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.
Unless otherwise indicated, commentary on this site reflects the personal opinions, viewpoints and analyses of the author and should not be regarded as a description of services provided by Touchdown or its affiliates. The opinions expressed here are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual on any security or advisory service. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice. While all information presented, including from independent sources, is believed to be accurate, we make no representation or warranty as to accuracy or completeness. We reserve the right to change any part of these materials without notice and assume no obligation to provide updates. Nothing on this site constitutes investment advice, performance data or a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Investing involves the risk of loss of some or all of an investment. Past performance is no guarantee of future results.