Hi, I'm Jeppe and welcome to my weekly newsletter on Corporate Venturing, released every Tuesday. My aim is to provide a comprehensive perspective on the latest developments in the field and its related topics, drawing from the insights of top management, venture capitalists, founders, LPs, and family offices. I aim to offer valuable information and thought-provoking content that will aid in understanding the importance of Corporate Venturing in business strategy.
Last week, I got some exciting messages that I'm now following up on. One of them was about finding the right team for a CVC, which is a really important topic that I'll be including in a future newsletter.
This week, we are exploring the various risks corporations may encounter when investing in startups via Corporate Venture Capital (CVC). CVC can offer corporations exposure to new technologies and innovative business models, however, it's crucial to acknowledge the possible drawbacks and to meticulously mitigate these risks. So here goes.
1) Misalignment of Interests
It is a common saying that:
Startups focus on growth, corporations focus on short-term gains.
One of the most significant risks of CVC is the misalignment of interests between startups and corporations. Startups are focused on growth and scaling, while corporations may prioritise short-term financial or strategical gains. This can lead to conflicts of interest and potentially hinder the startup's ability to reach its full potential. Additionally, corporations risk losing control over their investment, as startups often retain significant decision-making power even after taking CVC funding. This can result in corporations becoming passive investors, with limited ability to influence the direction of the startup and protect their investment. Alignment is a crucial part in these collaborations.
Moreover, the high level of risk involved in CVC investments can lead to significant financial losses for corporations if the investments don't perform well. This risk is compounded by the fact that many startups that receive CVC funding are at an early stage and have limited operating history, making it difficult to accurately predict their future success. Even if a corporation's CVC investment team is experienced and well-equipped, they can still make costly investment mistakes that negatively impact the corporation's bottom line.
Given the potential risks of CVC, it is important for corporations to carefully consider their strategies and approaches before entering this market. This may involve conducting thorough due diligence on potential investment opportunities, developing a clear understanding of the startup's goals and objectives, and having contingency plans in place in the event that things don't go as planned.
2) Culture Clash
When it comes to corporate venture capital, there is a common perception that corporations may struggle to keep pace with the fast-moving, innovative culture of startups. This can result in a culture clash that undermines the benefits of CVC. For example, startups may be used to making decisions quickly and taking calculated risks, while corporations may have more bureaucratic processes and a tendency to prioritise stability over risk-taking. This can create tension and hinder the effectiveness of CVC investments.
Additionally, corporations may find it challenging to effectively integrate new technology or business models into their existing operations, leading to delays and increased costs. This can be a result of a lack of experience with new technologies or a resistance to change within the corporation. Furthermore, startups may find it difficult to navigate the corporate landscape and can become frustrated with the slow pace of decision making and implementation.
Overall, cultural misalignment can be a major risk for corporations in CVC investments, as it can lead to disappointment and reduced impact. It is important for corporations to be aware of these risks and to work to mitigate them through careful planning, effective communication, and a commitment to collaboration and cultural understanding.
3) Balancing Autonomy with Alignment
Balancing the autonomy and independence of the CVC with the need to align with the parent company's strategy and goals can be a challenge. The CVC needs to be able to operate independently, making investments and decisions that are best for the portfolio companies, while still aligning with the overall goals and objectives of the parent company. This requires clear lines of communication, decision-making processes, and a shared understanding of the role of the CVC within the larger organisation.
It is worrying that a study conducted by Ilya Strebulaev found that:
"More than 60% of respondents (CVCs) believe that their executives do not understand the norms of the venture space and that educating them (including those on the investment committee) is a constant struggle, compounded by frequent turnover of parent executives."
Further, when setting up a CVC unit, corporations have the option of hiring external talent or placing employees from the parent company in charge. Hiring external talent brings several benefits, including fresh perspectives, greater independence and autonomy, specialised skills and expertise, and reduced conflict with the parent company. This approach can help the CVC unit to operate effectively and achieve its goals, while avoiding conflicts of interest and maintaining clear lines of responsibility.
Additionally, it is also important to consider the costs associated with setting up and maintaining a CVC investment team. Creating a strong and capable CVC investment team can be expensive, and mistakes made by the investment team can lead to significant financial losses for the corporation. As such, corporations must carefully assess the capabilities of their CVC investment team and ensure that they have the skills and experience necessary to navigate the startup ecosystem and identify high-potential investments.
To sum up, avoiding these three challenges is crucial when establishing a CVC, but it may not be as simple as it sounds.
Next week, we will delve into the topic of "CVC versus traditional venture capital" and I look forward to sharing more insights with you. As always please feel free to reach out with any questions or suggestions on topics you would like to see covered. Thank you for your continued readership.
/Jeppe
