How to Get Corporate Venturing Right

(Bloomberg) -- It may seem odd to see a company invest in other companies when the logic of business dictates that it should be focused on its own operations. For more than a decade, corporate venture capital (CVC) has been touted as a potential solution for large companies to stay innovative and develop new growth areas through investment in startups. Surprisingly, our research shows that many companies don't know how to design, monitor and assess their CVC units properly.

Among the many surprising revelations from our recent study of more than 150 CVC units headquartered around the world, one stood out: CVCs are often founded and shut down under the watch of a single CEO, who rarely remains in the chief executive's role for the unit's full lifecycle. On average, CVC lifecycles overlap with the tenures of three different CEOs. This statistic highlights the challenge of aligning the objectives of separate businesses, each with different risk appetites and financial metrics.

Often, the corporate parent isn't prepared for the time horizon or the financial returns profile of the asset class, which can cause conflicts and undermine performance. The venture capital (VC) industry as a whole has a notoriously high failure rate, with many funds failing to return money to investors. Successful VC funds typically take more than a decade to produce meaningful returns, if at all.

Several challenges can arise for CVC units, according to our study:

  • CVCs may compete with the parent company's core business or be pressured to support it, regardless of the unit's actual strategic alignment.
  • The parent company may not have a sufficient understanding of the VC asset class and its different risk/return characteristics, and may therefore misjudge the CVC's performance or fail to take a long-term view.
  • The CVC may not have a distinct competitive advantage versus other VC funds, especially if it's in an unfamiliar industry or geography.
  • The CVC may be subject to conflicting priorities when the parent company faces economic pressures, such as an upcoming initial public offering or a change in the parent company's business strategy.

To increase the likelihood of a CVC's success, companies need to consider the unit's strategic alignment, its distinct competitive advantage, and the appropriate incentives for all stakeholders, including the CVC team, the startup companies in which it invests, and the parent company.

These considerations can increase the odds of a successful partnership between parent and subsidiary companies and help avoid the all-too-common outcome in which a CVC's lifecycle ends before its potential can be realized.

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