In order to stand any long-term chance of success, corporates need to get better at cooperating with the most disruptive startups in their core operating markets and service areas. Corporates must get better at investing in and also working with these startups once an investment has been made, without immediately gobbling them up. This is the important role that corporate venture capital plays. Clayton Christensen’s Law of Conservation of Modularity is useful to explain the ubiquitous technology and business model-driven disruption currently occurring everywhere in large local & international markets. A very high number of startups are harnessing mature and emerging technologies and combining them with disruptive business models to deliver hyper-focused solutions to just one part of the value chain. These startups are primed to disrupt the status quo and will likely fundamentally change the markets that existing corporates operate in, a so-called “death by 1,000 startups” for incumbents.
Corporate venture capital (“corporate VC”) typically involves a large organization setting aside a pool of capital to be deployed over many years as equity investments into startups, often by an external venture capital fund manager. These programs will usually have the objectives of generating attractive financial returns over their lifetime, but with a strategic underpinning relevant to the core business of the organization.
Corporates find that corporate VC programs are a good way to remain innovative and agile with their most disruptive initiatives, that also future-proof their existing businesses against emerging technology threats, with no near-term strategic or operational impact on their core businesses. Additionally, investing in startups enables large organizations to get first-hand market intelligence, develop internal human capital, and act as a conduit to bring people together in the pursuit of collaborative innovation and the sharing of knowledge across the organization. To operationalize this cooperation, corporates will necessarily learn to phase-in market access to investee startups over the lifetime of the investment, as they see their current operating companies being disrupted and eventually even replaced by one or more of the startups that they’ve invested in.
The amount of money being deployed globally in corporate VC is also large and growing, with over $73bn invested by corporates into startups in 2020, across 3,359 individual transactions.
Figure 1: Global disclosed Corporate VC-backed deals and funding
Source: CB Insights
Startups are also increasingly interested in taking investment from corporate VCs because these investors are often able to offer much more than just financial capital. Similarly, corporate VCs frequently want to exploit these unique advantages that they have so that most corporate VC investment activity is at the early Seed and Series A stages when they are able to have the biggest impact on the early strategy and success of the startups.
Figure 2: Reasons why startups accept investment from a CVC
Source: CB Insights
There are simply too many well-funded startups attacking just one part of the value chain of large organizations globally for 1-on-1 defensive tactics to work and this trend is accelerating. Corporates need to be more agile and more disruptive in order to innovate in their core operating markets and service areas and to do this, they need to work with these startups.
A viable defensive and offensive strategy in these market conditions is to invest in a corporate VC program that invests in and enables cooperation with the startup disruptors before they are viable acquisition targets. This is the structure of the large innovative organization of the future.
Llew Claasen is the Managing Partner of Newtown Partners, a venture capital firm founded by him and Vinny Lingham. The firm invests globally in early-stage, emerging technology and disruptive business model startups that drive economic activity in a fundamentally positive way.
In 2019 they started working with global logistics group, Imperial (JSE:IPL) to enable their corporate venture capital program. Newtown Partners operate out of offices in San Diego, U.S. and Cape Town, South Africa.
The SAIS2021 -Expanding Horizons programme will include a deep dive into how corporates and start-ups develop the economy sponsored by Newtown Partners. An exploration of corporate venturing with heads of business sharing their insights into how to deal with technology and innovation from the outside-in, working with innovative startups, incubation and acceleration programmes and creating venture capital funds. Building portfolios with meaningful impact.