Rethinking Venture Engines
The Wake-Up Call
The Tech Winter has proven something that many within the tech industry knew but did not want to discuss until it happened. When too much money runs after too few deals, real innovation declines, and the number of bad deals grows. Even the all-famous VC Power Law has come under pressure when most funds have yet to be able to create a very high DPI by investing in more and more startups. In short: The productive use of capital has been declining at an alarming rate, leading to the outsized reckoning we can see today.
If this is true for the venture industry, it is also very much true for corporate venture building. Over the past 5+ years, an increasing amount of money has been poured into building new ventures with corporate assets, yet often, corporates have been drastically overspending. This, again, led to an unproductive use of capital and uninvestable ventures that could not find enough traction to justify the amounts of money the corporate spent on building them or for an outside investor to invest in them.
Yet, it seems that “innovation consultancies” have started to pitch a different tune to corporates: trying to tell them that if even more money is spent on more extensive programs, there will be a greater chance of success. The so-called “portfolio logic” demands that more ventures be built along the same flawed logic to finally produce the successes that they believe are possible. These consultancies forget a few things when pitching such ideas to corporates, and it seems, at times, more self-serving than genuinely trying to build something of actual value.
The new in-word in this context is “Venture Engine.” A guise under which more consulting work, more resources, and more low-value-added activities can be packaged to create the appearance of progress. There is often a strong emphasis on creating a broader team infrastructure, setting out a program and portfolio logic, and running many subsequent consulting projects to identify spaces to build in — often before a single venture has been launched. We believe this is putting the cart in front of the horse, as corporates need to learn how to venture build cost-effectively before scaling the process.
The Corporate Dilemma: Chasing Headlines or Substance?
Innovation heads used to have a fantastic job. They could spend their days discussing innovation with the business without real P&L responsibilities. They would attend conferences, meet with cool startups, and sit on panels. People in these roles are now full of fear as they need to ensure that their next venture succeeds. Otherwise, their whole program will be shuttered. There is a real reckoning whenever the macro environment is challenging, forecasts go down, and actual results come into focus — when the promise of the innovation dividends to come needs to turn into revenue.
There is indeed a better way to build a venture program at a company. That approach does not start with a “portfolio mindset” or big spending on creating an infrastructure of team members. The most long-lived and successful venture programs begin with a single venture. This first venture is a pilot, if you will — validating the concept of corporate venture building for this company in the same way a pilot can validate a business idea for a real venture. As with any high-risk activities, a lot is learned and iterated based on that pilot, followed by slightly more ambitious steps and more learning, before applying all the gathered insights to scale a more programmatic approach.
This approach has three steps:
1. Identify the right space to build — the first venture
2. Design the venture using an external entity
3. Solve governance issues early
Let us explore these three steps in more detail.
1. Identifying the right venture to build — the first venture
The only focus of the first venture should be to become successful under the success definition of the corporate. While corporates often look for alternative KPIs (e.g., purpose-focused venture) — and while those seem like the right targets initially — they might not represent success throughout the build of the venture. Building the first venture will already provide a lot of learning for the corporate and the venture team, hence, being overambitious with the first step is not advisable. It would be wise to pick a topic that can yield early success without extreme risk (e.g., needing to make a market for it to succeed), to show traction, and to turn vague promises into revenue-generating reality.
Building the venture far enough from the core (both in terms of content and structure) is also important for the first venture. This is because if the venture is too close to the core, the corporate might wish to overinvest initially but will not be able to put it up for external investment later on, hence missing the ability to value the venture properly and it might not be considered a success. Further, the gravity of the core might be too strong, and the venture could end up being pulled back in and crushed by the forces that be.
It is also crucial for the first venture not to rely too much on corporate assets. While it is essential to identify them, we have seen that most corporates have an issue leveraging assets for early ventures. They want their sales team to spend their time on something other than early unreliable products, and compliance might prevent pilots from happening early. Often, the governance and interest structure around a corporate’s “real assets” prevents them from being leveraged effectively.
Therefore, we suggest a first venture that works within a set of criteria:
A. Within the strategy of the corporate
B. Does not require heavy corporate support
C. Investable by external institutions (through capital efficiency and structuring)
D. Can create value quickly — does not require significant R&D
2. Design the venture using an external entity
Our approach looks at designing one venture in an investable structure (ensuring a cap table that can be invested in) through an external structure. As mentioned above, this part is essential in our approach as it allows for quick piloting and even receiving revenues (otherwise, the corporate overhead processes will drastically impede or kill venture progress). Our fundamental principles for designing the venture include the following:
A. Working on product, commercial, governance, and team from the start
B. Moving early towards a paid pilot where we can test key assumptions
C. Focusing on positive contribution margin (on top of revenues) within the first year
D. Taking the time to source the equipment for the venture without taking venture time
This is relevant because as we align risk with our corporate partner, we need to ensure that the first venture is successful (or in the rare cases where the corporate is very bullish on an idea that will not work — we achieve “negative success,” i.e., ensuring that the corporate does not overspend by showing early that it cannot work, to pivot or bury it efficiently).
As discussed earlier, our approach focuses on ensuring the design starts from a spin-out nature. This allows for limited investment and resource constraints, which simulate the conditions of startups in the wild. This way, if the venture should be spun out, it will be able to raise investment. On the other hand, if the corporate decides to spin in, that process will still likely be cheaper than starting to focus on developing a consulting case first (as seen in the chart above).
3. Solve governance issues early
Governance issues should be addressed as part of the design of the venture. As an ex-consultant, I was often very sad about how great syndicated strategies do not mature in reality because stakeholders change by the time of execution. This is the same for developing a governance process without having a venture. Setting a governance strategy without being in the thick of things will create an inevitable disconnect and many problems once execution rolls around.
CFOs and legal teams do not really get into the details of things unless there is something tangible to discuss, and when there is, the discussions become interesting. This is especially true when CFOs have not done such venture deals before (within the corporate) nor have benefited from or seen the returns of such ventures. We also know that solving this for one venture allows this approach to be replicated for the next set of ventures, so this time is well spent.
As a final note, corporates are not VCs. They should not immediately focus on building a broad portfolio but rather build specific ventures and buy themselves the corporate right to develop others. This is how we started with all of our corporate partners, and we have worked with some for more than three years across multiple ventures.
In Conclusion
We strongly believe that corporate venture building can add tremendous value across the board — for clients, corporations, and society. As an innovation instrument, it is uniquely positioned to allow big companies to act on some key Horizon 3 topics they would otherwise be unable to address. Yet when building ventures, corporates must be wary not to repeat the overspending mistakes of the VC world of the past decade and/or start out too ambitious for their own good, only to burn out.
Instead of starting with a portfolio mindset and big infrastructure approaches, corporates would be well advised to build one venture with an externalized structure first, learn from that process, work through the governance, and then consider what a more programmatic approach could look like. Further, investing in consulting activities and high-cost external service providers without skin in the game is a sure-fire way to end up burning money with no ventures to show for it.
We are pleased to be an appointed venture studio of EDB’s Corporate Venture Launchpad 2.0. CVL 2.0 is an expanded S$20m programme by EDB New Ventures, designed to enable companies to incubate and launch a new venture from Singapore, supported by venture studios experienced in corporate venture building. You can also find out more on our website.
Interested to learn more about sustainability ventures? Drop us a line: contact@wright.partners
Authors:
Ziv Ragowsky, Founding Partner at Wright Partners
Sebastian Mueller, Co-Founder at MING Labs
