When to build a corporate venture (and when not to)

When to build a corporate venture (and when not to)
SparkOptimus TeamHidde van Manen
Written by
Hidde van Manen
&
The SparkOptimus Blog Team
April 21, 2022
Content of this insight

<div class="insights_cta-component">This is the second article in our series on corporate venturing</div>

As a C-level executive or head of strategy, you are continuously on the look-out for disruptive trends and want to understand how to effectively tap into an environment that is continuously changing. You may already have specific ideas in mind on how to do this, perhaps through a corporate venture or some transformative innovation. But you only have so many hours in a day and may not be fully up to speed on the latest best-practices on corporate venturing. What are the conditions to build a corporate venture? And will corporate ventures work for you at all? In other words: when should you build a corporate venture, and when shouldn’t you?

Although some believe corporates aren’t suited to venture into the agile, fast-paced world of building a start-up themselves, our experience tells otherwise. Contrary to popular belief, corporates can and do beat start-ups at their own game when building ventures from scratch. If built properly, corporate ventures can enjoy all the advantages start-ups have, while leveraging typical corporate assets, and thus build lasting competitive advantages and create long-term value.

Synergies: Beat start-ups at their own game by exploiting synergies between corporate & venture

However, corporate ventures aren’t for everyone. They should only be built in certain situations, under a strict set of circumstances. Starting a venture with the wrong idea, or not setting it up for success, will typically result in pulling the plug a few months/years down the line – and lots of investments wasted in the process. To make sure you invest wisely, here are three ‘checks’ we believe you need to pass before going full steam ahead and building a venture.

CHECK #1: DOES BUILDING A VENTURE FIT WELL IN YOUR OVERARCHING CORPORATE STRATEGY?

Optimize, transform and disrupt

It only makes sense to build a venture if it fits in well with your overarching corporate strategy. That is, if doing so maintains the right balance across the three horizons that we discussed in our SparkOptimus Ventures Introduction: ‘Optimization’, ‘Transformation’, and ‘Disruption’. Developing new business models (i.e. ventures) is only one of the three horizons, and to achieve smooth growth, you need to spread initiatives and management time across these horizons in a way that upholds the equilibrium.  

<div class="insights_cta-component">Emesa (VakantieVeilingen.nl) had been growing at a tremendous pace when they approached us. Leaving the start-up years behind, the shareholder and its management felt a new level of strategic focus was key to igniting the next phase of significant growth. We agreed and concluded that instead of focusing on new disruptive initiatives, Emesa needed to re-balance management time it spent more towards the first two horizons. We helped Emesa compile and prioritise growth ideas across the three horizons into a coherent and focused growth strategy, balancing innovative high-risk/high-growth ideas with low-risk operational excellence and expansion initiatives. This approach solidified the operation and delivered immediate EBITDA growth to fuel the next phase of entrepreneurship. </div>

Not all ‘ventures’ are ventures

When determining your innovation portfolio across the horizons, first make sure the ideas you consider “disruptive” actually belong in that category. Although certain ideas may feel very disruptive, they may not be ventures at all and shouldn’t be treated as such. The goal of a venture is to explore new (digital) propositions or invent new products that reach further outside a company’s core. They generally aren’t expected to become a core activity for the next 5-10 years. What’s more, they often cause friction with existing business and may even cannibalize on it.  

For example, we worked with HEINEKEN to develop a B2B platform, which felt quite disruptive to their industry. But it was in fact very much intertwined with their existing business and mainly allowed them to serve their current clients better, faster, and cheaper. After initial pilot testing, the platform became part of the core business within a few years. HEINEKEN’s digital B2C venture Beerwulf, on the other hand, was a disruptive idea that extended far beyond the company’s core. It caused natural friction with existing business (e.g. by also offering non-HEINEKEN partner products), and therefore was set up as an independent legal entity, had a separate P&L, and should not be expected anytime soon to be integrated with HEINEKEN’s core activities.  

Three horizons: Not all ‘ventures’ are ventures

Another example is KRAMP, a supplier of parts and technical services for the agricultural sector. We supported them in setting up an online direct-to-customer channel. This was transformative to their business but not disruptive, and it was fully capable of running inside the existing organization. As such, we don’t consider this channel a venture.

But we also built a disruptive platform with KRAMP that goes beyond their current categories and which we would consider a venture. On this platform, farmers can find everything they need; not only parts and technical services, but also farm feed, seeds, and even financing. Also see our interview with KRAMP’s CEO, Eddie Perdok, where he explains how they “incorporated all of the stakeholders and parties in the agricultural ecosystem in order to offer the farmer a good value proposition”. Again, this causes natural friction with the existing business and perhaps even cannibalization thereof, and needs to be managed separately – at least for the foreseeable future.  

