With 70% of M&A failing, and only two years after a big corporate acquires a startup, 50% of the top talent is gone, corporate venture building seems to offer a better path to innovation and growth.
Corporate venture building makes the most of your core organization’s existing assets to create separate but linked businesses offering new products, services, or business models, typically addressing new markets and geographies.
As reflected in the 2021 McKinsey Global Report, more than one-fifth of business leaders name building new businesses as their companies’ top strategic priority, and 55% consider it a top-three priority – nearly double the share who said it was such a high priority for their companies between 2018 and 2020.
Corporate ventures can operate with the flexibility and agility of startups, yet they have the advantage of being able to leverage the many resources of the core business. And companies that have set up a separate entity to build new ventures already report promising results.
However, building new businesses is difficult. At our recent Innov8rs Connect on Venture Building & Scaling, we explored the principles and practices for making it work.
In this article, you’ll find a summary of the key components of the corporate venture building process we learned from experts Frank Mattes (Founder and CEO at Innovation-3 and co-author of Lean Scaleup), Sebastian Müller (COO and Co-Founder of MING Labs), Sigrid Hellberg (Partner and Venture Builder at Desifer), Misha de Sterke (Managing Partner and CEO at Innoleaps) and Thomas Van Halewyck (Co-Founder and Managing Partner at Bundl).
In a soon to be published follow up article, you’ll learn how cross-industry innovation leaders from companies such as Maersk, MasterCard, Amadeus, Schneider Electric, Barclays, EnBW and Airbus are running their venture building efforts.
Let's dive in!
1. The Overall Picture
Corporate venture building is on any company's agenda, but it’s challenging: 85-90% of corporate startups die after the MVP stage. Why and how to overcome this hurdle?
The business-building problem
New forces are reshaping the business environment: greenfield startups, competitors from different industries, customer demand that switches from product to services, technology, and sustainability. And if you do not react adequately and use these trends to your advantage, your business model loses its relevance.
Frank shares a couple of examples from his experience in such a changing context: the CEO of BP said that in 10 years, they want and need to become an energy company since oil and gas are losing their relevance. Hilti, a construction equipment manufacturer, has started selling other services, including financing, leasing, and replacement.
At this point, business leaders have three options: creating new businesses from innovation, buying new businesses, or buying startups. Stated that 70% of M&A fails, and only two years after a big company bought a startup, 50% of the top talent is gone, creating new businesses from innovation activities seems the most effective way. That's why corporate venture building is high on any company's agenda, but that doesn't mean it's an easy ride.
Indeed, while many resources are at stake, the success rate is low: 85-90% of corporate startups die after the MVP stage.
Companies perform great when it comes to maintaining product relevance with small step innovations, when fighting with known competitors, with comparable value propositions, and for known customers. However, they struggle to maintain relevance and think about new business models. But the latter is a suitable space to create future businesses. So there’s the need to address this business-building problem.
Structuring a venturing end-to-end journey: from “meaningful idea” to scale
A big part of why companies have that business-building problem is that they don't have an effective framework to ideate, validate, and create new businesses from innovation. In a nutshell, they don't have adequate tools and a process of "Disciplined Entrepreneurship". Such an approach is necessary because corporate venture building has many uncertainties.
The Lean Scaleup, the framework co-developed by Frank, 20+ practitioners, and two business schools, will help you as an innovation leader to overcome the corporate business-building problem.
The Lean Scaleup is an end-to-end framework that looks at the whole innovation journey – from the meaningful idea to the scaleup phase – and focuses on creating businesses. It provides crucial success factors to favor unleashing corporate venture building. One of these key factors is aligning innovation units and paying particular attention to the handover points.
As you can see in the snippet from his section, Frank shares some instructive examples: Bayer has CoLaborator where they are scouting for startups; Airbus has BizLab, a global network of aerospace accelerators where they are enabling the organization to work with new technology; Amadeus has Nextwave to identify and accelerate units; BP has Launchpad that takes validated innovation concepts to scale; PostFinance has a strategy lab where the innovation units test new business models so that they can become part of the corporate strategy.
