Measuring Success in Corporate Venture Capital

How to identify KPIs for strategic investment programs

Corporate venture capital and institutional venture capital (also known as “financial VC”) are sometimes similar and sometimes very different. Financial VCs largely have one goal: to generate superior financial returns for the fund’s limited partner investors. Corporate venture may have multiple goals: in addition to generating financial returns, “strategic” goals may include helping the corporation learn new industries and market trends, seeking start-ups to fill a product roadmap, or even sourcing commercial partnerships. Of these goals, the simplest to measure is financial return.

Measuring financial return is easy once a fund is complete. One tabulates the capital deployed in an investment or portfolio of investments, and compares it to the money returned on realizing an exit. The raw comparison provides a cash-on-cash multiple on invested capital (referred to as “MOIC”), and when the dates of these cash flows are included, an internal rate of return (“IRR”) calculation is generated.

On the other hand, measuring strategic return is challenging — there are very few frameworks to help corporate venture capitalists articulate strategic goals and measure them. So at the recent Global Corporate Venturing & Innovation Summit in Monterey, California, I led a session exploring best practices for identifying and measuring the strategic goals of corporate venture capital. The session leveraged my two decades of personal experience in corporate venture, as well as the expertise of our firm Touchdown Ventures. We also benefited from the insights of our audience, which included experienced and new corporate venture capitalists.

First, we brainstormed a list of possible strategic benefits that could be delivered by corporate investing. Here is the “crowdsourced” list we generated, in no particular order:

• Access to new technology
• Trend spotting and marketing intelligence
• Commercial relationships
• M&A pipeline
• Launching businesses in new markets
• Customer experience
• New business models
• Talent, recruiting, and training
• Disruptive investing and hedging
• Culture change
• Future proofing the business
• Branding/marketing the corporation as innovative
• Product roadmap
• Cost savings and efficiencies
• Supply chain optimization
• Freedom to operate in a non-regulated environment

Second, we voted on the top five most popular goals. The five objectives prioritized as most important were:

1. Access to new technology

2. Trend spotting and market intelligence

3. Commercial relationships

4. M&A pipeline

5. Launching businesses in new markets

Each corporation is unique, and while these were the five most popular objectives according to the people surveyed during our session in Monterey, other objectives may be more important to any one particular organization. It is important for each company to generate a comprehensive list of objectives and then prioritize the ones that are most important to its own circumstances.

Next, we discussed how to measure those goals by developing qualitative descriptions and quantitative key performance indicators (“KPIs”) for the five most popular goals. For each goal, we described the benefit to the company, but also translated that goal into quantifiable, measurable KPIs.

1. Access to new technology

• Qualitative: accelerate product roadmap, IP licensing, joint development
• Quantitative: number of new products introduced to market, number of patents in-licensed or out-licensed, number of external joint development partners, new revenue generated, or EBITDA (reflecting new revenues or cost savings from internal efficiencies)

2. Trend spotting and market intelligence

• Qualitative: insights on specific industry sub sectors, “road shows” to tech centers like Silicon Valley
• Quantitative: number of sector reports generated and shared with the corporation’s senior managers, the number of deals sourced and evaluated, number of contacts generated with industry professionals

3. Commercial relationships

• Qualitative: strategic benefit from deals executed with external partners
• Quantitative: number of agreements signed, number of pilots implemented, number of successful pilots, number of full commercial relationship implementations, number of business units engaged in external commercial relationships; revenue or cost savings from commercial partnerships

4. M&A pipeline

• Qualitative: de-risking of the M&A process through prior diligence (evaluating M&A targets at an earlier stage of development)
• Quantitative: number of acquisitions completed based on introductions from the corporate venture capital program; reduction in M&A price paid when including the price-averaging benefit of the venture investment

5. Launching businesses in new markets

• Qualitative: new business lines created leveraging start-up relationships
• Quantitative: revenue or EBITDA generated for the corporation from new lines of business launched, new customer segments reached, new geographic markets entered

Launching a corporate venture program from scratch can be daunting and setting up KPIs for the program’s performance is even harder. Note that it takes thought and analysis to translate goals into quantifiable objectives. It often takes more than one brainstorming session to arrive at key measures.

To summarize, the process consists of:

1. Brainstorm a list of possible business goals for your corporation that could be delivered by the venture capital program
2. Prioritize that list to the top five, most important goals
3. Describe each goal in qualitative and quantitative fashion, creating key performance indicators to measure the progress of your program

Here are some additional key takeaways we discussed in the session that may help guide your corporate venture program:

• Before focusing on deal sourcing and deal evaluation, set-up specific goals and KPIs for success of the overall corporate VC program or fund
• The strategic benefits of corporate VC provide optionality and can provide inputs to drive overall company strategy
• Goals can be measured in the short or long-term — include both and start with goals measured over a single year for a new corporate VC program
• Develop the right mix of quantitative (easier to measure) and qualitative goals for your corporation and its culture
• Make sure the first year strategic goals are achievable, as there may be an expectation to increase the goals in year two or beyond
• Make sure the executive team buys in on these goals and KPIs
• Review the performance of goals on at least an annual basis, but preferably on a twice per year basis
• Use your goal framework to educate new senior executives who join the company on why you are pursuing corporate VC and to demonstrate the success you have generated so far
• Financial goals, based on return on investment, should always be positioned as long-term (5+ years)

Remember each corporation is unique and the goals and associated KPIs must reflect what is most important and “moves the needle” for your company.

We hope this framework helps with either the launch or construction of your corporate venture capital firm!

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David Horowitz is a Co-Founder and CEO at Touchdown Ventures, a Registered Investment Adviser that manages venture capital funds for large corporations.

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