Build, Invest, Buy, or Partner? Which Innovation Vehicle When?

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Adventures in Ventureland

11 min readApr 30, 2021

Most corporates choosing to create new business lines and/or test new business models have 4 choices:

Build it in-house
Make a minority investment into a startup in the wild
Buy/acquire a proven startup
Partner to build new ventures

In this article, we’ll compare the 4 options outlining the chance of success, costs, timeframes, common challenges, and the type of idea they’re each best suited to.

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1. Build

What is it? Building new ventures in-house, either using internal talent (current employees) or hiring in external talent.

Chance of Success? Less than 8% of ventures launched internally reach scale. That’s worse even than the average 90% who die in the wild.

Time to Success: For those that do succeed, it typically takes at least twice as long as a startup in the wild to build a new company within a corporate. As an analogue, a standard startup accelerator is 3 months; a corporate accelerator is 6–12. Typically, this means 8–12 years to £100m+ in profit.

Cost: I’ve yet to see a corporate build an internal venture which didn’t cost at minimum two times(more often 4–5 times), what it would take to build it in the wild. Including talent, ventures often cost £100m+ to reach scale.

Control: The corporate enjoys 100% ownership, and the new venture typically operates within existing business structures and management.

Best for: New products within the core business. You already have a significant share of the market, so have time to play. There’s also inherently less uncertainty, increasing the chance of success and the ability to repurpose experts from within the organisation.

You could also invest here to build long-term capability in-house (if you can retain the founder talent you train), but you will likely need a parallel approach for the short to mid-term while you’re getting up to speed.

Common Pitfalls/Challenges for Building In-House

Talent: using in-house talent slows execution, as teams are learning founder skills from scratch. However, attracting proven founder talent is often harder than anticipated; entrepreneurs are cautious of corporate bureaucracy stifling the freedom to build something they’re really excited about.
Governance: corporates typically try to fit new ideas into existing reporting and funding structures. This leads to delays and often results in teams increasing the investment ask so they have enough capital to make it to the next budgeting cycle. The full investment will then be used, even if the idea has already been disproven. Meanwhile, day-to-day governance is too heavy for a new venture to have space to pivot and learn in the market.
Incentivisation: new ventures need real founders, who have skin in the game through equity, and are incentivised by making the business work, or killing it early, so they can make their money and find success elsewhere. If the salary is too comfortable (lacking personal opportunity cost), it again takes longer for initiatives to die — often requiring a steering committee to kill the idea.

Ultimately, these challenges slow the time to market and dramatically increase both the risk and cost, of failure.

As Anne Boden, founder of Starling Bank, and former RBS employee put it:

“I came from that world… if I thought I was going to be able to create that I would have done… It’s very difficult to replicate the energy and technology of a startup.”
- Anne Boden, Founder and CEO Starling Bank

2. Invest

Minority Investments are an increasingly popular way for corporates to innovate. Between 2013 and 2018, corporate VCs increased invested capital 4X, spending $50bn+ in 2018.

Chance of Success: Here, we can think about two measures: is the investment making a profitable return, and is it delivering ‘strategic’ value/learnings.

For the financial return, the metrics we look to are Return on Investment (ROI) and the Internal Rate of Return (IRR). Has the portfolio of investments returned a min. of 3x cash (i.e. a profitable return) in a suitable timeframe (typically 7–10 years)?

However, the true IRR or ROI is often ignored or not tracked for corporate investments, with investment teams not held accountable for creating profit here. Moreover, it’s an incredibly tall order in the first place for those teams. If we take the VC world as an analog for success; 95% of funds fail to make a profitable return on their investment at all. Of those that do, just 4% return 10X the value.

For the strategic value, it can be even harder to quantify the return. However, there are a few measures that can help make this more tangible:

What new revenues, resources or capability does this unlock for other areas of the business? (Indirect returns impacting the bottom line)
How many successful commercial pilots are you running with the startups? What is the value unlocked in terms of additional revenue or cost savings? Though you should also ask here whether the investment was really a pre-requisite for the pilot.
How many minority investments have you acquired? Did your investment increase your chances of becoming the acquirer? How much did you save on the overall cost to acquire and how does this balance across a portfolio of minority investments?

A question corporates need to ask is whether, given their responsibility to shareholders, they should be taking on this risk/return profile — especially if no “strategic value” can be tangibly measured.

