Corporate Innovation Through Effective Startup Investing
Corporate investment is an efficient way to help meet a corporation's vision by harnessing the power of startup innovation.
Bringing innovation to a corporate environment is inherently challenging. Many firms have established research and development or corporate development teams, but not innovation teams. Since corporations have complex organizational charts with any array of divisions and people, it's hard for any one team to have a complete view of the big picture. Intrapreneurship programs may inspire internal innovation, but this is an expensive and risky model to support.
The nature of corporate venture capital
The popularity of corporate venture capital (VC) has varied over the years. Firms like Boeing and Dell have eliminated their internal VC teams, yet CB Insights reports that big tech companies increased their startup investments from $7.6 billion in 2019 to $16.7 billion in the first eight months of 2020. Google Ventures, Intel Capital and Qualcomm are examples of successful corporate VC organizations. However, it's a model that's hard to replicate. According to CB Insights, 80% of S&P 500 companies do not have an internal investment team.
The objective of corporate investment is to help meet a company's vision by harnessing the power of innovation. Startups are inherently disruptive and are the most reliable source of such innovation. They typically fill technology gaps for the corporation and they might bring access to new customers and/or markets. Investing can be a more efficient way to access such resources relatively quickly.
However, it's challenging for any corporation to identify which startups are well run and have the right solutions to improve its business. It's also difficult to put an internal VC team in place because it's hard to identify smart, experienced people. They are expensive to hire — especially in markets like Silicon Valley — and it's hard to motivate them to stick around. A corporation might spend millions of dollars to assemble even a small internal team. Once in place, personnel are always at risk of considering competitive job offers.
Solving the problem
Outsourcing corporate innovation — sometimes referred to as venture capital-as-a-service — is an effective way to find innovation in a flexible and affordable manner. In this scenario, the corporation partners with a VC firm; they agree upon performance indicators upfront and the VC firm is accountable to meeting them. The Wall Street Journal reports that about 75 percent of venture-backed firms in the U.S. don't return investor's capital, so it makes sense to rely on experienced venture capitalists to make such investments.
Outsourcing corporate venture capital may be more cost-effective compared to creating an internal investment team. What's more, this approach allows the corporation to pivot and modify its priorities anytime. The VC firm will adjust strategy and modify its scale depending on the client's needs.
Since VCs research and build strong relationships, they're able to identify which startup teams have the right technology and innovation to benefit their corporate partner. Startups — typically protective of their intellectual property — might be more willing to share their technology secrets with a reputable VC firm than a corporation, since they might fear the corporation will take advantage of these secrets without making an investment.
Since successful startups have no shortage of potential investors, the existing relationships of established VC firms makes it easier for them to secure an investment. On the corporate side, the company benefits from almost immediate access to new technology and innovation, without the headache of establishing an internal team.
We expect corporate venture capital to continue evolving over time, with a few firms succeeding and the majority likely struggling to make it work. Farming out investment expertise to an experienced, knowledgeable VC firm with a solid team is often a smart way to succeed in an affordable, less risky way. Doing so helps bring incredible innovation to benefit people all over the world.
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