CHECK #2: IS BUILDING A VENTURE THE BEST OPTION VERSUS BUYING OR PARTNERING?

You don’t always need to build a venture yourself – depending on your strategy, buying or partnering may be a smarter option. If there are interesting disruptive players in your industry, it often makes sense to first better understand if they could be potential acquisition targets for you. Building a venture is great if you want to develop internal capabilities for digital business, achieve 100% strategic fit from day one, and don’t want to pay the premium you otherwise would in M&A. But there are times when buying a venture is the better choice, especially when there are already scaled players in the market. Key risks with this strategy are a lack of long-term strategic fit between the venture and your corporate strategy, and critical staff leaving straight after buying it. Partnering to (further) develop a venture mixes elements of the first two approaches and is a great choice if you feel you need to learn from best-practices and adopt new ways of working, while keeping investments manageable.

<div class="insights_cta-component">Instead of building or buying their own venture, supermarket chain Jumbo created a partnership with grocery delivery company Gorillas. This allowed Gorillas to leverage synergies from Jumbo’s immensely broad product range and strong bargaining power, while Jumbo gained access to both speed and (digital) capabilities that would have been difficult to acquire themselves. </div>

CHECK #3: CAN YOU SET THE VENTURE UP FOR SUCCESS FROM THE START?

So you have a great disruptive idea that fits your strategy and you’ve decided that building it yourself is the best option. As you know, success it not guaranteed for a venture because it’s a high-risk endeavor. So to have any chance of achieving your goal, you must be prepared for success from day one. This depends on two key factors, which we’ll discuss below.

Are there synergies with the ‘mothership’ you can leverage?

This touches on ‘Check #1’ above, as there needs to be a real strategic match with current overarching corporate.  

Synergies: Car2Go and Vipps were set up for success with clear synergies between corporate & venture

Take Daimler, for example, which started Car2Go. It offers the obvious benefit for the venture that they can supply the (capital intensive) vehicle fleet, while the mothership also benefits from acquiring a whole new consumer group for their product. Another example is Vipps, the payment app by Norwegian financial services provider DNB. These ventures could leverage synergies with the corporate ‘mothership’, giving them a much larger chance of succeeding.

<div class="insights_cta-component">LeasePlan had hundreds of thousands of used cars coming back from lease every year. This offered them a good starting point for establishing CarNext: a sales platform for used cars that effectively leveraged synergies with the parent organization. CarNext sells LeasePlan’s post-lease inventory and is now the biggest pan-EU platform for the second-hand car market. Its built on LeasePlan’s funds, tooling, processes, networks and people. </div>

Are you ready and willing to do what it takes?

In the venturing space, you need to be willing to make unconventional decisions and act under uncertainty. You need to test, learn and adapt quickly, and fail fast to eventually find a sustainable model to create customer value and succeed.

This requires a different way of working than most corporates are accustomed to. In order to thrive in the venturing space as a corporate, you need to build a separate venture team and give that team all the freedom it needs with a reporting line to a senior stakeholder within the corporate – and the right mandate to make exceptions to the rule.  

Different mindset: Ventures can flourish when they are not managed like corporate projects

Furthermore, investments will be significant – once a venture gains traction you often need to invest more, not less. It’s vital to employ stage-gated funding, where you invest more as the venture shows progress and results. You can only pull this off if you are absolutely ready and willing from the start to do what it takes.  

In conclusion, deciding when to build a venture is by no means a simple task. However, with the right checks in place, you can significantly mitigate risk and move ahead with confidence. It’s certainly not a luxury to do your homework first in order to understand whether a venture fits well into your corporate strategy, and whether building, buying, or partnering is the best option. And that whenever you do decide to build a venture, you are set up for success.

NEXT UP IN THIS ARTICLE SERIES

We have learned a lot through helping our clients over the years, and we’ll be sharing our key insights with you in a number of publications – see below the list of topics we will cover:

  • How to scale: Taking the right steps from start-up to a successfully scaled organization  
  • Common pitfalls: What can go wrong and how to make sure to avoid it
  • Governance – set-up: How to govern ventures correctly with the right targets, reporting lines, financing, etc.
  • Team: Solving key questions on venture teams and the importance of a great venture lead
  • Governance – freedom balance: Finding the right balance between giving a venture freedom versus ensuring a strategic match
  • Manage (KPIs): Looking at the right KPIs based on the de-risking funnel, performance analytics, and reporting to corporate
  • Venture tooling: How to make the key choices and available options for MVP landscape tools, growth hacking tools, and collaboration tools
  • Customer validation best reads: Sharing our top picks in the literature on customer validation

Stay tuned!

We hope you’re as excited as we are and please let us know if you have specific topics or questions you would like us to share with you.

Hidde van Manen
Managing Partner

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