Guidelines from Corporate Venture Capital Leaders (CVC Series, Part 4)

‘Establishing a venturing process usually requires both a strong external cross-industry network to be tied in to the right deal flow and a solid integration into the parent organization.’

Distinct Ground Rules Required for Corporate Venturing

Based on learnings from past cycles, CVC leaders recognize a distinct set of ground rules is required for effective innovation management within a venturing framework. Consider the ground rules (illustrated below) as proposed by the Boston Consulting Group (BCG) based on their extensive participation in designing and establishing CVC units in a variety of industries. It is not a Venture Capital or Private Equity business model, but an innovation and ‘play for the big win’ mentality that shape each venture’s business model.

Accepting the venturing basics requires long-term thinking and willingness to accept a higher risk profile, limited management control, and paying full exit price. For this to work, you need to select venturing partners to whom you are willing to extend trust. For startups, you need full confidence in the existing high-quality management team with whom you have chosen to partner. That does not mean corporate partners can’t help fill expertise gaps with a seat on the target’s executive team. However, they can’t effectively be the venture’s CEO (like with Private Equity) or have anything close to controlling ownership interest (like with some VCs). New ventures are risky because even with the best management and access to sufficient capital, no one can predict market and competitive response with 100% accuracy. When the venture succeeds, one must honor the IPO exit intent with a fair market-based exit price which is not typical VC behavior according to the August 28, 2012 Recent Research column  in Strategy+Business.

Corporate Venture Capital Program Best Practices

‘Staff corporate venture teams wisely – including CVC managers with business operating and innovation experience across industries and great networking skills to complement financial analysts and M&A experts’

Developing a venturing mindset usually means faster paced entrepreneurial decision-making. This by no means implies an irresponsible, ill-informed, or reactive decision process. What it does require is a recognition that relying solely on exhaustive analysis and inflexible legal documents will usually not produce high value for the venture shareholders or market stakeholders. To transcend industry borders, one must be open to discovering shared interests at the beginning and equitably sharing risks – not maneuvering to shifting risks to the other party.

Establishing a venturing process usually requires both a strong external cross-industry network to be tied in to the right deal flow and a solid integration into the parent organization. If the parent organization has established and maintains clear expectations and success criteria, then quick decisions can be made to maximize the potential of the venture. The venture operating team accepts accountability because it knows the parent is committed for the full deal life cycle.

Specific areas of focus for setting up and operating a CVC unit are presented below and are based on the Boston Consulting Group’s guidlelines. Although requirements for setting up and operating a world class CVC program vary, these general recommendations from the author are based on extensive operating experience in the domain. For specific examples and further guidance, contact us at the Law Offices of Robert A. Pasionek.

1. Define effective operating principles such as a charter and success criteria for each investment and development stage, and implementation processes to monetize the funded innovation.
2. Consider strategic imperatives of the parent organization including geographic expansion, leveraging current customer base, refined customer profile, financial objectives, change management goals, filling the new product pipeline.
3. Have a formal structure and process for how knowledge is captured and transferred – ideally one that is integrated into daily work flows with input to the changing dynamics of the market.
4. Maintain a focus on improving leverage of corporate assets such as providing target industry partners access to needs-based market research and R&D labs, visibility to senior corporate management.
5. Staff corporate venture teams wisely with CVC managers with business operating and innovation experience across industries and great networking skills to complement financial analysts and M&A experts.