 20 investments since being launched, making it one of the most active CVCs in Europe.
CV helps Orange innovate, thanks to the cooperation ODV has created with two thirds of the start-ups within their portfolio. Since investing in endpoint security firm, Morphisec, Orange is using the solution to reinforce its network cyber security in a number of countries in Eastern Europe.
Another firm in the ODV portfolio, Famoco, offers an enterprise mobility management solution that’s being used by Orange in Africa to perform the KYC (Know Your Customer) process for millions of customers and provide a safer route to financial inclusion.
Orange has learnt throughout the CV process that there are three key ingredients required to make this method successful, namely an independent approach, attracting the right talent, and a long-term commitment.
“Commitment towards a start-up you invest in cannot be short-term as it would otherwise jeopardise their future. As a company, you need to be able to support them over a long period of time and to reinvest when needed,” says Yann Kandelman, head of investments and development at Orange Digital Ventures.
“CV units must be able to leverage their privileged relationship with their corporate parent to bring ‘smart money’ and synergies, but at the same time, be independent in order to avoid any conflict of interests, and to have a ‘start-up first’ approach.”