Over the past decade, corporate venture capital (CVC) has played an increasingly essential role in the start-up ecosystem. In 2019 alone, CVC funds invested more than $56 billion across 1,774 US-based venture capital deals, totaling close to an eightfold increase in invested capital during the previous decade (see figure 1).
The structures and strategies of companies that invest in start-ups vary dramatically—from direct investments to limited partner investment structures. However, the overriding focus tends to be on the strategic or financial returns. Having advised and operated both CVCs and institutional venture capital funds, we believe access to start-ups can play a powerful role in speeding up an organization’s digital transformation and improving its operations—especially in the COVID-19 era.
Digital transformation has been a critical topic for years, and digital transformation strategies are now in full force. Conventional wisdom suggests that human resources and talent development teams are responsible for leading an organization’s transformation, and digital and IT transformation functions have also become more prominent. But in our experience, venture capital and access to start-ups can power a digital transformation in three significant ways.
1. The deal flow provides options and ideas
Like any successful venture capital fund, successful CVC programs review thousands of start-ups each year. Although a CVC fund might invest in only a handful of start-ups a year, having resources dedicated to generating deal flow gives companies access to new ideas and strategies. The ability to source start-ups based on the corporation’s strategic priorities creates an information flow that can yield valuable partnership opportunities and early insights into acquisition targets. For example, insurance start-ups can be broadly grouped as enablers, which empower corporations to improve how they operate, and competitors, which compete for the incumbents’ customers (see figure 2). An insurance company with a strong pulse on one or both of these areas has an advantage over peers that are less entrenched in the start-up ecosystem.
2. Start-ups encourage an intrapreneurial mindset
Start-ups operate differently than large corporations. Start-ups are often built on technology-advanced foundations and must grow with limited resources. They are often scrappy operations with employees who think and plan differently than corporate workers. As such, corporations, especially those pushing digital and innovation agendas, stand to benefit from exposure to start-ups. Working with start-ups can infuse corporate internal teams with new ideas, challenge them to move at start-up speed, and encourage them to build a culture around start-up-driven innovation. In addition, this exposure, especially for employees and middle managers, can promote an intrapreneurial mindset that improves a company’s systems and how it operates, expands its boundaries and new business opportunities, and drives employees to think and look not to the past but to the future.
3. Exposure to start-ups creates a broader, deeper strategic vision at the top
As COVID-19 wreaks havoc on our social fabric, companies are being forced to accelerate their digital go-to-market initiatives. During a recent earnings call, for example, Microsoft CEO Satya Nadella highlighted this transformation, noting, “We have seen two years’ worth of digital transformation in two months.”
In our experience, corporations that have consistent exposure to the start-up ecosystem provide their leadership teams with a broader and deeper playbook of options. With this playbook, leadership teams are more willing to work with start-ups rather than continuing to sink internal resources into an expensive and time-consuming build process. Put another way, leaders shift from a build–build–build mentality to a build–buy–partner mentality (see figure 3). This mindset can produce a wealth of outcomes, such as faster time to market, an ability to capitalize on previously unavailable talent, stronger offerings, and additional value. A leadership team that has access to start-ups that are aligned with the company’s long-term strategy can use this access to get to market faster. The company can choose to build its next offering from scratch, or more importantly, it can acquire or partner with a smaller company that can help it move faster.
During previous times of economic or leadership uncertainty, we saw CVC funds wind down as companies sacrificed long-term revenue for short-term cost-cutting aimed at the next quarter rather than the next five years. Now more than ever, investing in and interacting with start-ups can fuel the digital transformations that companies need to overcome today’s challenging circumstances. With exposure to start-ups, companies are better able to focus on the long term.
Perhaps venture capital is the right lens for looking at post-pandemic life and investing accordingly. Perhaps start-up valuations will be relatively inexpensive. Or perhaps more start-up technology talent will become available. Only a corporation that is ingrained in the venture ecosystem will have an open door to these opportunities and insights.
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