There are two schools of thought when it comes to corporate venture capital (CVC), as Sifted pointed out a few weeks ago.
- Some believe that CVCs should stick close to the core business, meaning they end to focus on so-called Horizon 1 investments — sustaining and incremental innovation;
- Others argue that the investment arm should be as independent as possible and invest well ahead of business in Horizon 2 and Horizon 3, i.e. adjacent and disruptive innovation.
The first group includes companies like ENGIE New Ventures, who tend to invest in startups that have a commercial agreement with one of the business lines; the venture arm of Honeywell’s sustainability unit, which aims to invest in a startup after a partnership deal is in place with the parent company; and ABN AMRO Ventures, which takes great pains to make sure the bank is actually using the products made by companies it invests in.
Shell Ventures, RBVC (the venture arm of Robert Bosch), Cemex Ventures and Maersk Growth belong to the second group, together with all the corporates (such as BBVA, Siemens, AXA, SAP, E.ON) that have spun out their corporate venture arms and even removed the visible affiliation with the parent company through rebranding (you can find a deep dive on the latter in a prior article).
Both approaches have their pros and cons.
The pros of investing close to business
“The value is the proximity to the business”, the head of innovation of a big company told me a few weeks ago over dinner. “No clear business connection, no investment.” These words summarise pretty well the first approach. The benefits of this are:
- This kind of investing leverages the unique differentiator of a CVC — the opportunity to use the size and power of the corporate to turbocharge a startup. It allows startups to do things like tap into a corporate’s global network of customers and broker introductions.
- There is a reputational benefit too: other investors might ask themselves why the corporate isn’t doing business with the portfolio company despite the investment.
- Faster implementation. As Ben Luckett, Aviva CIO and founding managing director of Aviva Ventures, told Sifted last month: “If your innovation efforts are too separate from the core business, when you come to scale you have to sell the idea to someone. You’ve got to convince someone in a part of the organisation to take what you’ve brought them and prioritise it (and resource it) ahead of whatever else they already had on their agenda. The best way to avoid fighting for buy-in is to have the business units and their leaders own the innovation from the outset.”
- Additionally, investing in a startup in which you plan to provide revenue is a less risky bet.
In the end, assuming this perspective, the CVC becomes a sort of an “attempt to build strategic value at no cost or with a small profit”, continuing to quote my dinner guest.
The pros of investing ahead of business
One of the biggest problems with investing close to the core business is that you can’t really disrupt the parent company this way. CVCs shouldn’t be used for safe bets and financial returns. A CVC’s financial returns, whatever the magnitude, are unlikely to be material for the success of the parent company.
You are not going to change the shape of the mothership if you invest short term
The ultimate return on innovation investment is survival, quoting myself. Doing these things allows a company to be alive in 2030 or 2040. If they don’t innovate, they won’t be. Companies should be looking at their CVC arm as an insurance policy. And that requires going ahead and beyond the core business. During my Mind the Chats I’ve asked several CVC general partners about how they invest:
- Firstly, CVCs are supposed to be the “eyes and ears” of the parent company and report back to the mothership the strategic insights gained from scanning potentially disruptive trends and anticipating external change.
- Additionally, they should take bets on innovation and test new businesses on a small scale and in a separate environment.
- Finally, they should be looking for disruption rather than investing in something that solves current needs. It makes no sense to ask for advice from business lines. They will give you a shopping list in short term, adjacent innovation, and tell you what they need today or tomorrow. What is needed further beyond that is of little interest, and if it is disruptive, it will be seen as a threat.
Why should a CVC be restricted to either approach?
CVCs follow a portfolio approach and then they might do both by balancing short term with long term. Some CVCs actually do that but, as Nacho Gimenez, managing partner at BP Ventures, says: “You are not going to change the shape of the mothership if you invest short term.”
Also because you don’t need to invest into startups to have them working with your business units. For that you have the venture-client model (proof of concept projects and partnerships) that has proven to be able to provide quick strategic wins. And it is faster to be deployed.
One of my favourite quotes on this comes from Giancarlo Savini, investments and partnerships and director at Honeywell Ventures, who says: “Moving your CVC operations outside the corporation is like trying to be Superman without the S.”
Very true. But the real value CVCs have to deliver is strategic — that’s the real S on the CVC jumpsuit. Strategic for both the parent company, by anticipating disruption, and the startup, through getting a successful exit via acquisition. Feeding the current business is the low-hanging fruit. It might be juicy, but you don’t need a huge ladder (i.e. a CVC fund) to grasp it.