A corporate venture building dilemma: investment vs. control
Having founded my startup a few years ago, I am familiar to why founders go through the pain & grit to build their own company. The statistics around startup survival rates show that the risk is high, but the potential reward both financially & emotionally is also significant.
In my case, risk was defined by the amount of money I invested in the venture plus the opportunity cost in case the startup goes nowhere. The later relates to the fact that I earned no salary at the beginning & that when I committed to that specific idea I was instantaneously saying “no” to many other opportunities and potential career advancements. The reward was two-fold too; the first one was the attractive financial outcome of a potential exit. The second one was the freedom to chase opportunities as they appear, doing what I want and how I want it.
Once I raised capital from investors, I basically traded reward for reduced risk. I started paying myself a small salary and anticipated that more resources would increase the success likelihood of the startup.
This pattern of weighing risk against rewards was crystal clear in my mind… until I joined the arena of corporate venture building. Directly during one of my first projects, I was tasked with the creation of a startup for a blue-chip corporate client. I was immediately puzzled by the reasoning behind this endeavor.
Ultimately corporate decisions are also guided by risk against reward: if they don’t take risks and innovate they might be left behind and, in some cases, join the once-great-now-extinct corporate hall of shame. That’s why they invest in research and development, spend hard earned cash in mergers and acquisitions and start innovation programs. But my interest was more at a micro level, meaning, which reasoning my corporate client follows to decide if and how to found a specific new venture?
Having thought about it a lot, I believe at micro level corporates weigh investment against control. Investment is the level of capital, manpower & political will provided by the corporate to propel the venture towards exit, break-even or strategic relevance. Control is the possibility to steer the venture towards the strategic goals the leadership team has in mind while defining the boundaries of what can & cannot be done.
In the startup case, the risk/reward is typically shared between the founders and external investors. In a corporate venture building case, the investment/control can be shared between the corporate, an empowered founder team and also external investors.
I am still in the middle of the corporate decision-making process but wanted to share with you the scenarios we are using to guide the discussions on how to structure the new venture. But before I do, I would like to mention that the considerations of investment vs. control takes place at three different stages of the venture’s existence:
• Incubation: develop & validate idea
• Acceleration: validate business model incl. product, operations & customer acquisition (find the winning formula)
• Growth: replicate the formula to grow exponentially
Based on that, three main scenarios are being considered to found the new venture.
Scenario 1: Control & Grow
- Full investment & control during incubation & acceleration
- Shared investment & control during the growth stage
Per definition, the incubation and acceleration stages are less capital intensive and is the moment when key strategic decisions that shape the future business are made. In these stages, the corporate is interested in maintaining the full control of the venture while absorbing the whole investment. Only when they enter the capital-intensive growth stage it becomes necessary to “share the burden” with other institutional or strategic investors. This scenario is suitable for ventures of high strategic value, especially the ones leveraging core assets and know-how of the corporate mothership.
Scenario 2: Spread the Bets
- Lower investment & control during all stages
In this case, the corporate initiator empowers a founder team and joins the project almost like an external investor would do at Seed and Series A of a startup. They agree on a broad vision, provide the funding and retain a part of the shares with shareholder meetings in between to track progress. Beyond that, they let the founder team do their thing. External investors can join at any funding round to share the investment tickets. The corporate would have lower control and investment from the get-go and can increase their influence only when new funding rounds are required or via an acquisition offer. This scenario is suitable for ventures in which the corporate can function as the first client or use their network to manufacture, market or distribute the product or service.
Scenario 3: Build, operate & transfer
- Lower investment & control during incubation & acceleration
- Full investment & control during the growth stage
The venture is initially built by a founder team or external partners (often a consultancy). Only once they successfully finalized the incubation and acceleration stages, the corporate has the right or obligation to absorb the business. Differently than scenario 2, the corporate gains stronger control of the trajectory of the business during its initial stages by defining how a “transfer” event looks like. The investment necessary to put together a strong founder team is reduced by the reward of a pre-defined & short term exit event. The initial investment can be further reduced by the participation of Business Angels, also motivated by a clear path to exit and access to a new source of deal flow. This scenario is suitable for ventures closely linked to the core business of the corporate and where speed & excellence of execution is key.
There is obviously no right and wrong. Each scenario can make sense according to the end goal of the corporate. Furthermore, there are surely new scenarios and variations of the above. What is important in my opinion is to openly discuss which road to take. If the client can’t discern the alternatives and consequences, you will risk a “best of both worlds” mindset where expectations regarding investment & control don’t match. If that is the case, you will be up for a tough ride.