Challenging times for corporate venture capital

By Jochen Ditsche and Ulrich Kleipaß

Corporate venture capital (CVC) investments are generally a win-win deal: The venture receives a financial injection and can draw on the corporate investor's production facilities, expertise, sales channels and reputation. The corporate investor, besides a financial return on its investment, can access the venture's innovations, people and distribution channels. But the challenges of cost cutting, growing competition from private equity investors and now the Covid-19 pandemic are putting CVC units under pressure to adapt. How can they build a sustainable virtual operating model, ensure that they provide real value to all stakeholders and at the same time cope with the demands of the independent venture capital world? Our study attempts to provide some answers.

Challenges abound

CVC firms have been having an exciting time over the past decade. Both the number of corporate investments in new ventures and the total amount of CVC funding has soared, from around EUR 29 billion in 2016 to in excess of EUR 60 billion in 2020. This increase in overall investment has been mirrored by an increase in the size of corporate investors' funds.

But in today's belt-tightening times, CVC units are facing new challenges both from within their own companies and from outside. Internally, they are often being called upon to justify their "right to exist". This can be tricky, as the impact of CVC investments is usually only apparent in the medium to long term, and is often strategic rather than purely financial. CVC units can find themselves juggling the various interests of the different stakeholders within the organization. And with the average tenure of C-suite members shortening, it can prove difficult to keep up with changes in the company's priorities and strategic agenda.

External factors also present challenges. Corporate investors are increasing the size of their investments and shifting their focus towards later-stage deals, while private equity investors are moving towards smaller ticket sizes and earlier-stage deals. This creates overlap between their areas of interest and even direct competition over the same startups . At the same time, the Covid-19 pandemic has put companies under increased cost pressure and reduced their appetite for risk. Investing companies have had to learn how to find potential investment targets, perform due diligences and interact with new ventures virtually rather than in person. In some cases this has prompted companies to rethink their entire innovation strategy.

Recommendations for maintaining growth

We interviewed more than 50 senior executives in CVC units to find out how companies can secure growth despite the challenges, and what they should be doing to prepare themselves for the "new normal" of the post-pandemic world. Our recommendations, summarized below, are based on their responses and backed up by our own analysis.

#1 Build a sustainable virtual operating model

Companies need to create a virtual operating model that will survive beyond the pandemic. This new model should encompass three key dimensions: processes (enabling virtual networking sessions, virtual due diligences, virtual management, virtual support for ventures, and so on); organizational structure and governance (managing a distributed workforce and remote working, for instance); and leadership (empowering employees to make independent decisions rather than re-establishing former hierarchies).

#2 Provide "smart" capital

Corporate investors should provide the ventures they invest in with access to their resources and expertise, and develop technical interfaces that allow them to connect with their IT (information technology) and OT (operational technology) system. They can foster collaboration between the business units and the ventures by dividing the CVC unit team into "hunters" (responsible for identifying potential investment cases, conducting due diligences and managing investments, for example) and "farmers" (responsible for nurturing the investment and creating opportunities that benefit both the venture and the business units).

#3 Measure impact and tell powerful stories

Equally importantly, companies should measure and communicate the impact of their CVC investments. KPIs should consist of 50 percent financial metrics and 50 percent strategic targets, achievement of the latter being demonstrated by means of powerful success stories. Effectively measuring and communicating impact will help the CVC unit fend off attacks both from inside the company and outside it. In addition, the CVC unit needs to become a trusted advisor to stakeholders within the company, providing them with technology-driven market intelligence.

#4 Manage the CVC and IVC worlds

CVC units operate in a complex environment, shaped by often conflicting demands from within their own companies and from the IVC (independent venture capital) world. They must act as a liaison between these two worlds, maintaining strong relationships with both. Critically, they should not be a venture investor in name only.

#5 Rethink your investment approach and focus

Finally, corporate investors should develop new forms of investment and partnerships, such as separate funds in partnership with external investors. Cooperating with external partners can be extremely beneficial for CVC units, generating new impetus for their work. At the same time, we encourage them to review their investment approach and increase their focus on sustainability and "green tech", areas that promise strong future growth.

How will CVC further evolve and what will be required of CVC units 2022 and beyond? How can corporate investors create sustainable win-win situations for the corporate partner and portfolio startups? We invite you to contact us via email or connect with Ulrich Kleipass or Gerwin Fels to discuss your thoughts.

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