Time to Results: In terms of exiting investments, 10 years is the target for most venture capital funds. However, the typical time to actually realise any return on capital is actually 12–14 years.

Pilots typically require the startup to be series A or above, so if you invest at the Seed Stage it will likely be c.2 years before the startup has the maturity to deliver pilots with you. You can find more on typical acquisition timelines in the next section on “Buy”.

Cost: At Seed Stage: The median VC deal size in 2019 was £350k at a pre-money valuation of £8M. At Series A it was £3.6M invested at a pre-money valuation of £27M.

This gives an indication, but we also know that corporates often end up overpaying compared to VC funds. For example, the average Corporate VC deal in 2017 was £16m compared to £12.4m for VCs.

Control: After dilution, corporates typically have a 10% stake in the venture. They often don’t have a board seat and are also not guaranteed the right to acquire, should the startup be successful.

Common Pitfalls/Challenges for Minority Investments

Delivering strategic wins: if it’s close enough to core, you ultimately want to own the startup, but having an early stake doesn’t guarantee either control or a right to acquisition. If it’s exploring a new technology or business model, why not create a commercially meaningful partnership instead, without the need to invest/own equity prior to partnering?
Unlocking unfair advantages for a minority investment: offering a unique advantage from the core business to your portfolio companies can be a real differentiator, but how much can you really move the core to support something you only have a minority stake in, and will likely never own?
You can read more on the challenges of CVC from Rainmaking Venture Studio’s CEO Jordan Schlipf: here.

Best redirected to focus on pilots and joint ventures: Honestly, we struggle to recommend the minority investment model for corporates as it stands.

If the startup you want to work with already exists, and you want to test new tech, we’d recommend corporate-startup collaborations on pilots and joint ventures, where you can really learn about a new technology or a new business model, and see the impact on the bottom line; however, typically you don’t need to have invested to run a pilot, so make sure you’re not overpaying for the privilege.

3. Buy

There are two types of M&A: to grow the core, or to innovate. In this post, we’re talking about M&A to innovate.

Chance of Success: According to Harvard Business Review, 70–90% of Mergers and Acquisitions fail.

Time to Results: the actual acquisition process can take months or years, depending on the deal complexity. However, the startup needs time to prove itself worthy of acquisition. If we count from idea inception, it’s a long slog. In 2018, the average age of a startup at acquisition was 5–10 years old (37% of acquisitions), followed by 10–15 years.

Capital Required: In 2018, the global median for M&A was 9.3x EBITDA, but it can easily reach the double digits.

For example, PayPal paid 40x revenues for Honey Science Corporation, for $4bn cash. They also paid13x revenues and double its IPO valuation for iZettle, forking out $2.2bn. Meanwhile, Salesforce paid 22x revenues for MuleSoft in 2018, at $6bn. The list goes on and on, with many examples of 12–25x revenue acquisitions, including Microsoft’s purchase of GitHub for $7.5bn (25x revenues).

Control: Technically, you have full control post-acquisition. However, if you want to keep the original founders, you will have to cede some of this control in practice, as they value the autonomy to try new things. To get the inside perspective on this, I recommend this post by Waze’s Founder Noam Bardin, who shares why he left Google 7 years after Waze’s acquisition. In it, he talks about the rising trend for independence amongst acquired founders, but the still inevitable clash in cultures.

Common Pitfalls/Challenges for Innovation M&A

The startup has to exist: it must also be open to acquisition, and you must be able to outbid competitors.
Designing for exit: the startup is now at a new stage and needs to start acting as such. But, rarely has the business been designed for this. It’s succeeded because of its independence, and transforming into a new kind of company, as part of another company, brings new risk.
Who leads: the existing CEO is likely to struggle to repeat their success operating in such different conditions and as part of a larger organisation. Moreover, do they still have the drive and the hunger post-acquisition? However, changing leadership again risks the business.

For more reasons on why M&A fails, I highly recommend this blog by the inimitable Steve Blank.

Best for: when the idea already exists, and there are enough startups at maturity, rendering it too late to build your own version. Culture clashes simply have to be managed here (often requiring external specialist support) if the acquisition is to survive.

4. Partner

Typically, this means partnering with a consultancy to build new ventures.

We realised there was a fundamental misalignment of incentives when building ventures as consultants.

