Corporate Venture Capital as an innovation tool

“In times of crisis, only imagination is more important than knowledge” — Albert Einstein

The current competitive market dynamics leads corporations to focus much more on innovation. An example is Google, who actively makes use of different corporate innovation tools (Tools for Corporate Innovation https://bit.ly/3ehV4k5) to disrupt the market. One of the relevant entities adding value in this process is Google Ventures, the company’s corporate venture capital fund (CVC).

The corporate venture capital fund (CVC) is an investment vehicle that acts similarly to an independent venture capital fund (IVC) although with unique features (Independent Venture Capital vs. Corporate Venture Capital https://bit.ly/3gPVTm0). According to Josh Lerner of HBS, a CVC is one of the elements that motivates innovation as a powerful system that consistently and efficiently produces new ideas.

Generally, the corporate venture capital fund (CVC) is established as a subsidiary of the organization and is a way to efficiently conduct external research and development, exposing the organization to new technologies and disruptive business models and new forms of entrepreneurial thinking. The objective is to increase productivity in innovation and finally the value of the company.

In this way, the corporate venture capital fund (CVC) beyond investing in startups and being able to increase this investment significantly over time, collaborates with them and contributes with their industry knowledge, business specialization and corporate processes with a long-term vision.

In terms of collaboration priorities, some of the mechanisms to develop innovation through the corporate venture capital fund (CVC) and the alliance with startups are:

1. Proof of concept

The corporate venture capital fund (CVC) is useful to know the technology and the business model, resulting in a preliminary validation of the business model vision and providing feedback to the entrepreneur to see if it is something that is ready to go to market; if it requires adjustments or pivoting or if it is simply just something that does not make sense to continue developing. This is a first approach towards validating a collaboration without compromising company resources.

2. Pilot programs

After prior communication between the corporate venture capital fund (CVC), the startup and (potentially) after a POC, a pilot program can be developed with the company. The objective of the pilot program is to apply the company’s technology or business model in a safe environment, validating its operation, scope and results. Pilot programs may vary in time, due to their implementation and scope. Furthermore, they may or may not be paid by the organization. If the result is satisfactory, there is a high probability that the company will become a client of the startup permanently. In addition, startups benefit from the knowledge of the organization and can be useful to go out to establish other strategic agreements with other companies.

3. Trade agreements

When startups already have a proven and validated product or service, this can be a complement to a company’s business portfolio. In this way, commercial agreements can be established as Microsoft does, where it integrates the product or service as part of its portfolio and sells it in an aggregate form. The startup benefits from the company’s sales force and its client portfolio by receiving a percentage of their sales.

Another form of a trade agreement applies when a startup wants to expand geographically and want a business partner, already operating in the target geography, to supports with its expansion.

4. Technological integration

Sometimes the technology is so relevant that the CVC and the company can take it and carry out a technological integration within their current business model. This allows both parties to offer additional services to those they already had. For example, in supermarkets, currently any customer can pay for services, dispose cash and make deposits to bank accounts. In exchange for this, the startup receives payment for the use of its technology.

5. Joint Ventures

When there is a relevant project where the startup and corporate venture capital fund (CVC) contribute specific resources to obtain a return, a joint venture can be established. In this case, both limit their participation in the project and assign specific resources. The startup leverages its strengths with financial, operational, distribution, and other additional capabilities that the company has.

6. Other mechanisms

There is a diversity of mechanisms that a corporate venture capital fund (CVC) seeks with startups to potentiate innovation. Some others could be an alliance to expand specific capacities of some of it, establish alliances to share knowledge (eg. processes, technologies, etc.).

In summary, corporate venture capital funds (CVCs) are an inexhaustible source of innovation for the organization and a resource for the development of startups, and collaboration structures between both of them ideally assure win-win scenarios. Companies could make use of these innovations and the startups reach out to these allies to meet specific goals. The mechanisms are diverse, as Alfred Hitchcock would say “there is something more important than logic: it is the imagination”.

Written by:

Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund.

ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.

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