#70: The Power of Incentives in Corporate Venturing
The Power of Incentives in Corporate Venturing
Incentives drive behavior. It's a simple truth that often goes overlooked, especially in corporate settings where the interplay of motivations can be complex and, at times, counterproductive. Understanding this dynamic is crucial for anyone involved in corporate venturing, as the incentives within large organizations are often not aligned with the very innovation and risk-taking that ventures are supposed to foster.
In a recent post by Professor Ilya Strebulaev, the distinction between how startups and large corporations approach investment decisions was laid bare. For startup founders, incentives are straightforward: limited downside (investor money at risk) but unlimited upside potential if they succeed. It's this structure that pushes many founders to chase ambitious, even moonshot ideas. The incentives encourage risk because the rewards are practically limitless compared to their personal investment.
In contrast, the corporate venturing manager often finds themselves in an entirely different situation. Given the same choice between a risky but potentially groundbreaking project and a safer, less impactful one, the corporate manager is incentivized to play it safe. Why? Because in a large corporation, the downside is personal—a failed project can mean a reduced bonus, a hit to one's reputation, or even a career setback. The upside, on the other hand, is capped. Wildly successful ventures might benefit the company enormously, but for the individual, the rewards are often modest and shared across a large organization. The potential for personal loss far outweighs the perceived gain.
This is not about personality or courage; it's about incentives shaping behavior. The same person, faced with different reward structures, would make entirely different choices. The principal-agent theory describes this well—where the "principal" (in this case, the corporation) and the "agent" (the employee) have different risk appetites and incentives, leading to divergent decisions. In corporate venturing, this misalignment can be a serious barrier to success. Corporate leaders want transformative innovation, but their venturing teams are too often incentivized to protect themselves from failure rather than aim for transformation.
For those of us working in corporate venturing, this dynamic presents a significant challenge. We want to create change, drive new business models, and foster innovation from within. But the existing incentive structures are often built to reward predictable, incremental progress rather than the riskier bets that true venturing requires. This misalignment can lead to missed opportunities, with corporate venturing units ending up as little more than extensions of existing business lines, instead of the engines of disruption they could be.
Take, for example, a corporate venturing team tasked with investing in early-stage climate tech. The safe choice is to invest in well-established technologies with incremental improvements—easy wins that won't rock the boat. The risky choice is to back an unproven but potentially groundbreaking new technology. The company might say it wants bold moves, but if the rewards for taking those bold moves are unclear, or if failure comes with personal costs, the team will naturally gravitate towards the safer option.
To truly unlock the potential of corporate venturing, corporations need to rethink their incentive structures. It’s about aligning the rewards with the outcomes you want to see. If you want risk-taking, then failure must be acceptable—even rewarded in some contexts. If you want long-term thinking, you need to move away from short-term bonus structures that push teams to focus on immediate results. Aligning incentives isn’t about finding the right people; it’s about setting the right conditions for the people you have.
What Can Be Done?
Redefine Success Metrics: Move beyond traditional metrics that reward only financial performance or short-term milestones. Consider including long-term impact, learning, and ecosystem development as key performance indicators.
Risk-Reward Structures: Ensure that those who take well-considered risks are not penalized for failure. Reward risk-taking behavior that aligns with corporate strategy, even if individual bets don’t always succeed. One way to create a more aligned risk-reward structure is by incorporating an element similar to the "carry" that exists in traditional venture capital. In VC, carry provides a significant upside for partners when investments succeed, giving them a stake in the success of the portfolio. Implementing a similar structure for corporate venturing teams can provide personal upside that makes the risk worth taking. By giving corporate venture teams a share in the financial success of their investments, corporations can better align individual incentives with the organization's broader innovation goals.
C-Suite Support: For corporate venturing teams to thrive, they need visible and vocal support from senior leadership. This includes backing initiatives that might fail but are in the pursuit of significant innovation.
Culture Differences: VC vs. CVC
Culture plays a crucial role in shaping how decisions are made in both venture capital firms and corporate venture capital (CVC) units, and the differences can be stark. Traditional VCs operate in an environment that is inherently entrepreneurial. The culture is centered around speed, high risk tolerance, and a belief that bold bets are essential to discovering the next big thing. Failure is part of the process, and the emphasis is often on how quickly lessons can be learned and applied to the next opportunity.
In contrast, CVCs operate within the broader framework of a large corporation, where the culture is typically more risk-averse and process-driven. Decision-making is often slower, requiring multiple layers of approval, and the emphasis is on stability and predictability. This difference in culture can lead to friction between the goals of the CVC unit and the larger organization. Whereas a VC partner might back an ambitious but unproven startup with the belief that one success can pay for many failures, a CVC manager may face pressure to justify each investment in terms of immediate strategic fit and risk minimization.
Moreover, traditional VC teams are usually highly incentivized through carry, which aligns their personal success with the success of the investments they make. This personal financial stake drives a high level of commitment to the startups they back. On the other hand, CVC managers often lack such direct financial incentives. Without the same level of personal upside, their motivation to push for bold, risky investments can be significantly dampened, leading to safer, more conservative choices.
To bridge these cultural gaps, CVCs need to cultivate an environment that encourages entrepreneurial thinking, values speed, and accepts that some level of failure is part of the journey. Establishing a culture that rewards risk-taking, combined with incentive structures that provide personal upside, can help corporate venturing teams operate more like traditional VCs, ultimately making them more effective in driving innovation.
I hope you enjoyed this newsletter. If you have any suggestions or contributions that you would like to share with me, please do not hesitate to reach out. I would be delighted to hear from you.