Learning to fail: guide for the CVC
“Our strength comes from concentrating on the idea. Dig deep, range wide — and the ideas will come.
Godtfred Kirk Christiansen
Second generation owner of the LEGO Group, 1955
Who knows, has played with or has Legos at home? Yet, very few know that by 2003, the world’s most recognized toy brand was on the verge of closing due to a bad innovation strategy that generated negative results for more than 5 years since 1998. In the words of Mads Nipper, executive vice president of the company, they were not making toys interesting enough for children, nor did they understand the changes in the consumer and the market. Children had less time to play and markets such as the European market showed a decreasing trend in its underage population.
After ending the DUPLO line focused on small children, the inclusion of different shaped tokens in various colors that increased production costs, and a strategy of expansion through theme parks around the world, which generated overinvestment at a time when the company was not being profitable, LEGO was not afraid of failure and had the ability to reinvent itself.
The first major change was in the leadership of the company, which was handed over to an executive who was not part of the founding family. With the new management came a strong cost reduction strategy and an improved product portfolio. The traditional and profitable plastic token sets were maintained, but the need to accompany them with digital products was understood. That is why the creation of its own social network, discussion forums, and the focus on a Customer Centric company where consumers are encouraged to create new designs and vote for the ones they like the most, have brought their buyers closer again with the objective of being leaders in their market.
Lego was founded in 1932 in Denmark, the last decades has expanded its global presence and has become a recognized and trusted brand. In addition, they created Lego Ventures which shares the mission to inspire and develop today’s builders.
Lego Ventures is the corporate venture capital fund that invests in the future of creativity, learning and playing. It is dedicated to accelerating innovation by connecting entrepreneurs with resources, relationships and industry experts to succeed. In addition, they share the group’s knowledge of children’s consumer trends and the education market with startups.
Lego Ventures has invested, as a leader or a part of the syndicate, in 13 growth-stage startups that have achieved Product Market Fit and a growing active customer base. They invest globally with teams in San Francisco, New York and London. The Trust seeks to partner with portfolio companies over the long term. They recognize the need to be patient in investing capital to support their portfolio and achieve their financial and strategic objectives.
Lego is the clear example of companies that have failed or are willing to fail pursuing a more prosperous future. Are there more corporations ready to fail, are corporations ready to invest in venture capital, are they ready to invest in venture capital?
Companies must recognize that there is always a chance of failure. The key is to have more successes than failures. If a company has not failed, then it is not truly trying, it is not taking risks. Venture Capital investing is a long term game. For this game, you first need strong leadership that believes it is possible to go for more, that is making enough investments to be able to add value to the startups in the portfolio and also learn. Organizations can learn from successes and failures and must be committed to the venture capital investment process for the long term, according to comments from Carlos Kokron of Qualcom Ventures and Sean Simpson of COPEC at INC Monterrey.
Is Corporate Venture Capital for any company?
Although the CVC promotes innovation, it is not an instrument that is designed for every company. One factor to consider is the size of the organization, as it needs to allocate at least USD$30 to $50 million in a first fund, although the minimum size is close to USD$100 million to invest in multiple startups and deleverage the fund’s risk.
In addition, despite innovative structures such as Sequoia’s, VC remains a long-term commitment. Therefore, the organization has to be open to invest three or four times the amount of the initial fund. Nevertheless, VC is not a magic bullet, it has to be part of a broad innovation strategy, with an experienced VC team, perhaps with experience in entrepreneurship, and with a connection to the entrepreneurial ecosystem and within the organization.
How can companies and their leaders be prepared to fall and rise, especially in emerging markets?
For Sean and Carlos, one is not ready overnight. It requires a change in the organizational culture, a change in the mindset of its leaders which must be deployed at all levels of the organization, but above all it requires the ability to make things happen. The important thing is not to achieve good results, what is valuable is to try, to fall, to learn and to grow. In this sense, no one should be punished for mistakes, they should learn from them, motivate the team to obtain good results, in short, the team should have the psychological security of operating in a reliable environment.
How should a CVC be built and should it be part of the organization or operate externally?
Initially, CVCs are born within the organization. However, the trend has changed and currently there are CVCs that are external to the companies. For Carlos, the most important thing is that the fund provides value to the corporation and generates a continuous questioning of the innovation process on both sides of the organization. Likewise, the CVC must always support the corporation, although it must maintain its independence which allows it to get out of the box and look for disruptive ideas for the business. Therefore, the trend today is for CVCs to be external to the organization, with a structure and incentives similar to those of a traditional Venture Capital fund.
Who are the best profiles to form a CVC?
Given that the Venture Capital world is highly collaborative, a leader with experience in the market and a good relationship with key stakeholders in the entrepreneurial ecosystem is required. The team can be joined by an internal person who has great transversal knowledge of the company, is flexible and quick to change and thinks differently about the business. However, the most important thing is to be agile in the environment and react quickly.
How to build a good portfolio in a CVC?
Building a portfolio is something that takes time and experience. The CVC must establish an investment thesis and be disciplined and patient in executing it. The team requires a high origination capability derived from its relationships in the VC ecosystem with entrepreneurs and Venture Capital funds. The investment process must be robust and market standard in terms of efficiency and speed. Clearly this is achieved through the leadership of the CVC, who have the conviction to develop and invest in the best startups generating added value to them and to the organization.
In the end, the most important thing for CVCs is to move fast to generate transformation, innovate, understand new technologies and thus create value within and around companies.
Like LEGO, any organization that intends to innovate and transform itself must be willing to fail by taking risks, empowering teams and transforming the organizational culture. Those organizations that do not use technology as an ally, do not collaborate with startups and do not see the Venture Capital ecosystem as a source of development, will be destined not to evolve but to potentially fail at some point.
“Creativity is the ability to come up with ideas that are new, surprising and valuable — and it’s an essential 21st century skill”. The LEGO Brand Values. 2021.
Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.
Catalina Ruiz. VC Investor at AC Ventures
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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