Structure Beats Chaos in Corporate Venture Capital
Why professionalism can outperform opportunistic approaches
Corporations are maligned for conducting “innovation theater” instead of taking serious approaches to working with external partners. CB Insights even created an infographic describing eight ineffective patterns of corporate innovation, including pilgrimages to Silicon Valley, adopting tech jargon, and launching an accelerator. Corporate executives often make excuses for these stereotypical behaviors, claiming they are taking it slow.
But while many large companies prefer to start innovation efforts opportunistically, even the earliest stages of innovation programs can be conducted thoughtfully and professionally. In other words, even programs that “crawl, then walk, then run” can be operated in an organized fashion to make the best decisions. There are five main hallmarks of professionalized efforts providing the potential to improve deal selection:
1. Reviewing opportunities in the context of overall corporate goals
2. Reviewing opportunities in volume
3. Reviewing opportunities in depth
4. Reviewing opportunities over time
5. Reviewing opportunities as part of a portfolio
1. Contextualize Goals
Intended Benefit: target transactions with the greatest potential relevance to your parent corporation
The simplest principle of professionalized innovation programs is to compare every potential deal to corporate goals. Does the proposed transaction (whether it is an acquisition, commercial deal, or investment) support the overall direction of the corporation, as articulated by the CEO and the board of directors? For example, can the innovation relationship allow the corporation to enter a new business, or defend an existing leadership position? Is there something potentially important for the corporation to learn? If the answer to any of these questions is “yes,” then the deal may be in scope. If the answer is “no,” then the deal is probably not a strategic fit.
There are many reasons why corporations might pursue deals that are out of scope strategically. For example, being seen as an active deal-maker can be correlated with individual power in certain companies. In others, lack of clear direction from senior executives may create ambiguity about what is a fit. In some cases, innovation professionals may even complete transactions out of habit. But none of these rationales increase the likelihood of strategic impact.
Managers of professional programs ensure each transaction has relevance and that the corporation’s CEO would be satisfied with the answer to the question, “why are we doing this deal?” In ad hoc, or unprofessional programs, innovation team members just do the deals they like, instead of deliberately searching for transactions that can help the corporation survive and thrive.
Requirement: evaluating transactions for strategic fit demands clearly articulated corporate goals
Evidence: deal review committee that compares potential deals to corporate goals as part of the transaction approval process
2. Increase Volume
Intended Benefit: increase chances of seeing the best possible targets
Professionalized programs review opportunities in large volumes, even if they don’t complete a large number of transactions. In fact, many “serious” programs cap the number of possible deals per year, and also aim to complete less than 1% of the total deals reviewed. This is the principle of selectivity: better decisions are driven by having a lot of choices. Most professional programs with which I am familiar review more than 500 opportunities per year to complete less than a handful of deals.
As an example, if I show you one color blue and ask if you like it, you could say yes or no. But if I show you the 35 shades of blue in the chart below, you can pick out the best match for the room you are painting.
While there may be no “perfect” color of paint for a room, there might be an optimal external partner for innovation transactions because of market positioning, technology leadership, or team composition. Thoroughness allows the corporation to see as many opportunities as possible, before committing to a single partner.
Requirement: generating high volumes of potential deals requires an established reputation, sourcing relationships, and a team that can process the deal flow
Evidence: review 500 opportunities per year or more
3. Go Deep
Intended Benefit: avoid closing deals with fatally flawed targets, and incorporate risk assessments when structuring deals
My first boss explained due diligence to me very simply: it’s the entrepreneur’s job to tell us a good story. It’s our job to do the homework and verify that the story is true.
Professional programs take diligence seriously, even for very early stage external partners that may have limited operating history. Diligence includes thorough assessments of key risks: market, people, technology, and finance. Ultimately, it is an objective assessment of these risks that allows innovation professionals to set terms — especially pricing — to compensate the corporation for the risk of working with a smaller external partner. Of course, when a “smoking gun” is uncovered during diligence, the transaction can be avoided altogether.
On the other hand, there is an appropriate depth of diligence for different types of transactions: business development deals are a lower commitment than venture capital investments and thus should require less diligence. Similarly, venture capital investments are a lower commitment than acquisitions, and again should require less diligence.
Requirement: in-depth diligence necessitates a consistent approach to investigating potential transactional targets, and a team that can perform the work and summarize the findings to decision-makers
Evidence: standard diligence request list
4. Measure Over Time
Intended Benefit: avoid closing deals under pressure, with insufficient data
One of the most uncomfortable feelings for any dealmaker is the “gun to the head” moment when presented with an exploding offer: close this deal now, or it will go away forever. Sometimes the target company really does have other offers and will disappear, but not always. In many cases, waiting and watching is possible, and can improve decision-making through the introduction of more data. Very few decisions are improved by excessive rushing, especially investments and acquisitions.
Tracking deals allows innovation professionals to watch a target’s performance over time. This is often the best form of diligence, because you can compare promises to actual results. Disciplined, professional programs implement simple processes to track results over time, including note-taking in meetings and the use of a shared database. If an innovation team does not use a tracking database, it is a dead giveaway that the program is ad hoc.
Requirement: deal tracking requires a shared database resource and a process for translating meeting notes into usable electronic format
Evidence: populated deal tracking database used by the entire innovation team
5. Build a Portfolio
Intended Benefit: close sufficiently diversified transactions, increasing the chances of delivering transformational value to the parent corporation
Portfolio management is perhaps the most advanced sign of a professionalized program and hearkens back to the first principle: comparison to corporate strategy. But while contextualized goals are useful on a deal-by-deal basis, portfolio approaches require a wider lens and a greater emphasis on long-term planning. Dealmakers can sequentially execute business development transactions, minority investments, and acquisitions, but professionals think in terms of entire portfolios of deals that address multiple types of business problems for the parent corporation. This requires planning first, monitoring, and course-correcting as the plan unfolds. Portfolio builders also deliver additional benefit by avoiding concentration risk.
Professional portfolio managers build — what else? — a portfolio model. This model shows a projected size and pace of transactions that is nearly always wrong, but presents a budget and sets expectations with the c-suite. By updating this model based on the actual performance of the portfolio, innovation professionals can update priorities as needed, preparing better for requests from internal and external stakeholders.
Requirement: building a diversified portfolio of innovation transactions necessitates ongoing review of previously completed deals and identifying complementary opportunities in scope with corporate strategy
Evidence: portfolio model, updated quarterly
In her article Ad Hoc Innovation is a Business’s Worst Enemy, Serenity Gibbons notes that “companies that pursue piecemeal attempts at innovation aren’t really ‘investing’ in innovation at all.” By adopting the above hallmarks of professionalized innovation programs, you have the opportunity to move your program past ad hoc approaches and innovation theater.
This article originally appeared on Forbes.
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Scott Lenet is President of Touchdown Ventures, a Registered Investment Adviser that provides “Venture Capital as a Service” to help corporations launch and manage their investment programs. Touchdown’s Philadelphia-based CEO David Horowitz contributed to this article.
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