Startup events are ubiquitous nowadays and many companies and individuals are inclined to entrepreneurial practices. As a result, large enterprises have outrageously commenced to play a role in the entrepreneurial ecosystem by starting their investment arm or Corporate Venture Capital (CVCs) firms. I have recently been consulting two of these large companies to start their own CVCs and comparing these CVCs to the regular venture capitalists I have worked with, I maintain that these two types of venture investments are not the same as the conventional VCs. Corporate VCs are different from regular VCs from two aspects: structure and organization’s goals.
The Why of Starting a CVC
It is not only the financial gain that pushes the companies to start a venture capital arm. There are couple of reasons in starting a VC arm for a firm besides financial gain: boosting and speeding up the innovation in the mother company, speeding up the growth of mother company, and access to better corporate intelligence that leads the company to better understanding of threats, opportunities, and harbingers of future trends. In general, the main aims of CVCs are as follows:
Smart Resource Allocation
Larger companies usually have good capital resources in hand and it’s important for them to manage and invest their resources wisely. The resources such as financial resources, human capital, building and office spaces, business infrastructure, etc. are handy in larger firms. Converting the soft money into smart money and use of inactive resources requires a venture capital mindset. Moreover, the business network of large companies is one of the major intangible capitals that could be used to convert the innovation into a successful small business.
The decision making process is not as agile in larger enterprises as in smaller firms and startups. The process in such large companies is more complicated and the organization structure makes the decision making process longer. Thus, lack of agility is an impediment to innovative ideas and growth in large firms. I have faced this conspicuous issue in couple of firms I have been working with: Innovative ideas were not developed more than just presentation slides or when they just came to the decision-making point, it was too late.
Entrepreneurial Culture“The Little Prince” – Antoine de Saint-Exupéry
Entrepreneurial thinking is the foundation of innovation. In order to foster the innovative culture in large firms, entrepreneurial thinking should be promoted. But this is not easy when the employees are overwhelmed with their daily routines and the corporate culture does not let them think entrepreneurial. In some firms, this culture of innovation and entrepreneurial thinking is promoted by directors (top-down), however, in some other firms it is just limited to some routine R&D. Consequently, the absence of entrepreneurial mindset hampers the innovation in companies without entrepreneurial culture.
The Intelligence Arm
I have previously discussed the intelligence collection and its essence in business strategy for companies. One of the methods firms use in order to get better understanding of activities in the market, is the intelligence collection through their venture capital arm. They can understand the threats and opportunities and changes in the industry. They can manage and even disrupt the industry by investing in innovative ideas by having this intelligence arm and adapt themselves and their company to future changes.
The HOW of Starting a CVC
The structure of the Corporate VC plays an important role in the success of the venture capital arm. The main problem is to avoid getting involved in the mother company’s bureaucracies and processes. This is the main trap, in particular for companies with diversified services/products and will impose problems to the CVC. The venture capital intends to be a stimulus to ready-soon innovation, but the problem with CVCs is that they sometimes convert the ready-soon ideas into a ready-late one or they miss good deals because of the long waiting time they impose to innovators for their final decisions. Hence, CVCs should be totally independent from mother company and act totally independently. The latest change in Google structure and introduction of Alphabet is one example of such structural problems that large firms face.
Furthermore, The CVCs should change their mentality to some extent. They should stop thinking the same way as they did in their mother company and change their corporate culture. They should be more audacious if they really want to get into the venture capital business. They should learn the art of patience, particularly during startup of the CVC that they should invest, invest, and invest and get nothing in the first 5 to 7 years. They should learn that their profit is in exit, not in the yearly dividend. They should learn to think long-term. Changing the corporate culture gets tricky when the same people are in the board for both firms or the CEO comes from a division of the mother company with years of short-term profit-oriented mentality.