Corporate venture building is one of the most hyped subjects in the innovation world at the moment.

McKinsey data suggests that corporations that prioritize business building grow faster, respond with more resilience, and succeed in parallel ventures more often. But there's a problem. Most business building ventures fail.

Bernd Schmidt & Matthias Kramer at Mantro have helped launch over 20 ventures, most of those in partnership with mid-market and large-scale corporations. During this time, they've learned a lot about ownership and governance models. Bernd and Matthias sat down at our recent Innov8rs Connect on Business Design, Venture Building & Portfolio Management to discuss the early strategies Mantro uses for building new ventures, with a focus on governance.

1. Find

Before you can build the perfect business, you have to find it. Mantro starts by identifying and validating strategic business potentials with their corporate partners. Once they understand their strategic needs, they build the infrastructure and rally the people around a new startup. You should consider evaluating all of the following strategic elements before you begin building a venture:

  • Partner Trust
  • Market Size & Market Growth
  • Windows of Opportunity
  • The Attractiveness of the Value Proposition & Business Model
  • The Validation Roadmap
  • Scalability

In other words, treat business building like you're an angel staring at a crisp new startup. Except, instead of focusing on future valuations, focus on how that business fits into your overall strategy. Think lean, fit, and scale. Mentors should be on-hand to help guide your new team in the early stages.

2. Build

Once Mantro finds the perfect venture idea, they start building it. It's important to let the company evolve in your ecosystem. You want to accelerate its development without putting too much pressure on injecting your strategy layers.

Basically, you want to pick the perfect team and venture. Remember, this team should be focused on growth viability — not strategy. You should consider evaluating all of the following when building your venture:

  • Team Setup
  • Product-Market Fit
  • Lead-to-Sales Conversions
  • Customer Retention & Feedback (NPS)

When the time is right, you'll need to transform from experimentation to scaling. The decision should be made based on viability. If you have third-party partners, external viability can help you gauge when to accelerate. But you can also scale based on the timeline of your core needs.

This is also the stage where you’ll start defining your advisory board and approval catalog. Generally, you should have a well-established advisory board strategy by the time you convert your loan or execute a full ownership grab. But, remember, the venture is still independent at this point. You’re just setting the groundwork.

At this point, you're trying to prove that customers love your product, are willing to pay for that product, and that the overall pricing structure reflects fair market value. Do not grow before you prove value. Otherwise, you risk growing the wrong business based on strategy-fit alone. And if your core strategy changes, you'll be left with a venture that has a poor corporate fit and a poor market fit. Proving market-fit first helps you ease anxieties surrounding corporate fit, especially since your core will be growing alongside this venture.

3. Grow

After Mantro builds the venture, they hand it off to the venture team, let it grow organically, and delivers a successfully marketed business model to their clients. This is important. Mantro waits until the solution is proven until the venture team and business strategy team begins scaling.

You should consider evaluating all of the following during the growth cycle:

  • Profitability
  • VC & PE Valuation Models
  • Early-stage Assumption Comparison
  • Clear Growth-Metrics

It's time to reanalyze your entire venture. Does it still fit with your core? Were your early-stage assumptions true? And are the valuations good enough for your business. If not, this is the out stage. It's ok to leave a venture. If you set up your contract right, exiting now can still leave you in a good position. You can also consider a pivot and growth before an out. But you shouldn't spend years growing something you don't believe in.

For this overall process, Bernd and Matthias summarize their key learnings as follows.

  1. Don't be dogmatic: Every venture is different. Don't take this model as law. You may need to choose different metrics based on fit with the venture.
  2. Metrics and decision criteria change with business maturity: Over time, you'll see qualitative metrics change into quantitative metrics. It's almost impossible to find and build a venture based on quantitative metrics. And it's almost impossible to grow a business based on qualitative metrics.
  3. Early business cases are usually wrong, but that's always alright: Those first business cases are usually wrong. And that's a good thing. Those inaccuracies help you measure the integrity of your financial model, and they can help you find important breakpoints.
  4. Get your teams into working mode: Start like a startup. End like a corporation. Keep teams lean and execution-focused at first. And slowly morph them into strategy teams with advisory boards at the end.

