Five Prerequisites Before Starting a Corporate Venture Program
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Starting a corporate venture capital (“CVC”) program is a significant undertaking for any organization. Many executives indicate that the reason they are interested in starting a corporate venture capital program is to change the corporate culture as part of a digital or innovation transformation. To achieve culture change, the corporation must be ready both “physically” and mentally. Here are five considerations to help you prepare, before starting a new corporate venture program:
1. Establish Clear Objectives
First, it is important to understand what are you trying to achieve with the new venture program. There are many potential benefits to a corporation in starting a CVC. A CVC program can bring market intelligence, new start-up commercial partnerships and help a corporate launch and grow new businesses. I wrote a blog post on Measuring Success in Corporate Venture Capital providing a framework for how to think about setting and measuring strategic objectives for corporate venture programs.
2. Understand Your Organization’s Risk Profile
Venture capital is one of the riskiest forms of investing (note: our inspiration for the name of our blog, Risky Business). Any corporation seeking to invest in start-ups must go in with eyes wide open regarding the fact that venture capital investments can and will lose money. As discussed in my blog, Five Reasons Corporate Venture Capital Programs Fail, a best practice is to take a portfolio approach, to diversify risk. Most corporate venture capital investors seek to co-invest with other institutional investors, which allows risk sharing among investors in a syndicate.
3. Give Yourself Enough Time
On average, a venture capital investment can take 7 or 8 years to realize an exit, and seed stage deals usually take longer. So an investment made in year 5 of a program may not be acquired or go public until year 15. Organizations need to have the mindset that this is not a short term activity and establish expectations of the long term nature of venture capital investing. Practically speaking, educating the organization can help the success of the program.
4. Establish a Realistic Budget
Venture capital requires capital to invest in start-ups. We often get asked the question “how much is the right size for the first fund?” and the answer often depends on what stage of investment the corporation is focusing on (later stage venture investments can require more capital). Also a strategy of being a lead investor typically requires more capital than being a follow-on investor as part of a syndicate.
The budget should include capital for new investments and also reserves for follow-on investments in portfolio companies. A best practice would be to develop a model portfolio that allocates the capital between new and follow-on investments over the course of the life of the venture program. The budget should not only include the capital to invest in start-ups but the operating expenses to run the program, which would include the team.
5. Secure Executive Support
Corporate innovation expert Soren Kaplan writes in INC magazine about the correlation between innovation and executive support. He notes a report from Innovation Leader finding that “73% of innovation, strategy, and R&D executives say that leadership support is the biggest enabler of innovation. Over 55% of executives report that politics, turf wars, and a lack of alignment are the biggest barriers to innovation.” It is critical that the CEO and other senior executives on the management team are not only behind the venture program, but (per point 4 above) have made a long term commitment.
By addressing these five prerequisites you may be more prepared to build your corporate venture program and set up for success. Good luck!
David Horowitz is the CEO and co-Founder of Touchdown Ventures, a Registered Investment Adviser, that manages venture capital funds for corporations. Thanks as always to my co-Founder Scott Lenet who contributed to this article.
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