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CVC series, part 6: The future of corporations and startups working together  

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One way of thinking about a large corporation is that it’s a startup that became successful. That’s obvious for, say, Google or Meta, but also true for the majority of companies out there. 

But even as a ‘successful startup’, corporations are radically different from the original startup back in the day. Profit and revenue are the drivers of how the business thinks about itself. The company is likely public and has shareholders to look after. And the level of bureaucracy that has accreted around the products provided is something a founder might shudder at. 

So, sourcing new innovation is a non-trivial task, and a main driver for why a successful corporation might take on such an ‘unnatural act’ and launch a CVC. But, as we have explored in part 1, The goal of CVC, and part 2, Achieving financial and strategic returns, of our CVC blog post series, there is a lot of work to be done to make this work well. 

Correctly balancing the needs of employees, shareholders and investors is critical to successfully run a CVC. In order to get it right, you need top level support , aligned processes, investment skills, allocated capital and time, of course, but you have to start with metrics. 

And by metrics I mean: what are the objectives of your investment program and how will you measure against them? Saying you are ‘strategic’ is only the first step – how you determine the level of strategic value delivered is paramount to delivering the business case for the CVC mission. 

And for the rest: 

  • • Top level support and understanding: From the Board on down, does the organization understand the mission, know how to measure it, and support the strategic goals you are trying to solve? Buy-in is critical to achieving your goals as the rest of the organization needs to be motivated to help. 
  • • Process: Do you have an agreed deal process? For example, can you move quickly enough, have market standard terms and help your portfolio companies grow as startups, as well as deliver on the strategic promise that makes a CVC attractive to a revenue-hungry startup? If not, why would a startup take your investment over anyone else (like a financial VC, for example)? 
  • • Investment skills: Can you build the ability to find, invest and manage good startups that add strategic value and return financial success, while avoiding adverse selection issues? The ability to hire and retain talent is one of the hardest areas for CVCs to work with, given the constraints of the corporate parent; and also leads to other factors such as the structure and size of incentives. 
  • • Allocated capital: What is the structure of the capital allocated for investments? Balance sheet, single LP fund, multi-LP fund etc. The permanence of the structure and the incentives that can be layered on (‘carry’, for example) have a large impact on how prospective employees and startups will view you, and the attractiveness of doing business with you. 
  • • And finally, time: Investments in early-stage companies take many years to mature, so the financial benefits could be seven to ten years out. (Worse, the failed investments tend to fail before the good investments pan out, pushing you into the trough of the J curve). Likewise, these companies may not be ready to engage with a large multinational organization like you, so the strategic benefits might not flow for one to two years after an investment.  

So, the benefits are uncertain and far off, and meanwhile the senior management team that approved the CVC’s formation may have turned over before real proof points arrive… All this to say, a long term commitment is required to make it through to the promised land where, if you have been investing well and regularly, you will start to benefit from a stellar reputation (bringing you better deals), demonstrable strategic value (backed by metrics), customers that are happy with the innovation that you bring them, and financial returns that reliably arrive, making even the most hardened CFO crack a smile. 

No one said it would be easy, but getting it right has a huge upside! 

Written by Raj Singh, Managing Partner at JLL Spark

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