What is Corporate Venturing?
Corporate venturing, also known as corporate venture capital, is the practice of directly investing corporate funds into external start-up or early stage companies. This is usually done by large companies who wish to invest in new, innovative revenue streams, by taking equity stakes. The investing company may also provide other support, such as management and marketing expertise, strategic direction, and/or a line of credit.
Is Corporate Venturing something new?
Corporate Venturing is not new. It is generally accepted that Pierre S. Du Pont, then president of chemical and plastics manufacturer DuPont, started it in 1914. At the time, Mr Du Pont invested in a privately-owned, 6-year-old automobile start-up called General Motors. His reasons for doing so were twofold:
- Financial aims: He expected significant growth for the automotive industry post World War 1, which would yield a strong return on their investment;
- Strategic aims: The growth of GM would increase demand for DuPont products such as artificial leather, plastics, and paints.
Pierre Du Point was right. The $25 million his Board invested turned out to be a strong investment. By 1916, GM was growing sales by 56% per annum and had over 85,000 employees.
Other large corporations, like 3M and Alcoa, joined DuPont in corporate venturing and many other large companies have joined them over the years, including Intel, Siemens, Xerox, GE, IBM, Lucent and Merck.
Over the past two decades, due to the explosion of technology, there has been a spike in firms starting and expanding their corporate venturing units to keep pace with the evolution of technology and its ubiquitous adoption across industries. Between 2010 and 2016 in fact, the use of corporate incubators and corporate accelerators among the 30 world largest companies in the world rose from just 2% to 44%.
Why should my company consider corporate venturing?
Most companies have a portfolio of product and / or services that generate revenue. Each of these have a lifecycle – the BCG matrix by created by Bruce D. Henderson for the Boston Consulting Group in 1970, as well as the product life-cycle (PLC) continue to be used by many portfolio managers. While product life cycles can be managed to a degree and margins improved during the Maturity and Decline phases, there is no substitute to adding new revenue streams to the portfolio.
Many companies monitor revenue and profitability of products / services added within the past 3 years. According to a study conducted by Cooper & Edgett, “Benchmarking Best Practices Performance Results and the Role of Senior Management”, the top 20% of businesses researched in the survey achieved on average 38% of revenues from their most recent 3 years from new products, while the rest on average achieved 27%. The profit contribution from new products breaks down to be 42.4% of profits for the top 20% best performers vs. 28.4% for the rest.
You may feel that this only applies to tech-based companies, but that is not the case. If you look at Fast Company’s 2018 edition of the World’s Most Innovative Companies, you will find Patagonia (outdoor apparel), CVS Health (an American pharmacy and healthcare company with nearly 10,000 stores in its network), The Washington Post and the National Basketball Association (NBA) in the Top 10.
Here in the UK, the Construction Sector Deal was launched by the government in July 2018 to transform construction through innovative technologies to increase productivity. This new joint government-industry Sector Deal is worth £420 million and since the Construction Sector employs nearly one in 10 working people in the UK, this seems a good investment. In addition to delivering £1.7 billion in efficiencies and productivity gains, it also aims to support 20,000 apprenticeships, deliver 1.5 million new homes by 2022 and halve the energy use of new builds by 2030.
This seems to be a great opportunity for Corporate Venturing. CFPro Ventures sees no shortage of new technologies, great ideas and new ways of working in this industry. With support from some of the larger players in the construction industry this could be a win-win.
I’m interested. How do I go about it?
Firstly, Corporate Venturing has to be supported by your Board. Investing in early-stage ventures is inherently riskier than the risk profile most corporations are comfortable with. CFPro Ventures suggests that Corporate Venturing should be led by an appointed Board member, with a dedicated fund allocated for a fixed period of time. A clear set of financial and strategic aims have to be agreed – this is something we can help you with.
Secondly, Corporate Venturing has to be resourced. Finding opportunities in the market place is not an activity that can be purely a line management responsibility. CFPro Ventures has dedicated specialists who can help you. We will interact with your people, benefiting from their knowledge of the market place and competitors.
Thirdly, investments or acquisitions have to be given dedicated support. Bringing them into the corporate environment is not the best way to nurture them. We will do this on your behalf, helping them to deliver their accelerated growth business plan, whilst preparing them over time to transition into your organisation.
Want to know more? Talk to us today.