8 Things Successful Corporate Venture Builders Do Well
by Fernando Okumura, Venture Builder | Former McKinsey, BCG and JPMorgan M&A
What is Corporate Venture Building?
Corporate Venture Building (CVB) is the creation of new ventures by corporations. These ventures are often digital, separate from the corporation, and created with the help of a consulting firm or a venture studio.
Along with M&A and Corporate Venture Capital, Corporate Venture Building is an innovation / growth lever corporations can use to defend their core business from disruptors and to pursue medium-long term growth opportunities.
How does Corporate Venture Building fit alongside Corporate Venture Capital and M&A?
Not all projects or ideas are well suited to Corporate Venture Building. Generally, those that can clearly leverage the corporation’s assets (e.g. information, distribution channels, etc)and/or defend the core business from disruptors tend to be good candidates.
If the opportunity is too far away from the core or the time to act is long gone, then corporate venture capital or M&A might be levers to consider.
Finally, if it’s a chance to improve operational excellence, customer intimacy, or product-market fit of current offerings, it is probably best done internally.
Why Corporate Venture Building can be a powerful innovation tool?
More than anything, it helps corporations become more agile in spotting and acting on new opportunities. In today’s environment of rapidly evolving technology, speed is often key to gaining competitive advantage and to surviving.
CVB is also is PURPOSEFUL and tends to cost less and deliver ROI faster.
With Corporate Venture Capital (CVC), companies must rely on (i) what the market produces and (ii) the portion of it its VC arm is aware of and is able to attract.
Entrepreneurs can only act on opportunities they see. If you are a Consumer Packaged Goods company, chances are entrepreneurs will spot opportunities in your market. However, if you are a mining or oil & gas company, your chances are slimmer.
CVC competes with pure breed VCs for investment opportunities. More often than not, entrepreneurs prefer to raise fund with regular VCs because they are better able to help the startup raise the next round (i.e. signaling effect, network with other funds, social validation, etc) and generally have a more solid track record of helping startups beyond capital.
With few exceptions, companies’ commitment to venture capital tend to vary depending on their operational results. Building a company takes time and entrepreneurs are looking for solid and reliable partners for the whole journey.
With M&A, companies often end up paying more (startup is already at scale, competitive situations, etc.) and can have a hard time integrating it because the processes, systems, mindsets and culture are so different. In fact, a lot of what made the startup great in the first place, can be destroyed by “integration”.
With Corporate Venture Building, the startup is both (i) in alignment with the corporation’s strategy, and (ii) can leverage its operational and marketing assets to scale fast. An eventual acquisition often takes place in less competitive situations and integration is easier since the entities have worked together since inception.
#1: Scan the startup ecosystem before building
With the ever decreasing costs of launching a startup, entrepreneurs can be quite effective in spotting and acting on opportunities in many industries. As such, before investing considerable resources in a new venture, it’s worth scanning the global startup ecosystem.
If a startup has already attacked the opportunity you are aiming at, it can be both more effective and efficient to acquire/partner, especially if they have just reached product-market-fit and getting ready to scale. By acquiring/partnering at this stage, you can fast track product development, business validation, core team formation, and initial client base.
Scanning the startup ecosystem worldwide is no easy task for most corporations as new ventures are born and raised in a different realm. Therefore, corporations must rely on hubs (e.g., venture capital funds, incubators, accelerators, specialized M&A boutiques, and consulting firms) to “plug them in”.
Some large tech companies have their own startup programs than can help them in this effort, but they usually serve other purposes as well (e.g. sales, marketing, evangelization, and PR). Google is a good example.
#2: Start with the low hanging fruits
Early wins are very important because they get people excited and make the organization commit to innovation and venture building. If it takes too long to produce concrete results, people may think of it as yet another “pie in the sky” innovation project.
In the context of rapid digital transformation, revolutionary / disrupting ideas may be tempting, but these projects are inherently riskier and tend to take longer to take off. Because corporations are often pressed to generate results in the shorter term (vs. VCs who can patiently wait 4–8 years or more), these initiatives can lose internal support along the way and perish.
Therefore, even if it is Incremental, still carefully consider it, especially if it is the first venture building project.
#3: Leverage corporate resources
Corporate Venture Investments, be it venture capital or venture building, can be seen along 2 main dimensions: Corporate Objective and Ability To Leverage Corporate Resources (for more on this, read HBR’s article Making Sense of Corporate Venture Capital by Henry Chesbrough).
Corporate Objective refers to how aligned the investment is with the company’s current strategy. If it is aligned, the goal is usually to increase sales / profitability. If it is not aligned, the aim is to obtain a good ROI.
Ability To Leverage Corporate Resources refers to the company’s ability to help the new venture thorough its assets (e.g., marketing, distribution channels, technology, operational know-how, etc.).
When corporate venture building, ceteris paribus, start in the Driving quadrant and then move to Emergent and later to Enabling. The Passive quadrant should arguably be avoided because shareholders can theoretically better diversify their investments themselves.
