The Strategy Case for Investable Ventures

And why founder-led ventures have an edge in being investable.

Pilots Pioneers at the College Park Airport, 1912. Photo from Library of Congress.

With the unpredictability of the early pandemic stages in the mental rearview mirror, and a return to focus on long-term growth ambitions, C-Suites in 2022 and onwards are turning to revive their innovation efforts; many of which have been put on hold or low burn at the start of it.

Based on a study by VentureBeat, while 60% of companies are banking on innovation again many are unlikely to see results. According to Wellspring, who conducted the research, the lack of results will likely stem from organizational issues that will include the C levels not being engaged with the innovation team and the complexities of the innovation teams engaging with each other. According to a Capgemini report, about 90% of innovation labs fail to deliver on their promise.

All at the same time, new entrants are growing faster than incumbents, and many are upending older corporates and taking their positions in the S&P 500. There is a very clear innovation premium and a fast-mover advantage to obtaining it, yet corporates are playing the wrong game with an old playbook, which does not allow them to tap into this opportunity.

A great example of corporates missing out is how Telecoms have largely been reduced to monetizing their infrastructure (which yields less each year) while startups (sometimes without a revenue model, like WhatsApp) have eaten up their once-lucrative service businesses and are increasingly hollowing them out. And this is happening in all industries. No matter whether Banking, Automotive, Logistics, or Healthcare, value is being created at the edges and captured by new entrants.

In the HBR article “startup vs. corporate which culture is right for you” Rachel Kerrigan highlights some of the cultural differences that allow for startups to move faster (“agile”) and execute at times better than corporates.

1. Startups are led by a founder, who has far more decision rights on the day-to-day operations than even a CEO of a large company as he/she is able to manage directly a much smaller organization.
2. This founder also has much more skin in the game than a corporate CEO through equity in the venture and thus success/failure has a more significant effect on them than any BU head.
3. A smaller organization is also less hindered by bureaucracy and lack of decision-making than a large one and is less siloed.

As a new venture looks to solve new problems is often more ambiguous less structured settings (hence riskier (the definition of Venture) the lack of structure and often scarcity (in smaller budgets, and less job security) enables a smaller team to achieve faster. The intensity of identifying such a problem, developing the passion for it, executing a solution unhindered, and aligning incentives to the achievement of the right solution for the problem all exist outside the normal corporate setting.

Increasingly, though, corporates are looking for new ways to innovate and have engaged with startups, especially following McKinsey’s development of the three horizon approach for corporate growth through innovation.

Through this, companies have a few options outside of innovation at the core which include:

1. Investment in ventures (through Corporate Venture Capital) or other forms of M&A
2. Co-creation with startups through partnerships or other activities
3. New business building or venture building

It is our position that venture building is often the better way to develop horizon 3 opportunities as it is the best way to align corporate strategy and assets with an innovative new business that can yield significant revenue and new opportunities for the corporate. But, if this has all been strategized and clear, why aren’t companies achieving the desired success from pursuing these opportunities?

When exploring investment through CVCs there has been a large amount of research that has been done on both where the gaps are between CVCs and regular VCs as well as how corporates should try to close these gaps. Partnerships are often spoken about less, but we have seen based on our research and experience that the need for startups to show quick results as opposed to the corporate for whom early partnerships might be too small to have enough impact to drive the corporate momentum to match their needs.

As a venture builder, we are more focused on those business opportunities that do not exist yet, or that would be better leveraging the corporate unfair advantage allowing the corporate to both have a significant business benefit while also having the governance controls needed to manage its risk. Traditionally corporates have been building such businesses through complete investment and control. This has often been done with the aid of consultancies or product houses, and often this approach has led to limited success as mentioned above.

Our approach at Wright Partners and together with our partners MING Labs is to focus on investible ventures, different than the new businesses above in the way that they follow a playbook much closer to a venture in the wild. It starts small and has real founders who have the incentive and accountability to drive the approach to solve the problems while allowing the corporate the protections and optionality it needs in order to have better alignment and return from its quest for innovation. These ventures are set up for investment from external investors (who have their own requirements for governance and incentivized founders) hence are called investible ventures.

Investible ventures are the lowest opportunity costs for corporates in pursuing new horizon 3 (and sometimes horizon 2) opportunities to start with. They begin with an idea, or an approach that the corporates want to pursue, and continue with quick validation (often within two months) which includes a paid pilot — to mirror the approach that a founder would take re a venture in the wild. The venture is then created externally from the corporate with clear governance that manages risk for the corporate while allowing a founder to run the venture on a daily basis with autonomy and accountability.

The founder of such ventures is likely to be external to the parent corporate (with enough of a founder mentality but also the ability to manage the corporate as a stakeholder/investor) and sufficient upside as a tradeoff for initial capital, unfair advantage from the corporate and potential path to market/customers. From experience and research, such ventures have a larger than the normal corporate chance to succeed in building new ventures as well as a much higher chance to succeed than a normal venture in the wild.

At the same time, this model addresses many problems of corporate innovation, which are largely resulting from organizational issues. By placing a dedicated founding team with full day-to-day operational say at the helm, and letting them move independently, their likelihood of success is significantly higher. With the right governance framework that preserves this agility and ensures strong alignment to the general corporate interests, the strategic return on investable ventures is significantly greater than what is currently obtained by the corporate innovation spend out there.

Interested to learn more about investable ventures? Drop us a line: contact@wright.partners

Authors:

Ziv Ragowsky, Founding Partner at Wright Partners

Sebastian Mueller, Co-Founder at MING Labs

Stefan Jacob, Venture Partner at Wright Partners

Also published on https://minglabs.medium.com on March 16, 2022.