Corporate Venturing Uncovered

In a rush for innovation amongst mid and large-sized organisations, the boom in corporate venturing is one of the most visible signs of abundant capital chasing a paucity of great investments. For many sitting on the outside looking into the “hot” corporate venturing world, their view is obscured by the “steamed up” window pane. Sure, 25% of Fortune 500 companies are active in the corporate venturing arena. Daily business headlines in print and CNBC anchors, trail billion dollar valuations placed on “logo” investments (Uber, SpaceX) and a record number of  exits for lucky investors (2014: 125). What is less understood by the “outsiders”, particularly corporate executives, is how do you properly quantify the value derived from a corporate venture.

Corporate Venturer’s good deal (“ROI”) =

TI (Tangible Improvements) X Annualised Period

+ II (Intangible Improvements) X Scope of Impact

+ PI (Peripheral Improvements)_____________  

Proposed Investment   

The “investment” is the cost of total capital and human resources deployed, interest, management time and energy invested in nurturing and supporting the portfolio management team, setting the Corporate’s vision, lining up key corporate supporters and paths of least resistance, changing the corporate culture, reinforcing corporate employees’ beliefs about the new strategic direction, corporate training, hiring or integrating new skills and technology, rewarding corporate employee behaviour, corporate employee education and communication.

So for example, an investment by an insurer in a transformative digital distribution business might be expected to result in increase sales, increase operating margin, lower acquisition costs from Year 3 to Year 7 (unlike M&A, CV’s rarely have a short-term impact) ; enhanced repute with clients and prospects, reduced uncertainty for investors and employees, reduced competitive threat and greater peace of mind for top management; strategic acquisition opportunities, faster new products to markets, repeat business with existing clients, geographic expansion and so on.

You are not finished yet,

Risk Assessment: No corporate venture investment is “risk free”.

You must calculate the Corporate Venture’s Innovation Risk (IR) / Corporate Risk Tolerance (CRT)

So for example if on a scale of “0” (risk free) to “-5” (Catastrophic risk), objectively, the Innovation Risk attached to the proposed investment is “-4,” (a black eye for the firm’s management, balance sheet and repute) and the Corporate Risk Tolerance is no greater  than “-2” (modest hit to earnings, relationship with key constituents and repute), management would be advised to forego the opportunity.

Finally, there is a need to objectively consider

Strategic Fit: “high”, “moderate” or “low” fit with the Corporate strategic direction, vision and beliefs.

Ease of Implementation:“high”, “moderate” or “low” fit with the Corporate’s operating model, speed of making changes, adapting customer relationships, access to appropriate capital, skills and technology, management time, organisational change and so on

Top priority given to “high” strategic fit and ease of implementation investments.

Corporate Venturing is very much the innovation tool “du jour”. Whether it is education technology, clean tech or fintech.

Getting started requires that you take a panoramic, not a a portrait view of the investment potential and the impact on the corporate organisation’s future. If you lack or cannot reasonably acquire the skills to make these judgments you shouldn’t be in the business of corporate venturing. It is not for the faint-hearted.

For those corporate organisations with the skills and volition to commit for the long haul, it is a powerful and potentially highly lucrative source of innovation and profit.

© James Berkeley 2014. All Rights Reserved.

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