What Corporates Should (Not) Learn from VCs (Part 1)
Businesses need to innovate or die — that is a common saying. Depending on the business’s desire for innovation, four main strategies can be pursued.
As businesses further explore CoreX, business building and corporate venture building are becoming more relevant avenues for CEOs.
This is further supported by McKinsey research, which suggests that leaders are getting increasingly excited about venture building.
Venture building is also attractive for corporates as it is (as well as corporate venture capital) most similar to what venture capital firms do (with some caveats) and often creates an interesting interface with them (this is especially true recently where corporate venture building has been under pressure to find validation through venture capital investment).
However, it is important not to simplify the relationship and approach of the two entities, as they have different starting and ending points.
Corporations typically engage in venture building as a strategic extension of their core operations, leveraging existing assets to explore new markets or technologies. This venture building is an avenue for financial returns, and a strategic endeavor to fuel long-term growth, adapt to emerging technologies, and preemptively tackle industry disruptions. Unlike startups that begin from scratch, corporate ventures are often incubated within the robust ecosystem of a mature company, endowed with brand credibility, customer networks, and deep industry insights.
On the flipside, venture capitalists operate on a different paradigm. VCs thrive on high-risk investments, scouting for startups with explosive growth potential that can disrupt existing markets or create new ones. Their goal is clear: to maximize financial returns over a relatively short investment horizon. This involves a high-stakes game of identifying and investing in high-potential startups, nurturing them through strategic guidance and financial support, and eventually exiting at a peak valuation through an IPO or acquisition.
This dichotomy in approach raises pertinent questions: How can corporates, with their vast resources and industry clout, best navigate the innovation landscape differently from VCs? What unique strategies can they employ not only to compete but also lead in the creation of transformative solutions? And, importantly, how can they leverage their inherent strengths while learning from venture capitalists’ agility and risk-embracing nature?
As we delve into these questions, it becomes imperative to explore not only the contrasting approaches of corporates and VCs but also the unique advantages that corporates hold in the venture-building arena. By examining these facets, corporates can refine their strategies to harness innovation effectively, ensuring they remain at the forefront of their industries in an increasingly competitive market.
This exploration sets the stage for a deeper understanding of the inherent advantages of corporate venture building and how corporates can learn from the venture capital model to enhance their own innovation processes. We will unravel these layers as we progress, offering actionable insights for corporates aiming to enhance their venture success rates and establish a formidable presence in the innovation ecosystem.
Corporate / Venture Capital Comparison: A Strategic Divergence
The innovation landscape is starkly delineated when viewed through the lenses of corporates and venture capitalists (VCs). Both aim to foster groundbreaking technologies and ventures, yet their paths diverge significantly regarding strategic focus, risk tolerance, and operational methodologies. Understanding these differences is crucial for corporates to identify the opportunities and challenges they face in venture building compared to their VC counterparts.
Strategic Focus and Objectives
Corporates typically approach venture building with a strategic lens that aligns with their business objectives. This strategic alignment ensures that new ventures not only contribute to the company’s financial health but also reinforce the corporate brand, sustain long-term growth, and pay other strategic dividends. For example, a tech giant like Google develops ventures that complement its existing ecosystem, enhancing its market offerings and competitive edge.
In contrast, VCs are driven by the potential for outsized investment returns. They focus on scalability and exit strategy — often within a 5–10 year timeframe. VCs are less concerned with how a new venture aligns with a particular industry or existing business and more with the startup’s potential to capture market share and achieve rapid growth quickly; no matter where the pivots might take them.
Risk Tolerance and Investment Philosophy
Venture capitalists are synonymous with a high-risk, high-reward investment philosophy. They spread their risks across a diverse portfolio of startups, knowing that while many fail, a few will achieve exceptional returns. This risk tolerance allows VCs to invest in unproven technologies or business models with the potential to disrupt markets.
Conversely, corporates generally exhibit lower risk tolerance in venture building, given the repercussions a failed venture might have on their established reputation and operational stability. Corporations prefer to invest in ventures with a potential path to integration with their current business models and markets, where they can exert more control and predictability over outcomes.
Operational Approach and Resource Allocation
VCs excel in rapid scaling. They are adept at identifying startup growth levers and pushing them toward quick market penetration and expansion. They provide capital, strategic advisory, networking access, and operational expertise to swiftly transform a startup’s innovative idea into a viable, market-leading entity.
On the other hand, corporates often have abundant resources but face challenges in agility and speed due to their larger size and more complex bureaucracies. However, they have the advantage of leveraging existing infrastructures, such as established R&D departments, customer service networks, and marketing channels, which can provide new ventures with a significant headstart over VC-backed startups.
Market Entry and Scaling
VCs encourage their ventures to grow fast and capture market share, often prioritizing speed over efficiency. This growth-first strategy can be risky, but high-speed scaling is critical in environments where being first to market can determine a startup’s long-term success.
While possessing the resources to scale, corporations often take a more measured approach. They might look to start new ventures within geographies where they can confer a starting advantage and would often focus on making ventures viable before supporting larger-scale roadmaps.
Conclusion: Same same, but different
While corporates looking to innovate increasingly see themselves using the VC playbook, there are distinct differences in goals and approaches that need to be considered. Corporate offices “playing VCs” often make decisions that do not leverage their distinct strength and do not lead closer to goal achievement. Similarly, not taking a look over the fence and learning venture building and investing from consultants, instead of VCs, will force them to learn many expensive lessons.
In part two of this article, we will elaborate on what corporate can and should learn from VCs and where they should not aim to be too influenced. In those details, a nuanced picture forms that clarifies the lines that make a corporate venture outfit successful.
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:
Sebastian Mueller, Co-Founder at MING Labs
Ziv Ragowsky, Founding Partner at Wright Partners
