Companies are increasingly using corporate venturing as a tool to expand on internally motivated innovation initiatives. Being a serious player in corporate venturing, however, requires governance rules and cultural dynamics that do not always fit into the existing corporate context.
This is the sixth article in our series on corporate venturing.
- What is corporate governance?
- Managing the differences between corporate and venture governance
- How corporate ventures could be structured as a separate company
- De-risking the venture
- Who pays?
As we’ve already touched upon in our previous articles on Corporate Venturing, ventures and scale-ups require a fundamentally different approach to governance than conventional corporate businesses. Previously we discussed the common pitfall of corporates making their ventures adhere to corporate standards like in their IT infrastructure, legal checks, and corporate hiring processes.
While these standards make sense for the type of companies they are designed for – international corporates with tens of thousands of employees – when building a venture you need speed and agility, and that is exactly what those standards fail to accommodate for.
In this article we will concentrate on the optimal governance set-up – namely how to govern ventures correctly with the right targets, reporting lines and financing to name but a few.
What is corporate governance?
The corporate governance essentially means the set of rules that govern the way companies control and manage. It distributes and balances the powers among all the different stakeholders of the company (board of directors, shareholders, clients, suppliers, employees) and establishes the rules and decision-making procedures that must be followed.
To put it plainly, the main, and often only objective of a company is to create value.
In corporate business setting, we are rightly geared towards making use of the already existing business models – we’ve seen it work time and time again. However, it is by no means self-evident that conventional approaches to governance work in corporate venturing – they are more likely optimized for compliance or accountability, but not to support the process of innovation.
So while in a corporate business setting we tend to avoid risk, optimize bottom-line, try and get it right first time, predict outcomes, have long timelines and practice strict operational excellence, we should all but abandon this line of governance when it comes to the fledgling venture.
Managing the differences between corporate and venture governance
In business model innovation (also known as Horizon 3 Innovation) we explore new opportunities and at first glance the approach looks the complete opposite of the business model we’re used to – and the leap of faith that requires from the corporate stakeholders can be anxiety-inducing.
It’s important to keep in mind that Horizon 3 essentially means the creation of new capabilities and new business to take advantage of or respond to disruptive opportunities or to counter disruption. It’s not business-as-usual by any metric.
In principle:
To manage these differences successfully, you need to give the venture sufficient freedom, structure it as a separate company, and de-risk with stage-gated financing. Let’s break this down.
Give the venture sufficient freedom
Corporate assets (like partnerships, expertise, funding to name a few) are some of the most logical sources for building a sustainable competitive advantage at any venture project. The issue is that sometimes it’s difficult to use the necessary resources appropriately or quickly enough. Delays in corporate governance may cause the venture to lose that all-important momentum. This is why giving the venture sufficient freedom to set up fit-for-purpose governance, processes, and policies is vital.
Set targets / KPIs for learning & growth
Because corporate venturing involves big investment, it creates high expectations. But now is not the time to focus on profitability. If ventures are handled like corporations, they fail. In other words, forcing existing business models and KPI’s instead of exploring and developing new ones, and trying to squeeze out profits while the susceptible start-up is not yet even viable is a recipe for failure.
Instead, you need to test, learn and adapt quickly, and fail fast to eventually find a sustainable business model. In short, ensure your team focuses on testing and learning what is the right (and viable) business model for your venture, and only then consider growing it. The KPIs will change over the first few years along with the developing maturity of the venture.
Create tailored HR processes & policies
Because early-stage ventures are often more focused on product and customer development, it’s no surprise they don’t tend to spend much time worrying about HR processes and policies. But in order for your young venture to flourish, you need the right people to take it forward – and you need them fast.
Whereas in the corporate setting you may hire a certain individual for a specific role after countless rounds of interviews, trials and evaluations, in a venture you need to be able to rapidly hire the necessary talent. And often instead of specific skillsets, you need a healthy mix of individuals with a wide range of skills and backgrounds, able to take on an almost jack-of-all-traits mindset, as the required roles and even the setup of the venture constantly changes.
Separate your IT setup & policies
Testing out new technologies within corporations is complicated due to the sheer size and the potential risks involved in making big changes at that scale. This is not the case with ventures – but you should still take care with the setup of your IT infrastructure and policies and ensure they are the right fit.
Although it may seem tempting, integration with your current systems is not value-adding in this stage. Your venture needs speed and agility to enable quick development of new features and technology landscapes. Don’t shy away from re-platforming and using third party tools if that’s what is needed to get you ahead. Of course, you should remain modular and agile, so probably don’t invest in giant best-of-suite solutions just yet. Instead, build modules step-by-step as the needs arise and connect them to a scalable modern backbone of your growing venture.
Give fit-for-purpose legal support
Corporates manage small risks, because their scale is huge. Covering all those small risks costs a lot of time and effort – and slows down your speed of innovation. And without speed of innovation, your corporate venture doesn’t stand a chance. In ventures, you are willing to take on more risk, because your scale is tiny. This means you should judge costs and risks differently than you would for corporates.
Ultimately, there’s often plenty of room to speed up and come up with creative new solutions that are legally sound, once you accept that the risk in corporate venturing is fundamentally different.
