July 26, 2016
Special guest author John B. Riggs, Principal, PwC Innovation & Corporate Venturing
You’re committed to innovations that will keep your company ahead. You’ve expanded the R&D budget, appointed an innovation team to spur fresh thinking, perhaps even created a division to develop new products and services.
All the same, you know your toughest competitor also intends to create the next big thing, and you’re well aware that some agile young startup could disrupt your sector in a flash. Meanwhile, your board seeks bigger returns, even if that means embracing more risk.
It may be time to reach into the vast ecosystem of innovation beyond the corporate coffer by launching a corporate venture capital (CVC) program. Corporate venturing has become a key component in the quest for growth. PwC’s MoneyTree report, produced in association with the National Venture Capital Association, showed US companies invested $7.5 billion through such programs in 2015 — the highest level this century and rising quickly.
We see many successful companies through our CVC practice, which just captured the 2016 Consultancy Firm of the Year award at the Global Corporate Venturing Symposium for the second consecutive year. The best of those companies blend CVC with other operating models such as open innovation, incubators, accelerators and design thinking to drive results. That said, a CVC initiative should be tailored to each company based on its innovation strategy, risk tolerance, targeted rate of return and business model, among other factors.
By investing in innovative companies, your organization can access innovative technologies, discover novel new products and experiment with different business models. And it can do all those things with the clock speed of a startup.
With typical CVC vehicles, the internal rate of return (IRR) will vary from 10 to 30 percent depending on the balance of strategic objectives versus financial gain. Strategic investors tend to link venture projects more tightly with core operations, making fewer investments but getting more deeply involved in the projects. CVC initiatives based on financial gain may aim for the higher returns more common in the traditional venture capital world.
Some of the other common questions PwC fields about venture programs are: “How should I set up my CVC operation? What about the legal structure? Should it be a separate entity or managed as a budgeted line item of an existing cost center or division? Or should I manage it ad-hoc?” These are among many important considerations with implications for operations, reporting, incentives and other factors.
Many corporate venture capitalists start with the things that are most familiar but may expand into areas that overlap with colleagues in other parts of the company. That may involve investments beyond cash, like market access or intellectual property. A collaborative trifecta of CVC, incubation and licensing opens a wide range of possibilities, including the potential to spin-out a venture, transition it to the company’s core operations or license the results to others.
The first step forward is to discuss the options based on your company’s specific strategies, goals, resources and targets. In the end, you may find there’s no need to fear disruptive changes at all – when your company is nurturing them through corporate venture capital.