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There is some debate about whether corporate venturing should be focused on strategic or financial goals, but a fair amount of evidence — such as the work of Dushnitsky and Lennox — indicated that a strategic approach gives companies the most value. The new knowledge and capabilities companies gain from working with innovative startups more than counterbalances the negatives (incompatible goals, misaligned incentives, conflict).
However, while many executives know that strategic venturing is central to their firms’ long-term success they still struggle to put this into action, especially when it comes to making early-stage investments in novel technologies based on new scientific discoveries.
These are some of the key reasons why:
Evaluating novel technologies and their unique opportunities is complex. By definition, there is no clear market for these yet and it can be hard to know when the technologies will be mature enough for commercialisation.
Managing expectations realistically can also be challenging, particularly if they may not be a priority for the business. Not to mention how difficult it can be to measure and assess the performance of these pre-revenue businesses.
Matching the longer gestation periods needed to grow them with the corporate planning cycle creates tension between long-term and short-term views.
Executives grapple with the high failure rates of ventures/portfolio companies, amplified in early-stage investing. It is hard to measure the performance of a very early-stage portfolio so the value they get out is often unclear.
Thus, corporates face a dilemma in early-stage investing. On the one hand, they have a strong desire to find and exploit novel innovations so they can be on the right side of any disruption happening in their sector. On the other hand, investing in these nascent technology ventures has significant risks and challenges.
There is a model, however, that companies can look at to make strategic early-stage investing a little more comfortable and less risky. It comes from the life sciences sector — the syndicated CVC model.
The life sciences model
The life sciences sector has become accustomed to investing in novel technology early-stage ventures based on new scientific discoveries or engineering innovations. There are lessons that many other companies could take from the model.
Novo Holdings is a good example. The fund has different investment teams (Seeds, Ventures, Growth) based on the stage of development, with different risk and return goals linked to their mission. Novo Ventures and Novo Growth are purely financially focused.
Novo Ventures generally does not plan to hold onto biotech investments to the stage of commercialisation where that requires large resources and human capital (e.g. a large sales force) for the operating company. Instead, they help to get the venture to a stage (e.g. clinical proof of concept) and then seek to exit through an acquisition or public listing.
Novo Ventures does not have any strategic goals in supporting research or following developmental specifics or geographies. Their remit is to make money.
Novo Seeds, however, has both a financial and strategic objective: their goal is to create Nordic biotech successes. Success is defined as either exit straight sales, major IPO achievements, or exploring the untapped potential of Nordic and European research.
Strategic investing requires a lot of patience. Since 2007, Novo Seeds has only had five exits from its 32 portfolio companies.
It is clear that this requires a lot of patience. Since 2007, Novo Seeds has only had five exits from its 32 portfolio companies.
The life sciences industry has a tried-and-tested format for handling these long gestation periods. It is routine to spin out promising non-core projects into separate start-ups, in part to protect them from the changes in individual corporate strategy.
NeRRe Therapeutics, a GSK spin-out, is one example. The Stevenage-based spin-out, which is developing a treatment for lung diseases, was created after GSK re-prioritised neurosciences research as part of their corporate strategy. NeRRe has continued to get the strategic backing and help to succeed from GSK, Novo and their other VC co-investors (Advent Life Sciences, Fountain Healthcare, Forbion Capital and OrbiMed).
It is routine for life sciences companies to spin out non-core projects into separate start-ups, in part to protect them from the changes in individual corporate strategy.
Once a startup passes certain milestones in clinical trials, there is a well-trodden path to either being bought by one of the big pharma companies or listing on the stock exchange. Having strategic partnerships and collaboration along the way is vital, however.
It can work outside of life sciences as well
I have come across this outside of life sciences. One case I studied confidentially as part of my research involved three industrial conglomerates, a city and VCs from four European countries. They preferred not to be publicly named, but in 2006 they created a €10 million experimental venturing fund as a strategic vehicle to find novel innovation from outside the organisation and to grow the local economy. The corporate investors initially wanted to experiment and learn about corporate venturing without setting up an internal corporate venturing arm to avoid the time and overhead costs by partnering with a VC.
This strategic partnership and collaboration model has been successful and has had two successive follow-on investments and a five-fold growth of the fund between (2006 and 2018).
The corporate investors provide capital, technical expertise, market insights, and access to senior people.
The corporate investors provide capital, technical expertise, market insights, access to senior people with deep and influential ties into their organisation they can call on to support the venture and syndicate. Their goals are a combination of strategic and financial to find, grow and potentially acquire these ventures.
The venture capital investor has financial-only goals. They provide early-stage venturing expertise, an investment management capability, and innovation scouting to find innovative start-ups that addressed specific innovation gaps of the corporates. They use strategic partnerships and collaboration mechanisms to gain an early-stage foothold at a lower cost of entry. Together, they play an active role in creating a valuable new company in less time and at lower risk.
The venture capital investor provides early-stage venturing expertise, an investment management capability, and innovation scouting.
They are careful to avoid conflicts between corporate investors and between the corporate investor(s) and VC by having clear role definitions upfront. The corporates provide the VC with capital to set a venture fund and then actively participate in the venturing process through collaboration and provision of resources.
The VC is the lead investor who drives the venturing process and manages the investment (due diligence, term sheets, etc.). The corporates do not always acquire the ventures, but they have a great deal of insight into the actual value as they have been actively part of its evolution.
This is a model that could be used more frequently by companies wanting to make sure they don’t miss out on cutting edge innovation. Especially for smaller companies, a syndicated approach can be a good way of lowering the investment risks.
For smaller companies, a syndicated approach can be a good way of lowering the investment risks.
The arrival of new technologies such as machine learning, biotechnology, AI and quantum computing, means that there is a greater need for companies to invest earlier in the lifecycle.
To do so requires different approaches to corporate venturing. The model that has already evolved in the life sciences is one that could be adapted by companies more widely to achieve this.
Ezra Carlson is an innovation and corporate venturing consultant and recently completed his doctorate at the Cranfield School of Management. This article partly draws on his research at Cranfield.