Corporate Venturing
Requirements for a winning corporate venturing tool
A comprehensive guide to assess and benchmark corporate venturing tools needed for the new game of corporate venturing
Since I created the Venture Client Model in 2014 at BMW, it is gaining popularity among leading companies (BMW, Bosch, Siemens, Holcim,…) and academics (Passau, INSEAD, IMD, ETH,…). What ignited me to invent that new tool, instead of using old ones, were 5 requirements I defined as essential for a tool to enable companies to win the new game of corporate venturing.
A corporate venturing tool has to be able to …1) Identify known and unknown startup-relevant problems …2) Find, attract and adopt the best startup solutions quickly …3) Scale to plus 100 startups p.a. …4) Generate more strategic benefits than costs …5) Be able to measure the strategic output.
2003 was a game-changer for me. I decided to switch from running to triathlon. More than anything, the difference between these two sports is the dependence on tools, way beyond personal fitness. While running needs a few (if any) tools, they are mandatory in triathlons. You will not get admitted to the race without a bike, for example. Moreover, bad tools will likely get you disqualified. When your bike chain breaks, you are out. Winning with your generic 35kg city bike is not possible. Even for Jan Frodeno. So, picking the right tools, based upon the right set of requirements (bike weight, …) is a crucial part of the game for every triathlete.
Ten years later, I joined BMW. There, I experienced another game-changer. Corporate Venturing — the game of winning strategic benefits from the world’s best startups — was turning from a nice-to-have for just R&D to a must-have for the entire company.
I created a new coporate venturing tool at BMW — the Venture Client Model — because old ones did not meet the requirements to win the new game of corporate venturing.
In this story, I describe requirements and associated metrics to assess and select the tools needed to play the new game of corporate venturing. I developed these initially at BMW, yet they can be applied by any company. Some people know that none of the old tools met my requirements. Not corporate venture capital (CVC) and not corporate accelerators. I subsequently invented a new tool, and coined it the Venture Client Model of corporate venturing (see HBR). At this point, I want to emphasize that I invented the Venture Client Model, not as a criticism of old tools, but because they did not meet my expectations. (BMW has, by the way, a great culture that nurtures this type of re-thinking and questioning of the status quo.)
The new game of corporate venturing
Unless you have been living under a rock, you will have noticed that startups are no longer a nice-to-have. Startups have become a must-have part of your corporate strategy.
In the old world, corporations focused on startups just for transformational R&D. Over the last decade, the need for startups has grown beyond product innovation to become critical for the entire value chain. Today, startups have also become elementary for gaining speed and improving existing products and processes. And, for discovering and executing new exponential business models. Furthermore, the days are gone where startups only had strategic relevance for just a few large industries like pharma or IT, and herein for a selected few global players with large M&A pockets. In the new world, startups matter to any company in any industry.
In the new world, startups matter to any company in any industry, for any part of the value chain
To play the new game of corporate venturing — that is to be able to gain competitive advantages from startups across the entire value chain— you need tools. As this game has transformed, becoming more ambitious and strategic, your tools deserve a critical review. Do you have tools at all? If yes, do you have the right ones, and are they up to the complex challenges of the new game?
While I worked at BMW, I asked myself these questions. In 2013, I had identified the growing need for startups, and I started to assess if existing tools — in particular minority investments (aka corporate venture capital) and accelerators — would suffice for the new corporate venturing game. For this, I developed a series of requirements. I have refined these over the last years with multiple other corporations such as Holcim, Bosch, and Siemens, and also as part of my academic research with the universities of Passau, IMD, and INSEAD.
The requirements for a corporate venturing tool
I trust that the following requirements and associated metrics serve you to review and benchmark corporate venturing tools and to decide which are best for your company to play and win the new game of corporate venturing.
#1 Identify startup-relevant problems! A venturing tool has to be able to identify, even to anticipate problems that startups solve best. H1, H2, H3, … Hx problems. That includes problems you do not know about or you are unaware of its relevance. Any company has thousands of unsolved problems, and it is key for your tool to be able to filter out those that startups can solve best. Better than your own or internal resources, and better than incumbent partners. In addition, as if this prerequisite was not hard enough, the tool has to be capable of identifying unknown problems. This is of particular importance, as the nature of the startup ecosystem is to be predictive. Startups see problems others do not. And build solutions that, at first, might look like stupid ideas but then turn out to be exactly what was needed. This requirement entails that your tool is capable of telling what a startup is.
#2 Top startups! A venturing tool has to be able to find the best startups for given problems. That is, it needs to be able to spot the golden needles in the haystack of 50 million new entrepreneurial companies founded each year. One good indicator for startup quality is its valuation relative to competing startups. The higher the valuation of a startup, the higher the chances for obtaining the desired strategic benefit. Why? Because those startups own a more valuable intellectual property and can afford better resources, for example, more experienced teams and more sophisticated tools. Startups that are valued 30% lower than the average are probably not qualified enough to solve your problems. Today, top early startups are generally valued at a x30 to x50 revenue multiple. The average Series A funding is $15,6 million, according to Fundz. But, as if this was not hard enough, the tool has to be able to attract the best. Even if you are not BMW or Google! A tool that does not generate a spontaneous “Yes! When do we start?” from over 90% of those startups that have the potential to solve your strategic problems, will not do. And, even harder, the tool needs to quickly accomplish a high adoption quota of startup solutions. Otherwise, whatever problem you have identified, will be solved too late or remain unsolved. Then, no matter how great a startup you may have found, it will not make any impact on your company. A good benchmark for the adoption quota is 50% or higher. The adoption speed depends on the problem to be solved and should be below 6 months.