This is the model we used to run. We charged fees and worked from ideation to implementation, bringing in our own talent. We saw that corporate scale strengths and deep domain knowledge could unlock tangible advantages for ventures; from infrastructure to data, to customers. But we still weren’t able to get new ideas to market at the pace, cost, or most importantly, the success rate, of our own startups in the wild.

Challenges to be surmounted in Partnering

What success are you paying for: as a consultant, if you’re paid to ideate X ideas in Z months, you’ll do just that. If you’re paid to test an idea for 6 months, you’ll keep testing for 6 months.
Cost to outsource: day rates add up fast, especially for top talent with an agency needing to make a margin on top.
Missing the talent altogether: attracting proven entrepreneurial talent without equity is hard, and at times, simply not possible. So, even if you have the budget for day rates, you may still miss the more experienced founders who can drive your idea forward at the fastest pace.
Continued corporate bureaucracy: if the venture is still wholly owned and legally part of the corporate, it’s impossible to give it the freedom needed by startups in the wild to make decisions and pivot at pace.

Ultimately, we realised there was a fundamental misalignment of incentives when building ventures as consultants.

“Over the last seven years, we’ve done joint projects with BCG Digital Ventures, Creative Dock, FoundersLane… and we’ve come to the realisation that corporations can’t buy innovation.
Consultancies that charge a fee for ideating and building new ventures rarely succeed, because of the fundamental misalignment of incentives. The motivation for the consultants involved is to maximise fee income, not necessarily to produce a successful new venture for the corporate.
The Rainmaking model fixes that.”
- Uli Huener, Chief Innovation Officer, EnBw

Our new venture building model:

We’ve created a hybrid of build, invest and buy; based on years of experiencing doing all three.

In our model, we partner with large corporations to build the businesses they ultimately want to own. By partnering with us, they syndicate the early, risky stage of the investment. They can then acquire the startup once proven with most of the value is still to come.

What’s different:

We don’t charge design and development fees. Instead, we co-invest millions in new ventures. We make our return on the successful exit of the venture back to our corporate partner. This means we win or lose together with our partners, based on the venture’s success.
We find proven, experienced founders for each venture, and incentivise them with equity and the freedom to run the venture as a true startup.
We identify unfair advantages (specific scale strengths and deep domain knowledge), which we can draw down from the corporate into the venture.

Chance of success: We’re turning the typical VC return rate of 1 in 10, into 1 in 3; derisking the process of building new ventures for our corporate partners, our founders, and ourselves.

Typically, venture studios outperform startups in the wild by 30% according to a GSNN Study. And that’s without the corporate’s unfair advantages, which give our ventures a decisive lead, and faster route to scale.

Time to success: The same GSNN study showed that studio ventures achieve 2x IRR in half the time. In our model, ventures are typically brought back by their corporate parent at the 4–5 year mark, once the business is mature enough to survive reacquisition and integration.

**GSNN’s Disrupting the Venture Landscape Report**

Control: corporates have 30–40% equity, the highest number of board seats of any party (3 seats out of 7), and are guaranteed the option to be the sole buyer of the venture, with minimum performance metrics to protect from buying a business that isn’t strategically valuable.

Cost: In our Seed Stage equivalent, we invest £200K while our corporate partners invest £400k. This £600k provides the venture with a 12–15 months runway. If we both decide to invest further (as the venture scales), we put in £1–3m and our corporate partners invest £2–6m. This gives the venture an additional 2–3 years runway.

When it comes time to taking control and integrating the venture in year 4 or 5, the corporate partner already owns c.40% of it. By taking full (100%) ownership at this stage, the majority of the venture’s value is still to be realised, as the business scales during its remaining lifetime. This translates to an average 90% value still to be realised, which is wholly captured by the corporate partner, after Rainmaking and the founders' exit.

Best for: creating new (to the corporate), strategically aligned businesses which leverage the scale strengths and domain expertise of the core. They represent adjacent opportunities that can’t be realized through product development alone, or as part of day-to-day business.

These are the kinds of ventures you want to end up fully owning, and which could one day become their own business line, but where you want to syndicate the risk in the early stages and increase the chance of the venture surviving and scaling; where you don’t have in-house capabilities; or where you’re looking to scale up that capability, without adding to your headcount with more FTEs.

Example Ventures:

Typically, our partners are looking to tap into a new market/customer group, test a new business model or business line, or develop a new capability. Their ambitions for new ventures are strategic and aligned to the core, but ultimately adjacent to business as usual. This means the new idea does not need to live within the core business while it grows.