These are some of the setups that emerged, and later in the article, we'll dive deeper into the actual corporate venture building setup. But now, the predominant question is how to align these innovation units? How to design that business-building process?
2. Aligning With The Corporate: Building Support And Leveraging Assets
Under the same corporate roof, there are two incompatible management systems. On one side, there's a system for running the day-to-day business on big efficiency and productivity. On the other side, there's a system designed for exploration. That’s why, especially early in the corporate venture building process, there are a lot of great ideas that don't actually show any connection to the mother company's strategic direction. How to make these systems work together?
Synergizing venture’s and corporate’s North Stars
Sebastian begins by introducing the concept of the North Star – i.e., the purpose that guides innovation leaders along the journey. He talks about the North Star within the context of sustainability, but what he highlights can be applied to all new corporate ventures.
The venture's North Star has to be something that innovation leaders are really passionate about to create an impact. They should clearly articulate why the company needs to address that issue. And the more this North Star overlaps with the corporate's vision and purpose, the easier it will be to secure buy-in and support while creating something economically viable.
To synergize and align with the corporate, innovation leaders should identify assets – e.g., aspects and capabilities – of the mother company they can adopt and leverage for the venture to bring them closer. And this is essential because, eventually, the leadership determines what happens in the organization.
Theory of Change: how to leverage corporate assets
Click here for the full session recording Building Sustainability Ventures by Sebastian Müller
On of the main benefits of corporate venture building is that new ventures are able to leverage existing corporate assets. There are already capabilities, know-how, R&D centers, and people corporate venture builders can use. But how to identify what is worth to be leveraged?
Corporate venture building is a process that addresses innovation problems that, by definition, are embedded in bigger systems, connected to multiple parts of the corporation. To properly address innovation issues, you need first to understand the corporate system holding them in place.
As highlighted in the snippet from his session, Sebastian believes that having a Theory of Change that looks at the whole corporate system and how different problems are connected is crucial to defining and understanding the system’s assets, goals, boundaries, and causal linkages. Therefore, having a Theory of Change helps you know which assets are suitable to be leveraged to address a particular problem in a specific system.
Ultimately, finding connections and reporting to the company how their assets are uniquely positioned to address a specific issue really makes the alignment between the core and venture businesses stronger.
3. Long-Term Perspective: Leadership Buy-In And Enablers
Knowing which assets to leverage is crucial. And what about the proper time of leverage? Is there anything else to consider to make the most of the mother company’s assets?
Leverage: planning ahead
Sigrid agrees that the key benefit of being a corporate venture is to leverage the assets of the mother company. According to her, that's an even bigger benefit when it comes to scaling: having access to certain infrastructure, brands, or assets that the company has, might be the thing that helps you scale properly.
But she also advises innovation leaders to identify these strengths from the very beginning and plan how to use them. Otherwise, there's a risk that you won't be able to integrate the venture with the mother company at the verge of scaling. Plan for leverage from the start, so you can do it quickly when it's needed.
Creating commitment and recruiting enablers in a long-term perspective
We've already mentioned how having corporate support is paramount for the venture to succeed. And Sigrid brings out this importance even more. She addresses how having leadership buy-in and long-term commitment is crucial, especially when it comes to scaling. You're unlikely to get the funding you need for it unless you have proper leadership buy-in.
Sigrid also mentions how recruiting enablers is essential in a long-term perspective. Unfortunately, many venture builders are afraid to bring in externals. But the externals – i.e., enablers or people who have worked for other companies, including competitors – are another key success factor not to be forgotten.
Enablers may have the networks and know-how to better navigate the venture. As such, they are important to help the venture team leverage the mother company's strength quickly and efficiently.
We'll dig deeper into why and how to recruit the proper team later in the article. Let’s now focus on actual corporate ventures setup.
4. Structuring And Funding
We already saw some examples of innovation setups, but how did those corporate innovators manage to get there? First, they have aligned corporate’s and venture’s purposes to avoid miscommunication and create the proper support. But they have also defined leaner policies to create exploration-oriented environments. Last but not least, they are always ready to fund the most promising bets. How to set up your corporate venture to increase its success rate?