#3 Scalable to many startups! A venturing tool has to be able to solve many problems through startups. Your tool needs to be able to handle hundreds of problems — and thus startups — per year. It even needs to allow for one problem to be solved by multiple startups simultaneously. 5–10 startups p.a. does not cut it! Wow — does that sound like a lot? Sure it does. Yet, remember how the game of corporate venturing has changed. It is no longer about a few startups for R&D. Your company now needs to benefit from startups for your entire value chain. Managers that are concerned that 100 plus startups p.a. are too much to chew on are probably biased by the much lower number of startups that traditional tools can handle. Yet, these are not a benchmark of how many startups your company needs. When the train was invented in the 19th century, regulators were afraid that 13 km/h would be too fast for passengers. They were biased by velocities possible through traveling by horse and on foot. At BMW, I calculated that there are plus 20.000 startups of relevance. So, I needed a tool with significantly more power.
#4 Strategic Output > Input! A venturing tool needs to be able to generate a strategic benefit that surpasses the cost it takes to generate it. By a factor 3 or higher. In other words, the strategic output of the tool needs to be 3x larger than its input. Though this requirement seems pretty obvious, it is generally not considered. The strategic benefit refers to the competitive advantage the company generates through the startup innovation. For example, the startup technology enables a company to create a new product, or new business model, which generates new revenue and profits. The financial benefit (loss) refers to the money a company makes (loses) from trading startup equity. The focus of the tool should be on maximizing the strategic benefit. The financial benefit must be secondary, and should only be pursued if it does not come at the expense of the competitive impact. That is critical because first and foremost, the strategic benefit is the raison d’etre of corporate venturing. That is because the strategic benefit can not only be substantially higher but also because it impacts the overall company valuation. Owning startup equity does not move the needle on Wall Street. “… Wall Street ignores the [startup equity] gain…” confirms Fred Wilson, General Partner of Union Square Ventures in his 2008 blog post about Corporate Venture Capital and Google Ventures. But, how do you measure the strategic benefit? This leads to requirement #5.
#5 Measurable! A venturing tool needs to be able to measure both the input and the strategic output. To quantify the input is no rocket science. You just add up the cost for personnel, offices, technology, data, and external service providers. To measure strategic output, however, has been the holy grail for traditional corporate venturing tools. In 2018, David Mayhew, Chief Risk and Investment Officer of GE, told the Harvard Business Review: „It’s easy to measure financial returns, but nobody has cracked the code for measuring strategic returns in a meaningful, ongoing way.“ This last requirement is probably the most relevant one.
„It’s easy to measure financial returns, but nobody has cracked the code for measuring strategic returns in a meaningful, ongoing way.“ David Mayhew, Chief Risk and Investment Officer of GE
Conclusion
The described requirements and metrics for playing the new game of corporate venturing can hardly be accomplished by old tools such as CVC or corporate accelerators. This is not a critique of corporate venture capital teams, or of their advisors. Even a perfect CVC unit would perform poorly against these requirements because of inherent limitations. For example, it is not scalable to plus 100 startups per year. And it is impossible to invest in every startup whose solution has a strategic relevance. Not even Sequoia or Andreessen Horowitz get to invest in every startup they would want to. At BMW, this insight sparked my decision to re-think. To pursue a new approach. No matter how good your horse is, it will never fly. The outcome was a simple, yet powerful, idea that led me to create the Venture Client Model of corporate venturing.
Even a perfect CVC unit would perform poorly against these requirements because of inherent limitations. It is hardly scalable to plus 100 startups per year. And no investor can invest in every startup they would like to — not even Sequoia.
After I pioneered the Venture Client Model at BMW, where I created and managed the world’s first Venture Client unit (BMW Startup Garage), a large number of companies have followed suit creating their in-house Venture Client unit. Among these are global players such as Bosch, Holcim, and Siemens. I am seeing again and again that a good Venture Client Model meets all requirements with groundbreaking performance metrics.
Of course, not all Venture Client companies meet these requirements. Yet, this is because they are not good at Venture Clienting. They have implemented the Venture Client Model poorly. Just like athletes do not win their first race — even if they had the very best bike — companies also need time, practice and professional help to build up their Venture Client units so they turn into a powerful tool to win the new game of corporate venturing.
Of course, not all Venture Client companies meet these requirements. This is because they are not good at Venture Clienting. They need practice and professional help to build winning Venture Client competencies.
Summary
Since I created the Venture Client Model in 2014 at BMW, it is gaining popularity among leading companies (BMW, Bosch, Siemens, Holcim,…) and academics (Passau, INSEAD, IMD, ETH,…). What ignited me to invent that new tool, instead of using old ones, were a set of requirements I defined as essential for tools to win the new game of corporate venturing: to be able to gain competitive advantages from startups across the entire value chain. The requirements are …1) Identify known and unknown startup-relevant problems …2) Find, attract and adopt the best startup solutions quickly …3) Scale to plus 100 startups p.a. …4) Generate more strategic benefits than costs …5) Be able to measure the strategic output.
More Information
Find more information about corporate venturing, the Venture Client Model and corporations like BMW, Bosch, and Siemens that run successful corporate Venture Client Units at the 27pilots knowledge base.
