“Innovation is the central theme of economic prosperity” — Michael Porter
Companies as different as Mitsubishi, Ford, Virgin and Accenture have something in common, they have all made investments in Venture Capital (VC). They have invested in companies that use disruptive technology, innovation and business models, for example, Coinbase, Rivian, OneWeb and Ripple. The main objective of these Corporate Venture Capital (CVC) funds is to generate value for the organization, usually strategic, in addition to financial performance.
Venture Capital Corporate funds are not a novel idea. At the beginning of the second half of the 20th century, the first investment vehicles led by companies such as GE, DuPont, 3M and Alcoa were established. Over time this concept has evolved and today the largest companies worldwide use it as a vehicle for innovation.
In the last 10 years, more than 3,200 corporations worldwide have made investments in Venture Capital and only in the first half of 2020, they have carried out more than 1,500 transactions (GCV). To date, the CVCs investment share of the total investments in VC is estimated at around 25%, a growth of 6 percentage points in the last 5 years (CBInsights). The expectation is that said participation will continue to increase in the coming years, perhaps until reaching the investment amount of independent VC funds.
A Corporate Venture Capital fund is a vehicle established by the company to channel capital in the form of investment to startups. Its objective is to generate financial returns on invested capital just like an independent VC fund. However, the main difference in relation to an independent VC fund is that in most cases CVCs seek strategic returns that strengthen the corporate or business strategy. In addition, to complement existing operational capabilities or develop those capabilities from scratch.
Unlike independent VC funds that usually have a life span of 10 years, a CVC can have a short- and long-term vision according to its strategy, structure and investment thesis. The short-term strategy aims to apply innovation to the organization’s operations, seeking to generate value immediately; for example, investments in social distancing technologies linked to external events such as the current pandemic. The long-term strategy seeks investments with a view to profound market transformations; for example, investments in autonomous vehicles to transport products through the supply chain.
CVCs are a generator of innovation within organizations. They seek to disrupt processes, products or services and business models. This innovation can be incremental when value is added through continuous improvement, disruptive when a new technology displaces an existing one, and breakthrough when a radical technological change and paradigm shift is generated.
In addition to the investments made by CVCs, such as ZX Venture, AB InBev’s investment arm in Venture Capital, they also impact the organization’s processes through proofs of concept or pilots specifically focused on use cases that originate for the organization. For example, if the company seeks to streamline the delivery of an order from the warehouse to the point of sale or direct to the consumer, it can turn to route efficiency technology that uses Big Data, Artificial Intelligence and Machine Learning.
When it comes to products and services, organizations seek to strengthen or complement their product or portfolio categories. For example, ZX Ventures has invested in more than 13 companies dedicated to the production of craft beer (eg Barbarian, Boxing Cat, Cucapa, Patagonia, etc).
They can also seek investment and innovation through new business models. In the case of ZX Ventures, it seeks to distribute its product directly to the customer (eg Semper em casa), receive orders from convenience stores through technological platforms (eg My market), among others.
The importance of CVCs in economic development has gained relevance in the current environment and is presented as a catalyst in the innovation and progress of a society. Emerging markets are being receptive to these types of initiatives, where CVCs are channeling investment in new companies. For example, in Mexico, companies like Bimbo and Cemex have investment vehicles that provide smart money to the ecosystem of entrepreneurship and innovation.
In addition, the CVC is a great vehicle to generate innovation. Through investment, they also favor the research and development of new technologies that seek to have an impact on the economy of a country. Similarly, it facilitates the generation of new knowledge, the development of startups and the emergence of best market practices.
CVCs are a vehicle that favors economic competition and to a certain extent seeks to generate wealth by redistributing it in the hands of entrepreneurs. These funds serve as a development lever for startups, not only for financial investment, but also for knowledge, business networks, commercial projects and infrastructure that they can share with entrepreneurs. They are also an inexhaustible source of intangible resources available not only to their corporations, but also to entrepreneurs.
Every organization must recognize that innovation is a primary task that defines corporate and business strategy, while generating competitive advantages in the market. CVCs are a powerful mechanism to meet these goals and accelerate the corporate process to become an innovative company. Building and operating a corporate fund is a strategic task that requires talent, resources and a genuine culture of innovation that permeates all corporate areas. Any organization that wants to endure in the long term should have a CVC in its sights.
“If you want something new, you have to stop doing something old”
— Peter Drucker
Note: please refer to the original publication at EL CEO: https://elceo.com/opinion/fondos-corporativos-de-venture-capital-como-pilar-de-la-estrategia-de-innovacion/
Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.
Ricardo Latournerie. Investment analyst at ACV.
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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