Since 2010, corporate venturing has been emerging at speed (with a 42% increase between 2010 and 2015) through many mechanisms, such as venture clients, venture builders, scouting missions, challenges prizes, and corporate accelerators.

Now the corporate-startup honeymoon phase is over, innovation leaders look for data so they can make better decisions. How much will it cost (in time and money) to integrate opportunities’ value into the parent company using each corporate venturing mechanism? How can those costs be reduced, while increasing the speed? Do the costs differ according to mechanism? Which mechanisms are quicker? And which are the most cost-effective? How long should a chief innovation officer wait before killing an opportunity? These are data that these executives usually do not have because of the novelty of the concept and the lack of historical data.

Based on 121 interviews with firms’ chief innovation officers and those in related roles in the United States, Europe and Asia, a joint study by IESE and BeRepublic, Open Innovation — Increasing Your Corporate Venturing Speed While Reducing the Cost has found at least initial answers to these questions. Co-author of the stury Josemaria Siota will be sharing the outcomes on stage at Innov8rs Barcelona. As a taster, here’s a summary.

Corporate Venturing is on the Rise and Opportunities Await

Based on a previous study, conducted in collaboration with chief innovation officers, it was found that 70% of firms were increasing investments in relation to their innovation units. Steadily rising, corporate venturing saw an approximate 42% increase between 2010 and 2015. Using a range of tools, including scouting missions and hackathons, corporate venturing allows large (and in some cases small-to-medium) enterprises to access innovations that would otherwise be challenging to produce internally.

It is important to note that corporate venturing opportunities do not just apply to start-ups and late-stage (more developed) start-ups. There are beneficial mechanisms for each development stage. Although corporate venture capital is typically applied to start-ups and scale-ups, very early-stage companies can benefit from hackathons and scouting missions.

Stages of Corporate Venturing

Within the guide provided, the authors explain the three stages of a corporate venturing project, assuming that these stages are a sequential process. These stages are what often impact innovation speeds and managerial cost.

These stages include identification, collaboration, and integration.

The first stage, identification, refers to the timeline between the creation of the corporate venturing mechanism and the actual identification of an opportunity. In this case, an opportunity is any discovery, a start-up, or a scale-up that may offer a company value. So, for the company this stage would include the detection of internal challenges, defining key research areas, choosing a search geography, searching for a problem-solution fit, and in some cases, the signing of a nondisclosure agreement.

In comparison, the second stage, collaboration, refers to the timeline between the identification and integration of an opportunity and its the idea to run its first collaboration test. For this test, a joint effort is put forward by the start-up and corporation, as well as potential stakeholders. The goal here is to achieve a specific, pre-determined objective. During this stage, some of the steps would include "seducing" the start-up that the company wishes to work with, conducting all relevant due diligence, drafting an initial collaboration agreement (and in this case of corporate venture capital, signing a term sheet), obtaining approval from legal departments, and then implementing the planning joint proof of concept.

The late-stage, integration, refers to the timelines between the beginning of the very first collaboration test and the integration of the opportunity's value into the corporate venturing company. In this case, value refers to anything in which the corporation will benefit from. This value could be in the form of products or services, knowledge, processes, business models, revenue sources, etc. The outcome of this stage will depend on the previous stage in order to better determine whether or not to internalize the collaboration or to continue moving forward with an external collaboration.

Corporate Venture Capital — What the Research Says

Corporate venture capital (CVC) is the oldest corporate venturing mechanism, which is why the majority of research focuses on this specific mechanism. There are a range of studies that answer questions on this subject, such as, how long does it take to for CVC to return capital to investors, based on each opportunity?

The research shows that after extracting data from 80 major American companies, it was found that:

  • Programs that had been in operation for five years or more, averaged a return on investment of 14% to 15%.
  • Venture capital (VC) is often used as a benchmark and there is estimation that VC exits happen between five and seven years after they initially invest in a start-up. While they often wait for returns seven to ten years after investment, VCs often sell their equity after eight to ten years.
  • While analyzing cost, both in terms of time and money, values can significantly vary. However, previous studies have shown that in the case of corporate accelerators, the annual cost to operate these programs range from approximately $2 million to $5 million — but these values can be much lower when third-party vendors are not involved.
  • Virtual and independent accelerators are more cost-effective in comparison to accelerators that are closely bound to the parent company.

Two of Firms' Greatest Concerns — Speed and Cost

When you are first drafting a corporate venture strategy in order to decide which mechanisms to combine and in turn, prioritize, there are two key questions that must be asked:

  • How long is the overall process?
  • How much does it cost to generate value from an opportunity in each mechanism?

In order to answer these critical questions, you would need two key pieces of information:

  • The time and cost associated with building each mechanism
  • The time and cost required to generate value from one opportunity

Although studies have determined and reported the required time and cost to build each mechanism, there is no data regarding the time and cost needed to fully complete the corporate venturing cycle. This is incredibly relevant to firms and is now attracting rising interest and attention.

Increasing Speed While Reducing Cost

As expected, a valid question would be, how can costs be reduced, while increasing the speed? Then, more detailed questions must be asked in relation to the costs of each mechanism and the speed of those mechanisms (determining which is the quickest). This will help you better determine an appropriate timeline before shutting down an opportunity.