Governance For Early-Stage Ventures? Balancing Autonomy Versus Alignment

Once you find an innovation that checks your boxes, most corporations look to quickly attain ownership and total governance control over that company. Typically, that involves call options, right of first refusal, ~50% total share ownership, and some level of co-funding by a business unit. On the governance end, many corporations install Managing Directors to help steer the company into a particular direction (i.e., the direction that fits your overall strategy). Frequent reporting is also maintained, and strong governance is installed by corporate.

This is the standard approach to early-stage ownership and governance. You want complete control of the company so that you can guide its strategic path to fit the needs of your core. But it's also risky. You're fully invested in the company, and you're deeply rooted in their governance policies. So what happens if (and when) things go south?

Determining if an innovation idea fits within your core business is tricky. Things change. You need to think about your core in the context of time. If it's going to take 5 years to scale up an innovation, you have to predict business-fit based on a projection of where you think your core business will be in the future.

Here's the problem with company building. Strategic paths are rarely linear. Your corporate pathway is going to change. And there's a good chance your innovation will too.

On the core side, c-level installs, rollouts, and re-organizations threaten to completely shift your core model during the innovation scale timeframe. On the innovation side, pivots, new opportunities, and new partners can completely shift the overall position of your innovation. So, it's easy to find yourself in a situation where your strategic fit is no longer clearly visible.

So what do you do? You spent all of this time setting up these governance controls and ownership models only to find yourself staring at a dead horse. Do you keep riding it? Do you jump off? This part is tricky. You probably have that venture consolidated into your balance sheet, so letting it die can disrupt your corporate rating and financials since it's part of your holding structure.

In the early stages, it's important to balance autonomy and alignment, and plan for a fit between the core and the new venture in the future, not force it to fit the current context. Bernd and Matthias summarized their key learnings as fllows:

  1. Strategy is a process: Always focus on future possibilities. What seems strategic now may not be in the future. Give yourself wiggle room to move out of a venture if it doesn't work out. Wait to set up your strategic leverage until the venture is proven. If you try to push too much strategy onto the venture too fast, you can impede growth and external viability.
  2. You don't need total ownership: You can finance/co-finance an innovation without ownership. But if that's too risky for your blood, you can also run an innovation without total governance control. In fact, ownership and governance aren't linear. You can have little ownership and high governance or high ownership and little governance. Try to approach each innovation in a way that makes sense for that project. You don't want to turn ever venture into your own personal R&D unit.
  3. Flexibility is king: Always keep your eye on flexibility. If any ownership or governance changes impact your venture flexibility, they're probably the wrong changes to make.
  4. Pick the right team: The biggest mistake businesses make is choosing a strategy-driven team in the early stage. You can change your team once you scale or prove the venture. Choose early talent based on technical fit — not just strategic fit.
  5. Focus on venture autonomy: Don't integrate your venture too fast. It disrupts organic growth. Give your venture a layer of autonomy (in both ownership and governance) at the beginning. You'll keep the startup mindset.
  6. Three is better than one: Third-party investors give you an external valuation, which is great for proving external value. Plus, it helps you diversify the strategic layer. Call options make it hard to get out of a contract. Once anything is written down on the contract, it impacts flexibility. Think long and hard about your partners and investment rounds before you sign that first contract.

In closing, Bernd and Matthias also added that there is a huge difference between doing innovation projects, and building new ventures. Projects by definition have an end... and ventures, ideally not. Of course, this is still a new field and the jury's still out how effective corporate venture building as vehicle for innovation and growth actually is. Feel free to reach out to Bernd and Matthias if you have any further questions.