The five sins of building a corporate venture
This is it. Your organization has identified the perfect business idea to generate new revenues. You have gone through a Build / Buy / Partner analysis, and your business case looks good. You will build a corporate startup/venture. You have identified and potentially mitigated environmental risks. And yet, you might not be prepared for the biggest risk of all: Implementing what you have on paper—making it real. Innovating on paper is an exciting process. Implementing the innovation project is hard. Based on our experience of doing just that, we identified the five biggest sins attached to that implementation. They are linked to expertise, speed, governance, processes, and KPIs.
1. Lack of internal expertise
As you start building the corporate venture, your most knowledgeable individuals are from the cross-functional team that identified, faceted, and sponsored the idea internally. While rewarding these individuals by allowing them to build the venture might sound natural, they are probably not your best choice. Are they truly experts in the industry you are now entering? Have they already been successful entrepreneurs in this industry? Do they have the capability to understand when you need to stay the course and when you need to pivot? Do they know how to build a new product or solution within a larger organization? This combination of experience and expertise is necessary to increase the chances of success. Therefore, to increase your chances of success, the best approach is to secure outside experts or fractional executives with experience building something similar to your project. Internal resources should nonetheless be assigned to the venture to guide the team through internal politics and processes, and to advocate for the venture with the executive team.
2. Slow speed
One of the most dangerous situations is imposing a corporate speed of operations on a corporate venture. An example of corporate speed is when a venture needs to secure approval from multiple stakeholders to make and implement a decision. The higher up the stakeholder, the slower the speed is typically. These corporate stakeholders will have various priorities, daily tasks to attend to, and numerous unexpected distractions. The corporate venture is small compared to other units of the organization, and as a result, decisions about it get pushed down their to-do list. They will resurface only if the representatives from the corporate venture bog down the higher-ups regularly. A decision that should take 15 minutes to make can take weeks or months in such an environment. Even trivial decisions such as acquiring temporary help/expertise, changing legal terms on a legal template, or evolving operational processes can significantly delay the implementation of a corporate venture. Venture speed and corporate speed are not the same. A corporate venture should be operating at startup speed. A corporate startup should be driven like a race car, yet it can be more akin to steering a sailboat.
3. Complex governance
There are several options when locating a new venture within an established organization. The new venture can be considered a project or a program within an existing department. It can also be put in a new department that incubates new ventures, such as an incubator, an accelerator, a venture studio, or within an emerging business department. A “light” governance is required for the venture to be successful. For example, a good governance structure is a direct line to a single sponsor who will accompany the development of the venture. Several dotted lines to other stakeholders add complexity to the situation. The venture could also be located in an innovation fund, where it is easy to apply lean and agile startup principles. When the startup starts generating revenues, especially after emerging from the valley of death, it makes sense to spin it out as its own business unit, likely as a separate legal entity/subsidiary of the parent company.
4. Heavy processes
Another area where corporate ventures can suffer from affiliation with a large corporation is the requirement to comply with existing corporate processes that are already in place. There are at least three areas where that causes issues for the corporate venture:
· Legal and compliance: While it is essential to have a solid legal review of commercial contracts, partnership agreements, NDAs, and other LOI in established business units, the first two stages of a corporate venture (proof of concept and pilot) do not require an in-depth review and extensive agreements. In fact, the notion that 'perfect is the enemy of good' may be counterproductive to working on exhaustive legal documents in an environment where pivoting and speed of change matter more than complete legal protection. Addenda can be added later on to reflect changes in the legal environment.
· Forecasting and reporting: Forecasting and reporting can be very time-consuming for a team building a new venture. Most forecasts in stages 1-3 are based on assumptions and are likely to change significantly as the venture learns from its mistakes and successes (see the next paragraph for stage descriptions). A good cadence of reporting in the first three phases is once every quarter. Requiring more frequent reporting – such as monthly reporting – creates busy work for the corporate venture team, especially in the first three stages. It is essential to note that at these stages, most forecasting is done manually and requires time and effort every time a new report is requested.