There are many variables to consider and these variables change depending on the stage. For example, on average, the integration phase is typically the longest. In fact, in relation to the whole innovation cycle, this phase can take up at least 50% — and in the case of corporate venture capital and hackathons, this phase can take up to 72% of the total cycle.

The mechanism also plays a significant role, especially in regard to speed. For example, a strategic partnership typically takes the longest, compared to a venture client, which has the shortest cycle. While considering a corporate incubator, for instance, once it's built, this mechanism can take over two years to complete a whole cycle. Of this time frame, the identification and collaboration phases are typically completed in just 10.5 months. The remaining timeframe is required for the integration phase (a total of 16 months).

Variations in Speed Are Often Based on Organizational Agility (and Factors That Impact Partnerships)

While the authors of this guide conducted interviews, they realized that although select companies were implementing the same mechanism as others, they required significantly less time to complete the whole innovation cycle. In comparison to their counterparts, some companies spent less time on each specific mechanism, yet achieved similar results.

This was based on select best practices, including the implementation of agile principles. In doing so, the speed of implementation increases while still maintaining the same impact.

Some of the agile principles that influenced speed included:

  • Delegation of authority
  • A bias for action
  • The freedom to test new ideas
  • Modular processes
  • Aversion to bureaucracy
  • An ownership mentality

Partnerships also play a key role, and although the average time span ranges from four to 48 months for the entire process, there are a number of variables to consider. These core factors include the following:

  • The initial stage of development. This is because building a minimal viable product from scratch is significantly different than building a joint partnership based on an already established business plan. This means that most often, when a partnership develops early on in this process, the average time span will take longer.
  • The maturity of the relationship. If a company has already worked with the start-up, they will already be familiar with one another's organization, KPIs, etc.
  • Regulations that impact select industries, such as pharmaceutical or chemical sectors. For example, legal compliance can be time consuming based on more thorough due diligence.
  • Whether or not the partnership will based on an equity model or codevelopment in relation to the collaboration stage.
  • The flexibility of the company's business model within the integration stage.

Analyzing Cost Per Opportunity Per Mechanism Per Year

So, how do you identify and select a corporate venturing mechanism to best meet your unique goals?

This is, of course, the challenge. After all, it is difficult to source a cost metric that will allow a company to effectively compare opportunities by mechanism. This challenge can be further broken down into two potential challenges — the cost in relation to work outsourced or the parent company; as well as the number of opportunities that the company or corporation wants to collaborate with.

For example, if a corporation outsources 90% of their process, their ongoing cost of management will be high. However, their internal cost will be low — and vice versa.
Based on the second challenge, it may seem obvious that the cost to collaborate with 2-3 start-ups will be lower than say, 50 start-ups.

In these cases, the ongoing cost per opportunity per mechanism per year = managerial cost + internal full-time equivalent (FTE) cost. This can be further broken down into the following:

  • Managerial cost — This is the annual amount needed to accurately identify value, collaborate and then integrate value, once a mechanism has been launched. This includes costs such as marketing, travel, legal services, and facilities (i.e. coworking spaces).
  • The FTE cost — This refers to the annual amount required to sustain the mechanism once it has been launched in relation to the number of full-time employees who are required per year to keep the mechanism active.

The Relationship Between Speed, Cost, and the Opportunity Stage

The development stage is imperative when considering the trade-off between cost and speed, focusing on the opportunity at-hand (i.e. the discovery. start-up, and scale-up). This is because depending on the situation, the development stage will differ. For example, the development stage of a discovery within a scouting mission will be unique in comparison to the same phase related to a scale-up that is to be acquired.

While examining the data, it appears that the more mature an opportunity is, being either a scale-up or start-up, the longer it will take to complete the entire corporate venturing process. In turn, this will equate to higher ongoing costs but of course, higher potential returns.

In Summary

To improve outcomes, focus on improving your strategy, increasing the speed and reducing the cost.

Choose the right combination of corporate venturing mechanisms, based on data rather than intuition or media hype. Since the speed and costs per opportunity per mechanism are different, understand first what your company’s objectives and expectations are (in terms of goals, capital and time horizon) and then analyze the numbers relating to each mechanism that fits those expectations.

Since integration has the longest time span of the corporate venturing process, think about how you can improve your organizational agility in that process to adopt the value you have successfully generated: flatter, faster, simpler structures; modular processes; delegated authorities; and more. This may give you a competitive advantage

Try to secure the involvement (with some budget and a decision maker) of business units and of corporate headquarters, and get one of each pocket. For instance, finance one POC with a start-up with a third of the budget from the innovation unit, a third from corporate headquarters and a third from a business unit. To go further, get a member from each of those three units involved in the decision-making process. This will reduce your cost for POCs.

If you’d like to dive into everything corporate venturing, join us at Innov8rs Barcelona.

Among these speakers will be one of the authors of the guide discussed above, Josemaria Siota, the Executive Director at IESE Business School. He has also been called "one of the world's most influential speaks on corporate venturing." Josemaria speaks at conferences in London Business School, Harvard Business School, at the Web Summit, and more. In addition, he is not only a highly respected speaker, but also a published author of books and studies.

He will discuss The 7 Myths of Corporate Venturing, and share WHY approximately three-quarters of corporate innovation initiatives fail — and more importantly, how to implement effective strategies used by the one quarter who do succeed. Check out the speakers and sessions for Innov8rs Barcelona here.