Structure the venture as a separate company
There are different ways to ensure the abovementioned points within a corporate governance framework. We have clients that have managed to create internal processes and guidelines to set up this up within the corporate structure.
However, we also have many clients – typically the complex international stock-listed kind – that struggle with giving sufficient freedom within their existing policy framework. With those clients, we have worked to structure ventures as separate companies. From our perspective, this overcomes most of the internal challenges, which we’ll detail below.
Corporate ventures could be structured as a separate company, with its own:
Investment cycle
Here, the investment is fundamentally Venture Capital-inspired. It’s based on “investment rounds” that are linked to certain goals you want to achieve (meaning; validating the solution, getting to profitable unit economics or expanding to a new country) rather than business-as-usual budgets which are simply based on “time & people & marketing” spend. This essentially means setting up a structured investment cycle that is in line with the parent company’s budget cycle, but waives the monthly reporting requirements for ventures. We’ll talk more about this later in the article.
Legal entity
A separate legal entity offers the venture a certain piece of autonomy and speed around execution. This can mean a separate legal entity with a supervisory board that oversees the venture, represents the parent’s interests and includes outside expertise. In order to experiment with new business models, you need a more agile corporate environment and leaner policies.
Financing horizon & set-up
You should finance your ventures from a separate fund to ensure the ventures are not smothered by P&L (profit & loss) requirements of the regular business. In practice, this means you will need to set up the venture as a separate, dedicated unit outside of your current organization, with sufficiently high reporting lines.
The venture entity can be owned by the parent company, directly or via a separate umbrella entity which governs multiple of the corporates ventures. This is the ideal situation. However, we do have some clients who find it difficult to set this up quickly enough, usually within a few months. For them, we have created a service in which SparkOptimus temporarily ‘hosts’ the venture entity and manages the data, HR, contractual, legal, and financials risks involved. This has proven to help accelerate venture development tremendously.
For example, we worked with HEINEKEN to develop the digital B2C venture Beerwulf, where we organized the venture separately from HEINEKEN’s existing business. Here’s how:
We set-up the team around the required core capabilities (Traffic, UX / conversion, CRM, IT, etc.) that reported to Beerwulf’s Managing Director, who then reported to a separate board (the ‘Beerwulf BoD’) to ensure speed & agility.
It’s worth noting that Beerwulf’s functions were separate from HEINEKEN – they did not report into functions from HEINEKEN, with potential exception for some key policies (e.g. IT, HR)
De-risk the venture with stage-gated financing
The rewards of corporate venturing can be quite vast in terms of growth, innovation and profitability, but it’s not a risk-free process. VCs (when corporations use direct equity investments to target start-ups of strategic interest) typically de-risk the venture building process by ensuring that the size of the investment is in line with the degree of certainty along three dimensions; desirability, feasibility, viability.
Stage-gate financing, on the other hand, ensures funding is released only when pre-set milestones are met. For example:
- After the initial proposition, a standardized €25k budget is released for the preliminary exploration phase – which means validating the complications with real consumers/customers and sharpening the solution direction in line with the business strategy.
- After a customer need has been shown to exist (i.e. the desirability of the project/product), and the venture team has shown basic feasibility to deliver at scale and viability to make money – an additional investment of €50-100k is released to develop and validate the concept through one or multiple ‘proof of concepts’
- Then, once a first MVP is launched, another €100-500k is released after it is actually used by engaged users, and the team has managed to pilot their capability to deliver customer value and get first revenue with, e.g., a transaction model
This process of releasing funds after meeting milestones then continues through the “grow” and “scale” phase, and can be customized to the requirements of the specific venture. The financial end model also depends on whether you will spin-out, spin-in, or merge into existing business lines. Most ideas need to grow into financially independent businesses, but for some strategic ideas there might be different routes.
But who should pay for all of these investments along the funnel?
In an ideal world, you want to get innovation like this funded from a separate investment fund. This fund should be ringfenced and thus disconnected from short-term P&L pressure from the core business.
If you don’t ringfence it, but take it from the normal P&L, money often gets squeezed out when times are tough. By doing that, you risk not investing in long-term innovation, and you will likely find yourself regretting this later.
So, it indeed seems like a separate investment fund is the optimal choice. It sounds easy in theory, but many of our clients have found this hard to implement. What we find interesting though, is that they in fact have a similar fund set-up for acquisitions – but not for partnering/building new innovative ideas themselves.
And finally, it should go without saying that C-level executive representation and support for “business model innovation” is an important enabler for such projects to have the chance to thrive.
Stay tuned for our next article on corporate venturing governance, in which we’ll talk about the friction that often exists between the ‘corporate’ and the ‘venture’.
THE VENTURE 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. The topics we cover are:
Introduction to corporate venturing: This article is the first in our new series of articles on ventures and scale-ups in a corporate setting.
When to build (and when not to): Exploring further that ventures aren’t for everyone, as strategy dictates approach
How to build a venture: Drawing the journey of venture building with activities, deliverables, and team set-up for each phase
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.
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
Team: Solving key questions on venture teams and the importance of a great venture lead
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.