CVC: How to attract innovation and possibilities
Nowadays every company has an existing business model and technical capabilities that has developed over the years. Walmart, for example, began in 1950 in Arkansas and was born as a chain in 1962, expanding in Bentonville. Throughout these years it established a business model with a physical territorial presence, buying directly from large producers and selling directly to the consumer. This activity allows Walmart to have a commercial intermediation margin, which is strengthened by the purchasing power it has with suppliers and its great logistical capacity. Today Walmart is the world’s largest retailer with more than 11,000 stores in 27 countries and a market capitalization value of nearly $400bn.
However, new companies with new business models and technical capabilities have threatened Walmart’s position as market leader. Amazon was founded in 1994 as a technology-based company with retail capabilities. Its first business was selling books online. In just 27 years it has reached a market capitalization value of USD$1.7tn, i.e. 4 times the value of Walmart.
Amazon’s dominance has pushed Walmart to look to Corporate Venturing as an element to generate innovation. In a broad sense, Corporate Venturing does not necessarily mean capital investment in startups by corporations. It also includes different tools that corporations have at their disposal, such as acceleration programs, incubators, intrapreneurship programs, venture builders, M&A and CVC’s (Corporate Venture Capital). Google is a clear example of how the use of all these tools can be leveraged to accelerate innovation, and in the case of Walmart an example of how these tools are applied is with Store №8, the company’s internal incubator.
Walmart, like many other corporations, is also investing in startups through corporate Venture Capital funds (CVCs) with the objective of responding to technological and business model changes in a fast, flexible and cheaper way than traditional R&D.
Corporate Innovation Tools
CVCs through investment in startups have the potential to generate different types of innovation impacting processes, products and services, and business models.
- Processes: Are those operational or administrative systems that are designed to fulfill the purpose of the organization and generate value for shareholders.
- When a CVC invests in processes, it has a short-term focus, trying to solve the immediate needs of the organization’s areas. The organization tries to improve existing processes or acquire new capabilities to carry out this process. For example, Walmart has a high efficiency in the management of the physical store, however e-commerce has led it to acquire new capabilities that allow it to be competitive with 100% digital businesses.
- This search leads them to find particular solutions that often impact a specific business area. Applying generic Corporate Venturing leads CVC funds to not necessarily invest in startups but to develop proof of concept (PoC) or pilot programs validating the technology and value proposition to implement this new solution.
- Product / Service: Perhaps the most obvious way is to impact the organization’s products or services, influencing complementary or substitute products.
- CVCs look for solutions that can increase the value proposition of the product or service to the customer. Sometimes this search is complicated, as typically the organization has a great deal of knowledge in this area, so finding adjacent value propositions could be complex.
- The products or services are the source of value generation for the organization, so investment in startups or new technologies would necessarily have to have a strategic impact on the organization. In addition, in certain circumstances the organization could buy the startup or its technology instead of investing or conducting a proof of concept or pilot beforehand.
- Business model: The mechanism through which companies generate profits.
- CVCs usually spend significant time trying to understand new business models and the impact of their technologies, as this may be the way to generate the most value for a company’s shareholders.
- As a strategic issue for the organization the use case could be unclear for the company, as it requires a long term vision to really understand the impact it could have on the business. For example, blockchain technology is currently in early stages building use cases in the financial and other sectors. The boldest visionary banks such as Bank of America, JP Morgan and Goldman Sachs have invested in this technology in order not to be left behind and to face changes proactively.
- Nevertheless, the investment and adaptation of the business model is extremely complicated for those organizations that do not have a visionary leadership and a culture of transformation.
The CVC impact has different effects on the innovation that is generated within the organization.
- Disruptive: Generates internal resistance at the beginning, produces permanent change and brings long-term benefits.
- The activity of CVC funds like Amazon’s Alexa is to look for technologies or businesses that can bring value not only incrementally but in a disruptive way creating the next big area of development of the organization. Sometimes the disruptive effect starts with the simple fact of technological or digital integration. The pandemic has resulted in traditional companies or large corporates like Walmart having the need to reach out to the e-commerce world looking for customer activation, order processing, and home product delivery. Companies like OlaClick, Parrot and GetJusto are supporting this digital transformation for retailers and restaurants of all sizes.
- Breakthrough: Innovation that is poorly perceived because it is poorly understood by the organization’s management team and potentially does not align with the current strategy.
- Sometimes the degree of technological complexity is so high that the CVC and the organization require specialized advice to be able to understand it. In addition, the CVC must evaluate at what stage of the innovation curve the technology is to determine if it is a bet worth taking, or if it is simply a technology at a very early stage where it is better to wait for it to evolve and be used by the market.
- Blockchain technology is combining with finance to create decentralized finance, which represents a challenge for governments and companies. However, the evolution of this technology and its potential use will undoubtedly be a milestone in the development of the economy.
The leadership and culture of the organization impacts the DNA of the CVC, the strategies it pursues and the way it invests. This definition will lead to whether the organization has access to more or less innovation and whether the benefits gained by the organization actually have a significant and lasting effect.
Corporate Venturing is a tool to attract external innovation. From a broad point of view, the organization does not need to invest capital to carry out this activity. All companies should determine under which circumstances it is convenient to invest capital and in which others simply use some of the tools in the Corporate Venturing portfolio to generate innovation.
Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.
Gonzalo Soriano. VC Investor at ACV.
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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