Managing Partner at Stacked Capital, an early-stage technology fund focused on fundamental investing.
Despite success stories (e.g., Google and Android or Apple and NeXT), corporate ventures often fail (e.g., Quibi or American Express's acquisition of Revolution Money) due to large organizations' inherent lack of agility in the face of innovation. Successful ventures require adaptation and embracing disruption.
Traditional approaches like internal R&D (limited scope) and reactive M&A (high cost) often fall short.
Internal R&D: This is frequently limited by existing viewpoints and focused on incremental improvements due to internal mandates. When conditions are right, we've seen great things happen, such as the original Bell Labs and Lockheed Martin's Skunk Works.
Reactive M&A: Acquiring companies can be costly. Integration challenges, cultural clashes and the inherent risk of buying past success instead of future potential are just a few factors contributing to the high failure rate. One can argue that you can buy your future once you have enough capital—just look at Meta absorbing WhatsApp and Instagram.
Established companies can leverage corporate venture capital (CVC) to drive innovation. CVC allows them to access promising ideas, trends and talent. However, achieving success with CVC has challenges.
Ownership
Approval politics often slow down the process due to conflicting departmental interests. There's often a misalignment with corporate development objectives, where CVCs prioritize future growth and partnerships, conflicting with the immediate risk-weighted acquisition goals of corporate development.
Effective internal communication becomes crucial for CVCs, as they must condense hours of research into clear and concise information to communicate complex decisions to various stakeholders. Moreover, risk aversion ingrained within corporate culture may discourage employees from taking ownership of risky ventures, ultimately hindering the success of CVC initiatives.
Human nature often hesitates to take ownership of decisions until a positive outcome is evident. This reluctance contradicts the proactive approach required for CVC's success.
Square Pegs, Round Holes
Some issues with traditional hiring practices include:
• Limited Search: Search is restricted to individuals with experience at similar corporations, neglecting diverse backgrounds and skill sets valuable for innovation.
• Degree Delusion: Degrees are overvalued, overlooking diverse expertise essential for success.
• Internal Promotions: Internal promotions may prioritize loyalty over specific skills.
Hiring based on these practices can create innovation roadblocks. Teams lack the crucial skills and diverse perspectives needed for success. This fuels an unsupportive environment. Internal champions, lacking relevant expertise, may resort to micromanagement, which can hinder true progress. This is often fueled by the dangerous yet often-rewarded corporate mindset: "Time spent equals value."
The Innovation Work Fallacy
• Misaligned Expectations: Pressure for immediate results conflicts with early-stage ventures' long-term, unpredictable nature.
• Pressure To Deploy Funds: This can lead to compromised due diligence and lower-quality investments.
CVC's potential advantage is the execution of a long-term vision. Unlike traditional funds, they can prioritize strategic alignment and quality over meeting spending and return targets. Unfortunately, a true long-term perspective is rarely seen among CVC units. A genuine commitment involves:
• Political Will: Secure sustained support from leadership for CVC's decisions and their approach to portfolio companies.
• Internal Support: Encourage business units to collaborate with CVC and become potential customers for promising ventures.
• Hiring Rethink: Reassess traditional hiring practices to attract diverse talent needed for innovation.
Companies acknowledge internal alignment is crucial for innovation, but a gap exists between their expectations and reality. This is further amplified by the starkly different risk profiles involved.
Playing With House Money
Both traditional and CVC settings often face a lack of personal financial accountability. Unlike fund leaders answerable to investors, many VC professionals haven't managed their own money, leading to a "house money" mentality. This, coupled with a lack of understanding of the complexities and responsibilities of raising capital and running a business, can hinder financial discipline and potentially impact investment decisions.
Flash In A Pan
Born in booms, many CVC units vanish with downturns, leaving investments and the innovation community unsupported. Companies need a long-term view to ensure CVCs can operate during hardships, supporting existing investments and the ecosystem, and they must build a long-term presence by moving beyond a reactive approach to establish consistent, reliable participation.
Making It Someone Else's Problem
While outsourcing innovation seems easy, it can hinder long-term success in the following ways:
• Conflicts And Misaligned Goals: External groups undeniably have different interests.
• Superficial Expertise: External teams may lack a deep understanding of individual companies' challenges.
• Divided Attention: Managing multiple clients dilutes the time and expertise available to each company. The solution is not for the consultant to spin up a dedicated cell.
• Short-Term Focus: An "on/off" innovation team lacks strategic direction and long-term vision.
• Accountability: Outsourcing fosters blame-shifting, hindering internal learning and accountability.
• Building Internal Capabilities: Companies must commit to building internal resources and expertise. Developing a team is essential for long-term success and strategic alignment.
That final point may seem challenging initially, but it fosters ownership, accountability and strategic direction, leading to a more sustainable and successful innovation path.
The Untapped Potential Of Corporate Venture Capital
While many CVC units struggle, the potential benefits are undeniable. A well-run CVC can maintain or expand market share by staying ahead of the curve; project an innovative image to customers and potential partners; and drive long-term growth by fueling new business opportunities.
However, numerous self-inflicted challenges hinder success, including:
• Corporate Culture Bias: Resistance to new ideas and risk-taking
• Poor Political Will: Lack of commitment and support from leadership
• Misaligned Incentives: Short-term pressures conflicting with long-term goals
• Limited-View Hiring: Recruiting practices prioritizing the wrong skills and experience
Despite these challenges, successful CVC units do exist. They are often characterized by strong leadership (a central figure or small group championing the CVC's mission), operational autonomy (the ability to operate with some freedom from bureaucratic constraints) and effective communication (dedicated individuals bridging the gap between the CVC and the broader company).
By fostering a culture of innovation and overcoming internal roadblocks, companies can unlock the true potential of CVC units. This can go beyond financial gains, offering employees a sense of purpose, challenge and ownership in shaping the future of the company.
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