A corporate investment into a startup could be a great approach – a CVC is a great tool for corporations to accelerate innovation and achieve financial returns at the same time. In contrast to traditional methods like M&A, it enables you to spread your bets without spending too much, spot the next tech wave ahead of the competition and work with fast teams without suffocating them under the corporate umbrella. The startup gets access, knowledge and a strong partner to go to market with.
For these reasons, the vast majority of corporates looking to jumpstart their Innovation activities have launched CVC programs. A quick look at the CVC landscape reveals a mix of organizational setups with vague mandates that tend to mix up strategic/operational and financial goals. This is, in many cases, due to the fact that the CVC setup evolved from the corporate’s innovation life cycle rather than the outcome of a full strategic and structured plan for investments.
This life cycle tends to look quite similar - almost every traditional company starts from a NIH (Not Invented Here) phase - when the company thinks it could do everything by itself with no external support. Then, when it understands it cannot and the world has become more complex for it to handle, it follows the path of M&A, buying companies in order to own the technology. The next phase is the understanding that this is not sustainable and the companies it bought might not execute well under the corporate umbrella.
The next phase is the understanding of “why buy when I can just invest and have the same benefits”?
This is where it starts to become messy: how to structure a CVC unit in a way that effectively caters to the strategic needs of the corporate while making sure that the operation in itself is sustainable and setup for the long run.
On the one hand you don’t want the KPIs (Key Performance Indicators) of the CVC team to be solely strategic since you can then find yourself with a lot of very cool ideas but no companies to deliver them, and on the other hand, the financial return of an investment of a few millions into a startup doesn’t really “move the needle” when you are a multi-billion-dollar organization.
Moreover, strategic KPIs by nature are not consistent and subject to change. If your CVC changes its investment behavior every year like internal BUs might shift their focus, then they cannot build up a consistent investment practice that will be taken seriously by the ecosystem.
At the same time, focusing only on financial KPIs may create a portfolio of financially attractive deals with no real linkage to the corporation activities and that are completely useless to advance the corporate’s innovation activities.
Therefore, the best way is to have it kind of from both worlds. First of all, you have to remember that an investment into a company is just another tool to get access to new ideas and technology, and secondly, these KPIs are almost impossible to pursue with one team - which is why you will need two:
1. CVC investment management
This team should consist with very knowledgeable people in the financial world but with a good technical understanding. They should focus solely on the investment procedure and execution. They will sit in the company’s board if needed and agreed upon and will help steer it towards financial success.
The sole goal of the CVC team should be financial and this team will need to make sure that they are taking the right investments that make sense financially so that the startup will have a future.
Eventually you need good financial people who know what they are doing and set the right valuation and framework with the company that will not jeopardize its future fund raising and development.
2. Operational team
Then you should have a separated designated team that should focus on the operational side and try utilizing the internal resources to help grow the startup as a partner in a win win situation.
3. Governance/ decision making
The CVC KPIs should be solely financial driven but in order to make sure this aligns with the corporation's strategy you should also set up an investment committee that will have the final vote.
The investment committee should have the right balance and mix of leaders from the organization that are aligned with the strategy and could also look at things from a high level position while still have a good understanding of the difficulties and challenges that lie ahead.
Why you should not mix
It is never a good idea to mix operational and financial - since then you get a team that is confused on what it is expected from them, and when they are confused, the management and the outside world will get confused too.
This could even jeopardize the company’s reputation – imagine a case where a company is trying to validate a technology. The BUs find 2 great startups they want to test and then the CVC team come with a 3rd one they think is great. If they get too much involved in the process what will the first 2 startups think? Most likely that the corporation is abusing them to learn as much as they can in order to invest in the 3rd company. In the same manner - if someone from the operations sits on the startup’s board he can steer the company to what is best for the corporation rather than to the startup’s best interest.
Therefore, the best way is to have a separated and designated operational team that deal with all operations and a CVC team that deal with investments and post investment portfolio management. This sets the clear boundaries, thus reducing the risk of confrontation and “stepping on the toes” of the other team.
This doesn’t mean that both teams should not work together - on the contrary. When working closely together, the CVC could also follow through on operational collaborations after the technology has been validated and a product market fit is found. This will reduce the risk of investment and make sure the corporation enjoys the value it generates to the startup.
The importance of the CVC to the corporation is to get a foot in the door, and leverage bets in technologies and solutions that will make sense to the company, but they should also have the freedom to make investments that are for the long term and are not yet on the clear path of the corporation. In this way they will turn to a real true spear head and keep the company on the right track towards innovation. They should work very closely with the operational team, as well as the BUs and be the final say in everything related to a financial investment without getting involved in the operational activities and therefore should be measured only according to financial KPIs.