"Cracking the CVC Code: The Three Essentials of Successful in the eyes of McKinsey
Hi, I'm Jeppe and welcome to my weekly newsletter on Corporate Venturing, released every week. My aim is to provide a comprehensive perspective on the latest developments in the field and its related topics, drawing from the insights of top management, venture capitalists, founders, LPs, and family offices. I aim to offer valuable information and thought-provoking content that will aid in understanding the importance of Corporate Venturing in business strategy.
This week, I was encouraged by a couple of readers to look into McKinsey's "Inside the Strategy Room" podcast. Titled "Three essentials of successful corporate venture capital," this podcast episode features Sean Brown, who hosts a conversation with Matt Banholzer and Sid Ramtri, both experts from McKinsey & Company. The podcast episode is based on an enlightening article authored by Matt, Sid and John Levene, titled "How to make investments in start-ups pay off," which was published in 2022.
Before delving into this insightful piece, I must admit that I approached it with a tinge of skepticism, expecting the usual consultant jargon. However, I was pleasantly surprised by the wisdom shared by Matt and Sid in the podcast.
The article: How to make investments in start-ups pay off
The article covers three themes. 1 The vision: Why should you engage with start-ups, and why should they engage with you, 2 The focus: What types of ventures are you seeking, and what kinds of companies would make the best partners? and 3 The model: How should you formalize and manage your CVC program.
The article displays several highlights.
Changing Dynamics between Corporations and Start-ups:
Historically, established corporations viewed start-ups as undisciplined, while start-ups saw incumbents as outdated. In the current ever changing market there's a growing appreciation of each other's strengths and the value of collaboration. Large companies are involved in about a third of all venture deals, with significant participation from Fortune 100 companies in the venture capital (VC) space.
Corporate Venture Capital (CVC) Involvement and Challenges:
Many large corporations have ventured into CVC, with over 75% of the Fortune 100 active in the VC space. Despite the widespread engagement, sustaining value from these investments is challenging. Only 14% of incumbents generate sustainable value, and a quarter of those investing in 2015 had exited the VC space by 2018. (According to Global Corporate Venturing the average lifetime of a CVC has fallen below 4 years in 2023) The sporadic or opportunistic nature of over 70% of CVC investments often correlates with poor ROI.
Benefits of Effective CVC Investments:
The analysis shows that the more active Top-tier corporate innovators gain 2-3 times the economic profit from investing in start-ups and M&A compared to their industry competitors.
Although only 1 in 10 start-ups succeed in CVC partnerships, successful ones have lower bankruptcy rates, faster growth, and a greater chance of producing a lucrative exit.
The Appeal of CVC:
Many industries find themselves disrupted by start-ups with innovative models and technologies. I have covered this topic in an earlier episode looking at the Netflix/Blockbuster disruption. Established corporations bring significant assets to the table, like financial resources, industry expertise, and sophisticated processes, which are attractive to start-ups. Despite a slowdown in 2022, corporate investments in 2021 surpassed $190 billion across more than 5,000 deals.
Motivations for CVC:
Corporations are primarily driven by long-term strategic benefits, including market insights, new product access, capability building, and securing strategic options, while start-ups seek new clients, access to distribution channels, and branding support. Data shows that when you combine and understand the success criteria from both sides, Start-ups with CVC in their early financing rounds have a higher chance of a successful exit. One of the main drivers for this is that Corporations understand how to drive sustainable financial growth which is especialy important in the current market.
Creating Effective CVC Programs:
Establishing a strategic objective that aligns with the ambitions of both corporations and start-ups is crucial. Corporations need to define their investment criteria, risk appetite, and expectations regarding the timeline for value delivery from the start-ups.
Challenges in CVC Collaborations:
Corporations’ slow processes can be a major hurdle for start-ups that need to move quickly. Setting up clear decision structures can cure the pain.
The podcasts: "Three essentials of successful corporate venture capital"
The podcast starts quite powerful with a statement from Matt Banholzer
Unexplored Frontiers: What's Missing in the Discussion
What I find lacking in both the podcast and the article is a deeper exploration of two critical elements essential for the success of a Corporate Venture Capital endeavor:
The Strategic Framework:
It involves establishing a clear long-term vision for the CVC. What defines success? Is it primarily driven by financial goals, strategic objectives, or a blend of both? Furthermore, what Key Performance Indicators (KPIs) should be in place to effectively monitor and measure performance, if any?
Unlocking Shareholder Value:
Another aspect that deserves more attention is the process of extracting shareholder value from CVC activities. Effectively conveying the value generated by CVC initiatives to financial analysts and stakeholders is increasingly vital. This isn't a short-term endeavor; it requires a commitment to playing the long game. Creating this value necessitates significant investment and a well-structured communication plan. It's worth noting that the typical lifespan of a CVC is relatively short, often less than four years. One of the primary reasons for this short duration can be attributed to subpar financial performance. However, it's worth recognizing that most Venture Funds have a much longer horizon, typically spanning a decade, underscoring the importance of sustained commitment and strategic communication
I hope you enjoyed this week's 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.
/Jeppe