Create transformative innovation

How corporate venture funds can avert disruptive disaster

Highlights
  • Unlike conventional venture capital, corporate venture capital comes from a single, corporate source seeking strategic value not just financial return
  • It’s about bigger companies engaging with the disruptive potential of smaller, more agile, innovation-focused companies
  • Google, Disney and Airbus have corporate venture capital arms; closer to home, Telstra has developed its Telstra Ventures program

Big companies are wising up to disruptive start-ups by investing in them – and not just for the returns.

If you talk to anyone who’s been in business for a substantial period, they’re likely to have some sort of story about the one that got away; or, perhaps, the one that didn’t.

It could be a small business owner’s lament over a lost client that went on to become a major household brand. And it could just as easily be about a modest but risky investment in a new or struggling company that netted hundreds of millions in returns.

These stories tend to be less kind to the not so lucky and, in an era of digital innovation and disruption of tectonic proportions, they’re getting more common. Yahoo had the opportunity to buy both Facebook and Google but passed. Blockbuster could have bought its biggest disruptor, Netflix, for $US50 million in 2000; instead, it battled on stoically and went bust while Netflix’s revenue has skyrocketed into the billions.

In such an environment, larger companies have become more circumspect about the potential of smaller, more agile, innovation-focused companies. 

man on running track

Big names on board

Founding director of StartupAUS and co-founder + CEO of innovation consultancy Beanstalk Factory, Peter Bradd, says that in recent years there’s been a global surge in new corporate venture capital (CVC) entities citing names such as Google, Disney, Airbus and, closer to home, the Telstra Ventures program.

Unlike conventional mergers and acquisitions activity, which broadly targets more mature companies in a bid to expand revenue or plug a product gap, CVC programs play the long game. 

A recent Telstra white paper on the topic, Strategic growth investing: The next evolution of corporate venture capital, found that “the number of active CVC groups who made an investment in Q2 2016 was almost double the same figure as four years ago”. 

Exposure and exchange

Richard Baker, Co-Founder of startup investor Blackbird Ventures, divides CVC roughly into two camps: those seeking “strategic value” and those making a purely financial play. He argues that most CVC funds in Australia require a sponsor to champion the strategic value of their investments. Very few, he says, have the autonomy to pursue a pure financial play. 

Bradd agrees that CVC investments may not be as financially motivated as first perceived.

“A lot of corporate venture funds want to get exposure to the entrepreneurs and the innovators so they can learn about them, it’s not all about the return,” Bradd says. “They’re also looking at how they might be able to get early access to a business that they can incorporate into their core.” 

This is the key distinction between CVCs and private equity venture capital (VC): VC funds rely on a pool of arm’s length investors seeking returns while CVC comes from a single, strategically interested corporate source.

Both can play mentoring roles but CVC operators can go further, perhaps providing newer companies with access to customers they may not ordinarily have. In return, the parent company may get a peek under the hood at a new business model or technology.

 The Chief Executive of the Australian Private Equity and Venture Capital Association (AVCAL), Yasser El-Ansary, says that while hedging against disruption once dominated traditional thinking about CVC, over the past five years in Australia (and 10 years worldwide) it has been giving way to a new notion – that it can be used offensively as well as defensively.

“Most large businesses have recognised that the smarter way to look at corporate venture is to turn that thinking 180 degrees and look not so much at disruption potential and concentrate most of their effort on how the fund can tap into the IP [intellectual property], the systems, the processes, the resource power that sits within the larger entity and use that to turbo-charge smaller businesses that are doing innovative, new things,” El-Ansary explains.

professionals shaking hands

“A lot of corporate venture funds want to get exposure to the entrepreneurs and the innovators so they can learn about them, it’s not all about the return.”

Peter Bradd, Founding Director, StartupAUS; CEO and Co-Founder, Beanstalk Factory

Make room for innovation

Baker says the challenge for CVC managers is mastering the art of letting imported talent innovate within proven and well-established business processes of the parent entity. Some have likened it to immaculately maintaining a classic car then having someone suggest you put an electric engine in it.

“Imagine you’re a senior manager and you’ve been running a business for 15 years and it’s going well, and you have a relatively young CVC person nagging you to get excited about a start-up which is doing something that you think is crazy and disruptive,” Baker says. “It’s really hard to make that kind of dynamic work.” 

However, El-Ansary argues that’s one of the strengths of the CVC model. He says that any return on investment from a start-up would hardly move the dial in a company that already has revenue in the billions. Rather, CVC can give companies a telescopic view of their market position with innovation that would meet resistance or suffocate in large, established corporate structures.

“I think it gives the larger corporate entity opportunities that they simply wouldn’t have except for the fact that they have a corporate venture arm that talks to a different part of the market and engages in a different way with the market,” he says. 

There could be as many models and reasons for CVC as there are start-ups in the business ecosystem. Regardless, its growth here and abroad could help more companies avoid being on the wrong side of business history.

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