Corporate Venture Capital
The Most Underutilized Factor Endowment Of Corporate Giants
“Make no small plans, they have no magic to stir men’s hearts or minds” — Daniel Burnham
As reported by PwC and CB Insights’ MoneyTree Report, the overall growth of Venture Capital investments activity in the United States reached $100 billion in 2018 — a truly watershed moment. And as U.S. Senator, Everett Dirksen once said: “A billion here, a billion there, pretty soon, you’re talking real money”…
So, since we are talking about so many billions, it’s more important than ever for VC community to make smarter investments.
Instead of relying on startup founder’s charisma, or the quality of his/her pitch deck, well-trained AI can help predicting investment’s success probability much faster than going through manual analysis, and with far less emotions while at it.
All business plans should meet the same rigorous and unbiased investment criteria — and this is where AI comes handy. It can be used all across the board: to discover, evaluate and support investments!
For example: blogs, posts and other social media sources, can be successfully scanned using Natural Language Processing — to identify early-stage companies searching for investors.
And since AI can be constantly fed with new data sets and new information, it can follow the emerging trends — accurately.
Better yet, AI production systems can be tested on some of the best investment propositions from the past — to see if it would have recommended investing based on unique preferences of Venture Capital funds. If not — back to the training phase, until it does.
Looking at the big picture, it’s important to realize that AI can expedite & enhance the entire process both ways. In the same way investors benefit from identifying the right startups, entrepreneurial founders can better target the right investors, too.
I was recently discussing Corporate Venture Capital (CVC) industry with one of their top performers. Although we discussed the investments in renewable energy sector, I gladly pointed out the following:
INSTITUTIONAL VC (IVC)
Whether it’s: 2,6,2 (referring to 2 losers, 6 mediocrities and 2 success stories), or 1/3, 1/3/, 1/3 model — the ROIs of IVCs, such as 500 Startups, reflect a sobering reality. They point to an empirical qualitative metric. Moreover, we all know that the reality is sometimes even harsher.
CORPORATE VC (CVC)
- In contrast to IVCs, CVC such as Google Ventures, should be driven by both: their strategic vision AND the financial gain. However, without a robust process in place and the right framework to execute the strategic vision, it is sometimes difficult to reach the optimal destination
- For example, if most of the CVC investments are of a “tag-along” kind and the CVC is not a lead-investor — the strategic value can be heavily diluted
- Minority co-investments with other IVCs could mitigate the risks — but they need to be balanced by a number of strategic investments with a majority stake
I was simply making the point that CVC incumbents should also consider pivoting their existing business models and start resembling startups. As in other industries, CVCs need to embrace innovation, agility and the ability to deal with uncertainty.
Unfortunately, it is not easy for a large CVC fund to innovate, as there is a greater resistance to change across the parent company. The bigger the organization — the greater the challenge.
At the strategic level, I couldn’t stress enough the importance of what the inventors of a Blue Ocean Strategy (BOS) so elegantly elaborated in the past (http://www.blueoceanstrategy.com/book). As in my previous blog, I recommended aiming at:
Creating NEW and UNCONTESTED market space
- Instead of competing in the existing market
Creating & Capturing NEW DEMAND
- Instead of trying to exploit the existing demand only
Making the competition IRRELEVANT
- Instead of trying to beat the competition at their own game
At the tactical level, I recommended the following:
IMHO, as part of an enhanced business development strategy, CVC fund manager can be much more than a “passive” reviewer of a business plan that lands on one’s desks. After all, if experienced CVC manager is smart enough to reject all the “losers”, her/him should also be able to propose a strategic venture and build such startup — organically, or through acquisitions.
While the above is equally applicable to IVCs, filling the void is exactly where domain specific expertise of CVC comes to bear. The untapped uniqueness of CVC should be linked to addressing the needs of industries that its corporate parent understands and serves.
Long-term, CVCs are more successful if the focus of their portfolio’s start-up and their corporate parent — overlap. It allows corporate parent for a quicker access to new business models and new technology. In addition, it also allows the parent company to learn about emerging competitive threats and quickly respond to market disruptions.
I am a great believer in a balanced approach which:
- ALIGNS GOALS — of CVC and its corporate parent
- PROVIDES INCENTIVES — to both organizations to do what they do best
- ENSURES A TWO-WAY KNOWLEDGE TRANSFER — in a tightly-coupled environment that is guided and monitored by a strong metric
Since gaining strategic benefits is usually the main goal of any CVC, I recommend the following strategy:
CVC
- In a stark similarity to academia (where the faculty is motivated and incentivised to publish scientific papers in a large number of reputable journals) — CVC’s investment manager should also be incentivised to annually pitch new strategic ventures to its Managing Director
If significant percentage of manager’s bonuses and pay (eg. 30% to 50%) is linked to strategic benefits of the corporation — the manager becomes sensitive to both: CVC’s financial objectives AND its parent company’s strategic needs
Corporate R&D and Business Development
- In addition to R&D spending on projects that may never see the light of day, I recommend that R&D management’s salary and bonuses — are also linked to a number of successful ventures they presented and got launched through a CVC
- By necessity, such origination process will increase the amount of formal and informal interactions between corporate R&D and CVC. It will also ensure that knowledge transfer works both ways — systematically
The Bottom Line: CVCs should be able to select outstanding business plans they review AND launch strategic ventures out of their own volition. All business plans should meet the same rigorous investment criteria.
With a relatively small tweak — CVCs can spur transformational and disruptive changes to the business development process at their parent company. My recommendations can help in “separating the wheat from the chuff” and cultivating the pool of the gifted.
The same way a lot of well funded startups fail due to lack of operational expertise and/or managerial talent — the complacency of CVCs could cause some of their parent companies to see their “Kodak Moment”, too. Unfortunately, most will see it in black and white.
Nourish, cultivate and grow your factor endowment, CVC — beyond the exclusive focus on a liquidity event and exit multiples!
To paraphrase Jim Collins in his Good to Great book: “First, get the right people on the bus — before even deciding where the bus is going”
After all: even 100 mediocre musicians do not amount to one Beethoven — the same way 100 mediocre economists are not a substitute to Daniel Kahneman’s brilliance. And it all boils down to … PEOPLE!
Oleg Feldgajer is President & CEO of Canada Green ESCO Inc. Oleg is positioning the company to become a leader in financing AI enhanced green energy projects and ventures. CGE’s mission is to guide DISRUPTIVE businesses in ENERGY & TRANSPORTATION toward profitable business models. Oleg is passionate about such mission, and firmly believes that without AI based innovation, we will all prematurely choke on polluted air and dirty water. CGE delivers 100% financing (levered and unlevered) to its clients — and utilizes large equity pools, and non-recourse debt. Oleg offers creative, fresh ideas to open-minded businesses — that embrace both: logic AND opportunistic intuition. CGE stands against mediocrity & its modus operandi is quite simple: If CGE is not invited to join your BOD, or Advisory Board — we failed!
