Corporate venture capital (CVC) has become a buzzword of sorts as more companies look towards entrepreneurship and investment as a gateway to grow their business during the pandemic.
Singapore for one is promoting such activities through a $10 million pilot programme that support large and established companies in building ventures in new growth areas beyond their existing core business.
Launched by EDB New Ventures — the corporate venture building arm of Singapore’s Economic Development Board — the programme will support companies new to CVC so they can stave off competition and disruption with innovative
products, services and business models.
The interest in CVC dates to sometime in the late 1990s. A 2020 report entitled Enterprise Growth during Turbulent Times by professional services firm Ernst & Young (EY) attributes this trend to a case of “old economy” companies having a bad case of “fomo” or “fear of missing out”. At that time, the interest of these old economy companies was piqued by the extraordinary returns that venture capitalists were generating from investing in young Internet companies.
“Lots of corporates got excited and entered into the venture capital industry by making small, minority investments,” notes Vibha Gaba, a professor for entrepreneurship at Insead. The root cause of this trend was the rise in digital technology and what these new technological capabilities can do to transform businesses. “It didn’t matter if your company was in coal, petroleum, F&B or IT, digital technology was transforming the overall customer experience and operational efficiency of companies,” Gaba tells The Edge Singapore in an interview.
Such transformations were seen in the way in which companies were interacting with their customers and developing new products. For instance, the time taken to create a product reduced significantly. Rather than developing everything from scratch internally, corporates started to tap talent from the community — such as through start-ups — to manage their investment portfolio.
Take the case of NYSE-listed pharmaceutical company Eli Lilly, with offices in 18 countries and products sold in more than 125 markets. The genomics revolution was fast transform ing the pharmaceutical industry and Eli Lilly needed to catch up to stay afloat. In 2001, the company launched a CVC fund in hopes of working with start-ups specialising in biotech.
This proved to be an effective strategy, for the collaborations made by the fund dubbed Lilly Ventures gave Eli Lilly critical insights and data on the science of developing drugs. Indeed, to accelerate innovation and tap new growth opportunities, more forward-thinking firms like Eli Lilly are turning to corporate venturing: finding, funding and then nurturing and ultimately monetising new businesses through exit or integration into the parent company’s core business processes. Put simply, corporate venturing provides companies with a new and more robust mechanism to stay ahead of the curve.
Teething pains of corporate venturing
To be sure, CVCs are no guarantees of success. The initial hype in corporate venturing was short-lived as many corporates made “bad investments” and had a seemingly arduous task transferring the knowledge from external sources, back into their business, says Gaba. EY’s report states that the world’s greatest companies lost some US$10 billion ($13.6 billion) from chasing dotcom start-ups. The corporates also took away another valuable lesson: that successful venture investing is more than just the willingness or ability to write a cheque to an up-and-coming start-up, sit back and wait to reap the rewards.
Instead, the process is very hands-on and requires leaders of corporates to roll up their sleeves and immerse themselves in every aspect of building and scaling a high-growth early-stage start-up.
Nevertheless, corporates have seemingly put aside this initial setback and interest in corporate venturing has grown, particularly in the past few years (See chart below). Participation in such activities for one jumped from 423 deals amounting to US$5.1 billion in 2009 to 3,234 deals worth US$57 billion ($77.1 billion) in 2019, EY notes.
It seems like the days of corporate venture capital investments being speculative side projects have mostly come to an end. Corporates can no longer just wait for these new ideas to come internally and have a pressing need to gain access to it if it is developed outside, says Gaba.
Claudia Zeisberger, professor of entrepreneurship and family enterprise at Insead, observes that there is more pressure on incumbent players to innovate because they face competition from new entrants they do not know of. “Given the availability of capital waiting to be deployed, there has never been a better time to be an entrepreneur than right now,” she says, adding that entrepreneurs are taking the plunge following an accelerated demand for solutions.
Start-ups are a natural place for corporates to get ideas from given their exciting technologies, ideas and models. This way, corporates can be more customer-focused, have new sources of revenue streams and stay on top of market trends, a 2018 white paper by the World Economic Forum (WEF) highlights.
They also stand to gain financially with data showing the most active corporates in CVC investing have outperformed their peers and the overall market in both the short and medium terms.
Meanwhile, the start-ups gain from not just the additional financial muscle — they can tap a scalable customer base, stronger market knowledge and mentoring as well as access to proprietary assets, the WEF paper points out.
At present, against the backdrop of the uncertainty brought on by the pandemic, it is natural for businesses to take defensive measures by reducing costs, managing cash flow and maintaining liquidity. However, a 2018 study by the Harvard Business Review shows that companies that balance fiscal tightening with corporate venture capital investing are most likely to outperform their competitors after a recession.
Interestingly, corporates are also making an effort to understand how start-ups are operating, notes Zeisberger. Many companies have come forward asking, “Can you come and talk to our boards? We want to get closer to what’s happening outside the corporate walls”, she adds.
In line with this, Zeisberger and Gaba are seeing strong interest in Insead’s corporate venturing and innovation programme that launched in February. The five-day programme which was first conducted virtually due to safe-distancing measures saw 26 participants from 22 industries and 15 nationalities.
No one-size-fits-all solution
Contrary to popular belief, corporates across geographies seem to be grappling with common issues: how to source for talent, sourcing for the best deals and dealing with cybersecurity. Based on informal observations, Gaba says that Asia-based corporates are seen to be more risk-averse, presumably because the culture here is more conservative. Moreover, failure is still seen as somewhat a taboo in Asia, which is a stark contrast to how it is considered integral to building new businesses in regions like Silicon Valley, which is home to several major tech-based companies.
Given the different make-up of boards and industries that companies focus on, Gaba and Zeisberger say there is no one-size-fits-all corporate venturing model for corporates to adopt.
One model is a CVC unit through which equity investments are made to a portfolio of high-potential start-ups. Another way is through a corporate venture builder (CVB) where new companies are created by combining the parent company’s in-house opportunity identification and development methodologies with externally-sourced talent to leverage on corporate assets and resources. Other methods include having a venture client model or corporate incubator unit.
For instance, SC Ventures — the arm of Standard Chartered which looks at innovation, FinTech and alternative business models — typically gets its ideas internally within the bank. Meanwhile, BMW operates a start-up garage under which it brings in start-ups and gives them the opportunity to be its client.
In another scenario, Xerox Ventures — the venture capital arm of Xerox Holdings — operates as a separate entity from its parent company. As part of this, some staff look into finding opportunities for collaboration among start-ups and provide them with non-financial support.
On the other hand, BP ventures — the investment division of British Petroleum — has a flat structure where staff can come up with ideas regardless of the division they are in.
The choice on which model to adopt ultimately boils down to the mindset and commitment of top management and how it fits into their innovation strategy in the long term. Some companies may find it impossible to integrate their corporate venturing activities with their existing business while others may manage to gain plenty of strategic benefits from these activities, notes Gaba.
Nonetheless, it is critical for corporates to explore the potential of corporate venturing so as to reap the financial and non-financial benefits it brings.
Cover image of Gaba and Zeisberger: Insead