The idea here is to, again, secure early wins to build innovation momentum inside the organization. A corporation can better help the startup reach product-market-fit and scale if the venture is operating along the company’s strategy and can leverage its assets.
#4: Get top management commitment
A common problem corporate ventures face is an autoimmune response from parts of the organization that feel threatened by what the startup is doing. At times, this manifests itself in low engagement (e.g., not making corporate resources immediately available to the venture) or even sabotage.
Therefore, it is key that top management be committed to the initiative because they have holistic view of the corporation’s interests and the power to iron out any internally created roadblocks.
It is also key that top management understands the economics of the new business being build. If the company is pursuing a recurring revenue model for example, decision makers must be aware that profitability and cashflow will actually worsen, in the short/medium term, once you get market traction and start investing in growth.
#5: Have the right capabilities and experience in place
Building digital ventures requires a tool box very different from what corporations normally have. The team’s prior experience, mindset, culture, organizational structure, decision making process, speed, ability to leverage the latest technologies, and so many other things are all very distinct from what a big company possesses and is used to.
Not having the right tools and experience is one of the main reasons why internal initiatives such as innovation labs often fall short of delivering the expected results. If you have, for example, the effort being led by people who have never started and scaled a business from scratch, who have spent most of their professional lives as employees (even if in innovation related positions), you will hardly get the drive, attitude, grit, adaptability and leadership required to maximize your chances of success.
In this context, leveraging professional venture builders who can fast track your business hypothesis ideation and validation, team formation, investment strategy and governance can make the difference between success and failure. If you opt for this route, however, make sure the venture builders themselves have in fact been entrepreneurs from scratch to scale. If they have been industry employees most of their lives, the difference between them and your internal team may not be as significant.
Experience also matters in more technical positions. Getting engineers, for example, who have built what you are doing before saves a lot time, rework, money and, therefore, wear out of project sponsors’ commitment.
#6: Pick a great market
“When a great team meets a lousy market, market wins. When a lousy team meets a great market, market wins…” This saying has been attributed to Andy Rachleff and tends to be true a lot of the time. You can have the best surfboard in the world, but, if you pick a beach with no waves, you will not be surfing a lot.
Corporations frequently have privileged insights about their market and adjacent markets. Make sure to use it when selecting where to launch your new venture.
Note, however, that market growth and size is one consideration among others. It is also wise to check whether you have the capabilities to reach product-market fit in those markets (see “Ease of Capture” #2’s figure above).
#7: Follow a structured process
Another great saying attributed to Andy Rachleff is “Serendipity plays a role in finding product/market fit but the process to get to serendipity is incredibly consistent…”.
Although lightning could strike, successful repeat venture builders tend do follow a well defined framework to validate a business hypothesis in the real world through a iterative process. This allows them to quickly hone their value proposition, pivot to something new or simply stop before investing a large amount of resources behind the idea.
It is worth noting that finding product-market-fit is often not enough. You may create something the market needs, but if you cannot command a price high enough to cover your development and customer acquisition cost, you do not have a business. As such, finding a scalable business model is also part of the road and, again, it is key to follow a well structured process for this step too.
Finally, after reaching product-market-fit and finding a scalable model, the next step is actually scaling the venture. At this stage, hiring correctly for key positions (e.g., VP of sales) is fundamental. A wrong hire frequently costs the venture 1+ year of growth.
One other important aspect of this stage is the ability to shift to more aggressive investing. Finding product-market-fit and a scalable model are not necessarily marked by discrete, big bang events that make it obvious you have reached them. Therefore, a common mistake is not recognizing when you have it, and loosing valuable time to step on the gas as consequence.
#8: Invest Significantly
Launching a new venture brings enough inherent risks (e.g., product-market-fit, business model economics and team risks). The last thing you need is to further jeopardize its chances of success by not providing it with adequate resources.
The investment required varies from project to project, but a bare minimum always exists and successful venture builders tend to make sure they are considerably above it, even if it means over investing.
It happens because of the somewhat binary nature of venture building. If the startup succeeds, any potential over investment will be largely compensated by the outcome, still yielding a great ROI. This is one of the reasons why venture capital valuations often seem too high for more traditional investors.
You can order 2 items out of the Venture Building 3 item menu: Quality, Price, and Speed. This means,
A) If you want Speed and Price, be prepared for potential rework and quality & reputational issues.
B) If you want Quality and Price, be prepared to move at a lower pace.
C) If you want Quality and Speed, be prepared to invest significantly.
Given corporates cannot wait too long to generate results and are usually averse to quality & reputational issues, option C tends do be the optimal alternative.
Fernando Okumura has been a serial entrepreneur, investor and digital venture builder for 14 years. Backed by VCs (e.g., Accel) and Corporates (Groupon). Former strategy consultant at BCG and McKinsey, and M&A banker at JPMorgan. Attorney at law.
Liked this article, and curious to know more? Drop me a note at fyo@alumni.stanford.edu
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