· Pivoting and decision-making: As the team learns from its experience and progresses through the stages, it is almost certain that the corporate venture will pivot once or several times. This pivot may occur in various areas, including the operating model, business/revenue model, customer experience, product features and benefits, or target market. It is essential that pivoting decisions can be made quickly and do not require multiple layers of approval. This would slow down the venture's ability to adapt and eventually compromise its long-term viability and profitability. Leaving the pivotal decision to the venture team is crucial for the venture's future.
5. Wrong KPIs at the wrong time
A corporate venture must be evaluated with different KPIs at different stages of its development. There are typically four stages of development
· Stage 1 - Proof of concept: A proof of concept is the process of gathering evidence to support the feasibility of a project. At the beginning of the venture, KPIs should essentially be milestones. Can the venture implement foundational building blocks, capabilities, and support mechanisms to conduct a proof of concept? Once these are in place, is the proof of concept successful? i.e., is the value proposition attractive to a set of potential customers (are these customers willing to pay for it)? This stage can last 6 months to a year. KPIs are milestones to reach.
· Stage 2 – Pilot Phase: The pilot phase is a small-scale implementation used to prove the viability of a project. Once the proof of concept is confirmed, running a pilot phase with early adopters is important. These early adopters will help the corporate venture refine its value proposition, improve its processes, and build capabilities to meet customers' needs. At the end of the pilot phase, the corporate venture team decides whether it is ready to launch, should pivot or evolve in a different direction, or should terminate the venture. This stage can last 1-2 years. Key KPIs for the pilot phase are customer satisfaction, customer usage/engagement, willingness to renew, alignment with business case hypotheses, and operational improvements
· Stage 3 - Launch: The venture is ready to launch after a successful pilot. The creation and increase of revenue streams characterize this phase. This stage is where the venture implements its marketing and go-to-market strategy. It might also continue to pivot, moving from assumption-based hypotheses to incorporating an actual track record and adapting based on lessons learned along the way. The corporate venture is slowly emerging from the valley of death (J-curve), which can last 2-3 years, as it reduces its monthly burn rate by generating revenues. These revenues increase as the venture grows. The break-even point is reached at the exit point of the Valley of Death when revenues cover expenses. Some ventures grow faster than others. Two-sided marketplaces need to create a virtuous cycle in which one side trusts that the other will continue growing and bring more value over time. KPIs are financial (revenue growth, number of revenue streams, ability to control costs) and operational (time to recruit new customers, build new functions,…).
· Stage 4 - Scaling: The corporate venture now has processes that can be scaled and an experienced team The key KPIs are profitability, free cash flow, ROI, CAC, and LTVC. The last step is typically when the corporate venture will be spun out as a separate business unit with its own profit and loss statement and can be part of the general budget cycle of the organization. Before that, the corporate venture was an investment, with different decision gates that allowed it to progress from one stage to another.
I think it’s essential here to distinguish viability from profitability. The first three steps of the corporate venture focus on its long-term viability (ability to bring value to the organization, both from a financial and strategic perspective). These steps are considered investments from the organization and should not be integrated into the general budget, where KPIs are geared at established business units. The lean startup approach is appropriate here when the organization has the expertise to implement it effectively.
The fourth step should be measured in terms of profitability, as the model has been proven and the organization possesses the means to scale and generate significant revenues and profits.
A key mistake that organizations with limited innovation capabilities make is quickly transferring the corporate venture to the general budget and expecting it to be profitable in the early stages of development. It is the surest way to kill a new venture without understanding its long-term viability and strategic potential.
Conclusion:
Building a corporate venture can be challenging, but it can also be quite rewarding. Examples of very successful corporate ventures that have become their own corporations include Sabre, AWS, Thermo-Electron, or more recently, PayPal and Slack.
Compared to private investors like venture capital, corporations can provide enough time and capital for a great idea to take shape and become a significant revenue stream / new business unit. And it typically owns 100% of the equity.
The first couple of times, it may be challenging to accommodate all the traps and mistakes highlighted in this article. However, over time, the corporation can develop the necessary skills to do this correctly and to its advantage. It can establish and operate a corporate venture studio. That venture studio can also be outsourced to specialized vendors. A hybrid solution that has merit is to bring experienced entrepreneurs as fractional C-level executives, allowing them to build the venture within the corporation, but with sufficient flexibility to avoid the various pitfalls presented here.
