The Venture Capital “Chronoscope”
Corporate venture capital (“CVC”) began with high-tech information technology companies like Intel, IBM, Samsung, Qualcomm, and Comcast leading the way and defining the category. But new corporate venture capital units are now springing up in nearly every industry sector, and established units in non-tech sectors are becoming more prominent in the marketplace, too. According to Global Corporate Venturing, there are approximately 1,200 total corporate venturing units as of the beginning of 2016. But all this activity is still the tip of the iceberg, and in the next decade, we will see a further, dramatic expansion of corporate venture capital with the formation of hundreds of new groups.
Why is corporate venture capital expanding so dramatically outside tech? Is it because our economy is in a bubble? No, it’s because of something much more fundamental — that every sector is being disrupted by innovation, and big companies have decided to participate in and manage the disruption instead of waiting to be left behind. And the expansion we have seen to date is actually quite modest, with only ~10% of the Fortune 2000 actively investing in 2015.
Is it really true that every industry is affected by innovative startups? Let’s look at some of the most outlandish-sounding examples we can in traditional industries:
- Can startups impact how food and other consumer packaged goods are produced, marketed, or consumed? General Mills and Unilever wouldn’t be engaged in corporate venture capital if the answer weren’t “yes” — the rise of craft brands and the ability to navigate three-tier distribution has changed access for startups and created real disruption for CPGs.
- Is technology changing how consumers shop with retailers? Of course! Everything from beacons, to payment systems, to personalization using big data solutions, to last-mile delivery is shaping the future of the retail shopping experience.
- Within the world of transportation, we see a tangible example of industry upheaval with the very established business of rental car companies being affected by startups like Uber, Lyft, Zipcar and a virtual fleet of ride-sharing alternatives.
We can keep naming sectors, from waste management to heavy manufacturing, but these industries are all being changed by technology and startups. Whether the issue is defending existing markets from new entrants, positioning to capture emerging markets, or remaining competitive by managing supply chain or sales infrastructure, there’s no established company that needn’t keep up with the changing times.
In fact, the more “old school” the industry sector, the more its incumbent companies need the injection of outside innovation that venture capital delivers. In hindsight, it’s obvious why CVC started with high-tech companies: tech companies understand technology, and having been venture-backed themselves, they also understand venture capital. But it is the “low-tech” or “no-tech” companies that most need to be active venture investors, because in the year 2016, no industry is immune from the combined effects of technology and innovation. We see this quite clearly in the decreased average lifespan of how long a company stays on the S&P 500.
So how can an established corporation use venture capital to plan for the market disruptions caused by technology and startups? By seeing the future. It turns out the principal benefit of CVC isn’t financial return, but to inform your corporate strategy by showing you glimpses of the future — and it happens to be a nice bonus that you can do that with a profit center instead of a cost center.
How does venture capital show us the future? Through a unique combination analytical of breadth and depth. I call it the venture capital chronoscope. To understand how it works, we need to look at the way venture capital firms manage their deal flow process. It’s basically a sales funnel, but instead of trying to maximize the number of closed deals (to create efficiency and lower sales costs, as would be the goal in most traditional funnels), VCs purposely broaden the number of opportunities reviewed to maximize market intelligence, while holding closed deals to a relative minimum and increasing selectivity. When managed properly, this process is a machine that produces predictable results.
For traditional, institutional venture capital firms, those results focus on delivering better financial returns. For corporate venture investors, superior returns can also be accompanied by additional benefits: (i) more business development deals, (ii) more acquisitions, and (iii) perhaps most importantly, the ability to see the future of your industry before it happens.
BREADTH: Like business development organizations, venture capitalists review lots of deals, typically between 1,000 and 2,000 per year in the case of VCs. This volume allows VCs to spot trends by pattern matching against the raw number of deals seen. For example, when we see ten startups attacking essentially the same problem in a 3-month time span, certain trends are revealed — these companies are springing up at the same time for a reason. Seeing the entire field also allows VCs to identify best of breed startups, which is important when trying to pick a winner and maximize investment returns. Unlike BizDev teams, VCs are not trying to maximize the number of transactions completed, and when opportunities proceed to the next level, VCs dig in deep.
DEPTH: Like in M&A, the venture capital due diligence process facilitates a deep understanding of market niches and industry trends. The due diligence process examines everything from customer value propositions (with numerous customer reference calls and visits), technologies (with technical due diligence), and underlying business models (with detailed analysis of financial statements and contracts with suppliers, distributors, and end-customers). Unlike M&A, these due diligence forays typically represent only 3% or less of the total annual deal flow reviewed by a venture capital organization, with closed deals often representing less than 1% of all leads.
It’s fortunate for corporations that managing a venture capital pipeline produces these four related outputs: not only venture capital investments, but also acquisitions, business development deals, and intelligence. Ultimately, it’s this last item, the combination of broad pattern recognition (by looking at thousands of opportunities) and deep learnings (by engaging in thorough due diligence) that allows venture capitalists to develop a sense of how and when the future will happen, and to share that foresight with key stakeholders throughout the corporation.
Can you think of any company that deliberately doesn’t want to be prepared for the future? I can’t. And that’s why I believe that every Fortune 2000 company will be in the venture capital business before you know it.
This article originally appeared in Global Corporate Venturing.
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