There is no doubt that collaborating with startups is essential for realizing a company’s strategy towards innovation and growth. An increasingly popular and highly effective way to gain access to the startup ecosystem is corporate venture capital, where corporate funds are invested directly in external startup companies. Sixty-three percent of Forbes Global 500 companies have utilized corporate venture capital1 and the number of new corporate venture capital firms making first-time investments reached record levels in 2017.2
Why do companies opt for this approach? There are three important advantages:
- Speed: Being independent from the larger parent enterprise, a corporate venture capital organization can make investment decisions faster.
- Commitment: The corporate venture capital organization can show commitment to startups and maintain a close, long-term collaborative relationship regardless, for example, of changes in management or restructuring at the parent organization.
- Synergy: The corporate venture capital organization can support startups not only through the assets and expertise of the parent enterprise, but also through the other startups it has invested in, to create a strong network effect and drive additional synergies beyond the parent organization itself.
A new trend of startup investment by strategic buyers
In setting up any new business it is necessary to balance speed and risks. The rise in the use of corporate venture capital in driving new business growth draws attention to the importance of portfolio management and other best practices in startup investments:
Shift to new business: Traditionally, companies acquired targets similar to their own organization in order to drive synergies. But increasingly—and especially among companies highly active in mergers and acquisitions—the majority of investments are made with digital in mind.3 In today’s digital deal, the acquiring company pursues technologies or capabilities it does not possess. This deliberately moves the parent organization into uncharted territory, which brings a level of uncertainty but also huge potential growth.
Prioritize startup growth: Large enterprises might push their own culture and agenda, which can be detrimental to the flexible nature and the potential of startups. Successful buyers start with identifying cultural similarities that could serve as a foundation for successful collaboration, while understanding and mitigating any cultural gaps.4 Successful buyers then prioritize the growth of their startups, by providing the assets and capabilities needed to support them.
Focus on capital gains due to strategic returns: Successful buyers focus on capital gains through increased enterprise value of the venture business. Capital gains due to strategic returns are not immediately visible, so it takes time to verify the effect of corporate venture capital. Recent research, however, shows that the stock performance of companies highly active in corporate venture capital beat its listing index by 42 percent since the establishment of the venture capital program.5
Challenges exist but can be overcome
The essence of collaboration is to create value beyond the sum of the parts. While corporate venture capital operations come with their unique set of challenges, our experience helping companies set up their corporate venture capital approaches reveals three key success factors that can maximize the chances of success:
- Access broadly, judge promptly: Successful corporate venture capital operations identify startup opportunities globally and can make decisions promptly through quick and holistic due diligence, leveraging analytics and artificial intelligence, in line with the time expectations of startups.
- Give and take: At the strategy planning stage, clearly define the assets and capabilities to be provided to startups (“Give”), but also set clear expectations for the new venture aligning with the overall direction of the business (“Take”).
- Scale up with hands-on support: Beyond financial support, it is key to plan business growth and formulate a hands-on support system. Talent plays a critical role in this. Three out of four executives (78 percent) recognize that their company cannot rely on current capabilities and must hire digital leaders into their M&A organization.6
Depending on where you are as a company, Accenture Strategy can help accelerate the corporate venture capital initiative you already started or provide corporate venture capital as a service. Accenture Strategy utilizes a comprehensive set of assets and experience to help companies move quickly to the New, now.
1 500 startups and INSEAD, how do the world’s biggest companies deal with the startup revolution?, 2016.
2 CB insights, corporate venture capital report, 2017.
3 Accenture strategy, M&A: From art to science, 2017.
4 Accenture strategy, david-goliath culture gaps, 2016.
5 Touchdown VC, the corporate capital correlation: one year later, 2018.
6 Accenture strategy, M&A: From art to science, 2017.