How to think about Corporate Venture Finance & tips for getting your growth projects funded

Behind every venture, there must be a solid financial story

Corporate Ventures, be it a buy/ build/ partner play are cash hungry activities. They’re also incredibly sensitive to inertia and funding delays. So you need to have a strong financial rationale, infrastructure (to fuel fledging opportunities) and the systems or partners in place to scale them quickly.

They represent new revenue growth that will become material parts of your group performance in years to come or strategic enablers to that end. These are higher risk investments that will take a number of years to pay-off and should be run in a portfolio to maximise the chance of returns off-setting losses.

The companies we have worked with that can really unlock opportunities win by scaling or killing ventures at speed by connecting their financial teams with their innovators.

In a previous life when I worked in M&A they used to say “Time Kills Deals”, and it applies Corporate Ventures.

Success depends on how fast you can identify the customer problem/ need, create the Proof of Concept, build the Minimal Viable Business, Scale and hit free cash-flows (sustainably!).

With Covid-19 the fundamentals remain the same but success depends on how fast you can adapt your rationale to the new market conditions.

Key areas where your venture finance can go faster:

Funding

Corporate venturing isn’t a luxury for cash-rich companies, it's an essential activity to ensure that you have a sustainable, growing business.

Company Self-test:

1. Are you setting aside money for scaling corporate innovation annually?
2. How fast can your company scale a new opportunity?
3. Are budgets siloed & promote duplicate activity?
4. Are your Corp Dev/ Strategy team talking to your sales teams or just buying new companies and telling sales to work it out?

Funding methods:

1. Cash investments (balance sheet investment/disposals or cost-cutting)
2. Customer funded is a low cash method that relies on winning work in order to build the offering project to project
3. Debt, take on debt to fund the activity and paydown with the activities’ cashflows/group operating cashflow
4. Partnerships, share the investment with a customer/ supply-chain partner

Project Sponsor — Tips for getting your project funded:

1. Know your organisation’s financial position & tell the story of how this will become a key part of your future growth story
2. Know your organisation's maturity, if partnerships are new reflect that in your risk planning.
3. Know your Company’s Investment KPIs (Payback, ROI etc.)
4. Are there any historic/ duplicate versions of this project? Can you learn from them / merge with them?

Incentives — if you don’t incentivise it no one will do it

When building new ventures incentives often get lost but the threat of failure remains high and if there are no cash rewards, why risk it?

Company Self-test:

1. Are you rewarding success?
2. Do you limit rewards? If someone can launch a venture and make you £100m will their annual bonus stay the same as if they sold a £1m deal because that’s the group limit?

Incentive Methods:

1. Revenue Share
2. Milestone Payments
3. Shares

Project Sponsor — Tips for getting your project funded:

1. Take accountability for targets & design short-term wins to prove the opportunity

Design your investment board to handle short and long-term growth

Its time for your monthly investment board, you’ve been finessing your business case for weeks and building support across the organisation. The idea is excellent and will deliver a key new capability and you have identified your first new customers but… your payback period is 5.1years and your investment board requires in year payback. Project Rejected.

Company Self-test:

1. Do you have a growth roadmap that your organisation clearly understands?
2. Is your funding process transparent and easy to use for managers across your organisation?
3. Do you talk about short-term, mid-term, long-term opportunities and have a portfolio of activities you can quickly refer to?

Great investment boards:

1. Are incentivised and monitored to ensure they are funding projects and now sitting on the fence
2. Are involved year-round in the opportunities they fund
3. Contain temporary internal/external specialists to help inform them

Project Sponsor — Tips for getting your project funded:

1. Build a coalition of support, brief, brief, brief, communicate, lobby, lobby, lobby. Organisations are political systems, don’t fight them, work them.
2. Share materials ahead of the board, don’t turn up and surprise the attendees with your request, ensure that everyone understands what the ask is.
3. Give them options on how to pay for it with the associated trade-offs.

Business Case Parity, don’t just win funding and put it on a shelf, make it a living document that evolves and teaches you how accurate your projections are

Company Self-test:

1. Can your innovation teams articulate the financial value of opportunities?
2. How often do you review performance against the plan for venture investments?
3. Are your teams creating projections just to get funding?
4. Do you have an open culture that can discuss when projections don’t pair with reality?

Great Business Cases:

1. Simply tell the story of the customer problem it solves & why your investment board should back it
2. Are living documents that evolve with customer feedback & validation
3. Are standardised and easy to create (don’t have your top talent spending most of their time making sexy business cases for opportunities that will never scale).
4. Are paired with a financial model that simulates, with scenarios, the venture performance
5. Financial models are recognised as simple simulations and do not become over-engineered black boxes

Project Sponsor — Tips for getting your project funded:

1. Where possible, talk to your customer and sell a POC/ gain a written commitment to ensure you have validation.
2. Use simple language, avoid hype/ buzzwords
3. Create a vision you believe in for where the opportunity can go and how it will improve the lives of your customers

Conclusion

As a company: establish a growth roadmap, learn from your investments & ensure the process to get cash is transparent and easy to use

As a project sponsor: ensure that your idea has support, is scalable and the financial requirements are clear / well thought through with contingencies.

Oh, how I could go on! in subsequent pieces, I will go on to detail the financial story of ventures in more technical detail.

If you need any help and would like to catch-up on how to improve your organisation’s venture governance/ how to get a new venture off the ground-

Please feel free to reach out to me via Oliver.Graham-Yooll@Sia-Partners.com

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