Pop Quiz: Should Your Corporation Start a Venture Capital Program?
Over the past three years, we have met with several thousand executives, board members, and innovation “change agents” from over 250 corporations. The majority of these firms are Fortune 1000 companies from diverse industries including finance, professional services, education, energy, telecommunications, information technology, media, healthcare, transportation, hospitality, real estate, retail, consumer packaged goods, and agriculture. Almost all of them want to talk about whether or not to start a corporate venture capital effort, if they haven’t already.
Corporate venture capital activity is at an all time high, but most companies still don’t have an active program. According to Global Corporate Venturing, in 2016, 965 programs were active world-wide, up from 472 in 2012. As a result, many corporations may be trying to decide whether a corporate venture program makes sense.
The following quiz can be part a self-assessment process to help your organization determine whether a corporate venture capital program should be part of your overall approach to innovation.
You should take this quiz if you are a senior executive in the company, a member of the board of directors, or someone with direct responsibility for innovation.
As honestly as possible, answer “yes” or “no” to each of the following questions:
- Does your firm aspire to be a leader in its industry 10 years from now?
- Do you desire to adapt your company’s culture to be more innovative and prepare for the future?
- Do your CEO and senior leadership team express that innovation is a core value of the corporation?
- Does your company embrace external innovation? (versus a 100% internally focused R&D culture)
- Do you believe that startups are affecting how your core products and services are perceived by your customers?
- Do you believe that relationships with entrepreneurs and venture capitalists can be beneficial to your company?
- Does your corporate culture reflect the belief that business relationships should be mutually beneficial and balanced?
- Has your corporation completed one or more business development deals with a startup in the past year?
- Has your firm completed one or more M&A transactions or minority investments in the past year?
- Does your firm have $1 billion or more of cash on its balance sheet, or generate $100 million or more of free cash flow annually?
How to Score & Interpret Your Results
Give yourself one point for each “yes” answer.
If you scored 9 or 10 — you should consider starting a corporate venture capital program, because your firm likely possesses the resources and the aptitude to benefit from the activity.
If you scored 7 or 8 — your company may benefit from a corporate venture capital program, but there may also be some impediments to launching the program or sustaining it over the long term.
If you scored 6 or less — corporate venture capital may not be right for your company at this time, as there could be several barriers to launching and sustaining a program at your firm.
Here’s how to think about your score:
Questions 1 and 2 reflect your organization’s preference toward long-term vs short-term thinking. Corporations focused exclusively on short-term results should not engage in venture capital, which is an extremely risky, illiquid, and long-term activity.
Questions 3 and 4 demonstrate the cultural importance of adaptation and change at your company. If you answered “yes” to these two questions, your senior leadership and core innovation team likely recognize that the answers your company needs are not already inside the walls of your organization.
Questions 5 and 6 reveal whether the firm maintains a learning orientation, recognizes the networking value of the venture industry, and whether senior management is in touch with the disruptive threat of startups.
Question 7 shows whether your company has the mentality to engage productively with startups and other venture capitalists. While many large companies are accustomed to bullying anyone who isn’t a true peer, the entrepreneurship sector operates on the principles of alignment of interests and mutual benefit.
Questions 8 and 9 highlight whether your company has any recent experience engaging with startups. A business development track record is especially important, as corporate VCs who can deliver commercial agreements with their portfolio companies often help drive revenue and prove their value as investors. M&A teams often have the transactional nature and diligence experience needed to understand the financial discipline of venture capital. These are highly complementary corporate development functions for a corporate venture capital team.
Question 10 examines whether your company has the financial resources to engage in venture capital. Because VC is risky, illiquid, and long-term, the financial assets deployed against the program should be a small percentage of available cash.
There are many complex factors that determine whether a venture capital program would be appropriate for your corporation, but the considerations above are a great way to start the discussion.
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