The FINANCIAL -- Company Leaders Are Increasingly Using Corporate Venture Capital and Other Venturing Tools to Access New Technologies and Accelerate Innovation, According to a New BCG Report
Corporate venturing has evolved from a fringe activity to an important strategy that companies use to gain access to new technologies and accelerate innovation. Although corporate venturing—which includes investing corporate venture capital (CVC) as well as running innovation labs and incubators—has matured, there is still much room for improvement, according to a new report by The Boston Consulting Group (BCG) titled How the Best Corporate Venturers Are Getting Even Better.
In a clear sign of how popular this strategy has become, the percentage of CVC investments as a share of global VC investments grew from 20% in 2012 to 26% in 2017. Fortunately, that stepped-up investment coincided with strong VC returns in Asia, the US, and Europe, and more than 95% of CVC units reported positive returns in 2017.
Moreover, the benefits of CVC investing have flowed both ways. According to a BCG and Hello Tomorrow survey of more than 400 technology startups, respondents preferred to partner with corporations, as opposed to pure financial backers. Of the possible alliances, startups preferred partnering with corporations to gain market access (43%), technical knowledge and expertise (26%), and business knowledge and expertise (19%).
Helping Startups Grow Faster
Despite strong CVC returns, some senior leaders question the value of CVC investments because they rarely deliver meaningful top-line revenue. One way that CVC units can address this concern is by using their domain expertise and company resources to more actively help startups scale their businesses faster. More revenue and earnings more quickly are a boon for both sides.
For example, in 2008, Coca-Cola acquired a 40% stake in Honest Tea, an organic tea company. Coca-Cola’s corporate venturing and emerging-brands unit leveraged its distribution network and scaled Honest Tea’s business from $38 million to $75 million in three years. That success led Coca-Cola to buy Honest Tea outright in 2011, and by 2015, revenues had more than doubled, to $180 million.
The report highlights best practices for building an effective CVC unit, including the following:
Set a clear objective. A company must decide if the principal objective of its CVC unit is financial or strategic. This decision guides the optimal organization structure, incentive scheme, and people mix.
Define search fields. A company must also determine where a CVC unit should look to find potential investments. Having the right prospects will keep senior leaders engaged and supportive.
Hire the right mix of talent.
Ensure independence. To give a CVC unit room for innovative, disruptive thinking and activities, it should be separate—physically and operationally—from the company’s daily activities.
Enable lean, agile governance. A company should put lean and agile decision-making processes in place so a CVC unit can keep up with startups.
Provide consistent financing.