Enabling entrepreneurship: the ideal setup
Over his career, Misha has learned that the ideal setup to create an environment suitable for corporate venture building is a separate legal entity.
Why is that important? Because to experiment with new business models, you need a more agile corporate environment and leaner policies.
And a separate legal entity ensures the venture a certain piece of autonomy and speed around execution, fewer legal challenges – logistics, IT procurement, HR – and a financial model with the same type of entrepreneurial incentives.
Funding: be ready to scale
No company is built without serious financial investment and commitment. Yet it's hard to get as a corporate startup significant investment.
Scaling up is actually the stress-test of the real appetite of corporate innovation, and business leaders should take a VC-like approach to funding. As such, be ready to have and differently manage resources and money to get from seed round – where you have many ideas to test and see which ones are promising – to series A round – where you launch the most promising bets – to scale round – where you ride the winning bets.
Furthermore, scaling up also means planning ahead for things that might happen or not so that you can properly set up your venture’s operational model and infrastructure. For instance, if you start an e-commerce, make sure you have the delivery and logistics in place first and set your infrastructure ready to take on the legal risks and compliances established for scaling up in different countries with different regulations.
5. The Right People
Thomas echoes Misha's thoughts: it’s essential to set up a certain path to follow without too much structure that allows the venture to explore enough by its own agile way. Moreover, he adds more insights about choosing the right squad profiles for each stage of the venture life cycle. While this may seem like a straightforward topic, hiring people for a corporate venture can be complicated.
Choosing different sets of skills and profiles
Corporate venture building process is a synergy between entrepreneurs, intrapreneurs, and corporations. As already mentioned, although some of the figures you need can be difficult to find internally, many corporate innovators are struggling with considering and bringing in external leadership talents.
Recruiting an effective venturing squad is essential: not choosing the right team, loss of focus, burnout and other people-related challenges are among the top 20 reasons why ventures fail. For instance, there's a significant difference between venture creation and venture growth in terms of people you should work with.
Venture creation is about ideation validation and pivoting ongoing, requires an in-depth knowledge of ideation, validation, and pivot methodologies. The "Validation Lead" is an internal profile that provides continuous ideation and validation. Ideally, they should be able to lead multiple venture-creation tracks.
Venture growth is about launching and scaling the venture. requires an entrepreneurial, scaling mindset with specific domain expertise. “Scaling Lead” is an entrepreneurial profile difficult to find internally: they’re open to risk, comfortable with uncertainty, driven by a grand vision, and incentivized by equity.
It's rare to find those different profiles all in one person. So Thomas’ suggestion is to have a continuous team when ideating and validating your propositions and to have a different team able to take ideas further once you start going towards venture growth.
More than prolific individuals: corporate venture building requires a multi-team setup
However, it's not only about the right individuals. It's also about building the whole team around the corporate venture. Thomas has witnessed that a multi-team setup built around the venture seems to define its success.
A proper multi-team setup can run multiple ventures at the same time and should include: the venture board – for corporate strategy, funding, and clear “go/no go” decisions; the internal team – for quality and roadmap ownership, and supporting venture teams; the venture team – for execution, validation, and traction ownership; the ad-hoc expertise – for specific support.
Ultimately, another crucial element to have in place is a continuous and transparent feedback loop. That might sound a bit cliche, but open communication and attention to insights, questions, and problems strengthen large teams. Encouraging transparency is a key success factor for the venture team.
Reflecting on the many conversations we had and insights gained during the event, one thing is for sure.
Corporate venture building can help companies diversify revenues and keep pace with shifting customers and markets. But whilst building new businesses from innovation is on any company's agenda and many resources are at stake, 85-90% of corporate startups die after the MVP stage.
The first hurdle to overcome is making the corporate and venture management systems, incompatible by definition, collaborate throughout the business-building process: one is focused on day-to-day business and productivity; the other is designed for exploration.
After aligning corporate's and venture's purposes, the other pillars to ensure the venture a chance of success are: creating commitment, leveraging the mother company's assets, and recruiting the right people internally and externally.