• Cato

Corporate Venture Capital Universe

In astronomy the habitable zone means the area around a star where planets can support life. If a planet orbits too close to the star it would be too hot for life to exist and conversely if it orbits too far from the star it would be too cold. This means that it’s only at a certain distance from the star that planets have the right conditions to support life.

For Corporate Venture Capital units a similar universal law seems to apply.

If the CVC unit is too closely linked to the parent company there is a risk that parent will hold too much influence over the CVC unit’s decisions and operations. This can result in more bureaucracy and slower processes. Startups need to move fast so if one potential investor is too slow startups with other options – which usually means the ones that are attractive investment opportunities - will quickly move on to the next investor. Only startups with no other options will be willing to wait for a slow investor. As a result - if the CVC unit moves slowly - there is a high risk that the quality of their investment portfolio will suffer. Another risk is that the parent company’s world view and groupthink dominate the CVC’s investment decisions. Part of the CVC’ mission is to make investments as a hedge in case the parents company’s strategy turns out to be wrong. In order to do this the CVC has to make room for new ideas and strategies. If the CVC unit does not have enough room to explore and take risk it won’t be an effective tool in preparing the company for the future.

At the other end of the scale are CVC units that are too remote from the parent company. One of the biggest selling points a CVC unit has to startups is their ability to link startups to relevant business units in the parent company. This means that the CVC unit needs to have enough authority to enlist the help of other business units when required. To have that authority the CVC unit’s position in the company has to be clearly defined and explained to the other business units. The CVC unit should also actively engage with the parent company’s sales, marketing, product and other teams to find out where their challenges are and take that into consideration when sourcing investments. CVC units who do not actively build their relationship with the other business units in the parent company may find it very difficult to enlist their help when they need it. If the CVC unit is unable to enlist the assistance of the other business units in the parent company when needed, it loses one of its biggest selling points to startups. Its portfolio companies are bound to be disappointed and the CVC will get a reputation as an unreliable partner. This in turn will lead to less quality deal flow and challenges finding good investment opportunities.

Statistically almost half of all CVC programs shut down within 3 years. Most likely this wouldn’t happen if they were hugely successful. So what could have gone wrong? In many cases it is not for a lack of talented people or due to failed investments – it is the CVC units positioning in the company. The CVC unit wasn’t positioned within the habitable zone.

So as we can see the CVC unit needs to orbit the parent company with just enough distance so that they have autonomy to operate effectively while at the same being near enough to collaborate with and get assistance from other business units when needed.

So, how do you get the CVC units positioning right?

Firstly the CEO and management team that decides to launch a CVC initiative must be aware of the units need to be independent. They also have to communicate to the rest of the company what the CVC units purpose is and what is expected from other units in the company. For the CVC to be really successful it requires the support and involvement of the whole company. Management needs to put in the effort necessary to educate and involve the rest of the company.

Secondly the head of the CVC unit needs to take charge and position the CVC unit safely within the habitable zone. This is done by making sure the mandate given by management is clear and understood by all stake holders. The CVC head also needs to recruit a team and set up investment committees etc in a way so that the CVC benefits from the knowledge and resources in the parent company while at the same time maintains a healthy distance. This is achieved by recruiting a mix of people. Some can be recruited internally from different business unit within the parent company so that the CVC unit acquires domain experts and build relations internally. Others should be brought in from outside. These can be people with VC or entrepreneurial experience.

With a clear mandate from the parent company’s management, the whole organization educated about the CVC units role and well-rounded team in place the CVC unit should be off to a good start.

However while planets travel at a fixed distance from their star this is not the case for CVC units. Their positioning in relation to the parent company can change over time. More than anyone it is the head of the CVC unit’s job to make sure that they remain within the habitable zone. This is achieved by actively managing their relationship with the parent company. This is not an easy job but it is a crucial component for the long term success of the program.

To assist with this work we have launched CVCinsight – an online portal with educational resources, information databases and software to make the process of running a CVC program a bit easier. Please have a look at our website or reach out if you have specific challenges you need help with.

Cato Gullichsen Senior Consultant CVCinsight