Corporate Venture Capital: how the expectations of big ships and small pirates converge
CVC is a massive emerging phenomenon in France and worldwide. Although it is less in the spotlight than Venture Capital conceived by independent private funds, it has grown significantly in the past ten years and prospects of growth remain high in France: in the United States, 16% of venture capital investments in start-ups are corporate funding, compared to 5% in France. Every large company nowadays wants its CVC fund… Is it a fad or are there longterm objectives?
Corporate Venture Capital is venture capital backed by private investment funds from large firms, who finance start-ups and innovative small businesses with high growth potential by taking minority equity shares.
Large corporate groups using CVC usually seek to achieve strategic and organizational objectives rather than mere financial returns. CVC plays a positive role in enabling the large ships to capture the new business models, the new uses or consumption modes enhanced by digitalization and in the end, CVC is “an innovative organizational arrangement for innovation.”
For start-ups or “small pirates”, the CVC funds build a protective wall that enables them to pursue their entrepreneurial venture and grow in the best autonomy conditions, while benefiting from corporate assets, being financial resources or accessing to their networks.
One major limitation is that the large groups investing remain largely resistant to the start-ups’ entrepreneurial mindset and practices. CVC is not transformative of organizational & managerial modes and does not easily enhance ambidextrous capacities in the traditional business units of large firms. Instead, CVC is transformative of the path to innovation and offers a new organizational arrangement in addition to R&D departments for the firm; it also provides tremendous leverage for the start-ups in search of financial but also social assets – human or network.
Is CVC a new kind of Venture Capital?
Firms have been investing equity shares in start-up for several decades already. The phenomenon emerged in the late 1990s with the “dotcom bubble” but it has intensified in the last decade and multi-corporate venture funds, such as Aster post-2010, have developed.
Corporate Venture is subject to tax incentives in France since 2016. Introduced by a Moscovici & Pellerin text in 2013, it was finally activated last year and companies can now depreciate their funding over 5 years. Many corporate venture funds were created in recent years, such as ALIAD by Air Liquide (2013), Safran Ventures, Airbus Group Ventures, Orange Digital Ventures, Engie New Ventures (2015). CVC funds increased from 61 in 2012 to 131 in 2016. 40% of CAC 40 companies had their own venture fund in 2015. Both the manufacturing sector and financial services- insurance companies – are well represented: in 2016 Axa Strategic Ventures had the largest equity (230 million euros), followed by Airbus Group Ventures (150 million euros) Maif Avenir (125 million euros), Engie et Air Liquide (100 million euros each). 590 equity taking were registered for a cumulated amount of 2.7 billion euros in 2016 (more than double the 2015 figure)
Just as regular VC, Corporate Venture Capital has financial objectives and is largely managed in the same way as private equity funds, with minor differences: average invested amounts are doubled, average investment duration is longer by a few months , and exit strategies (IPOs versus takeovers) might be different.
Corporate Venture Capital is addressing strategic objectives
However, financial expectations are not the most important factors. First and foremost, CVC is addressing some of the firms’ strategic objectives. In a fast moving business world based on the principle that “big fish no longer eat small fish, but fast fish absorb slow ones”, corporate firms are aiming to gain agility, to have an active competitive and strategic watch and to capture the upcoming business models.
Danone Manifesto Ventures (DMV) for instance claims to be an incubator as much as a fund (Le Monde June 28 2016). With its 40% equity taking in the food trouble-maker Michel & Augustin in July 2016, Danone is looking for growth levers with DMV:
“(DMV will) accompany the development of innovative small business with a high growth potential (….) while ensuring the necessary autonomy for the entrepreneurial venture ” (Emmanuel Faber, Le Monde , June 28 2016).
Danone wants to learn the new codes of food consumption, as well as the managerial practices expected by the younger Y & Z generations: playing on social media, creating virtual communities and social events, daring to disturb Bill Gates or Starbucks to promote their products, storytelling - each employee of Michel & Augustin must take a baking certificate course, creating a collective game -the tribe- and a cool atmosphere at work -La Bananeraie.
The idea is similar for Axa Strategic Venture Capital. Its Funding Chairman, François Robinet, explains:
“(ASCV) is helping cushion the organization against future disruption by investing in technology start-ups as diverse as sales bots and digital health advisors.(…) We invest in everything that is relevant for the insurance and asset management business. It’s not just pure tech, it’s everything that involves a customer touchpoint. ” (FinTech Finance, Spring 2017).
Jean-Marc Bally is at the head of Aster, the multi-corporate funds of industrial giants Schneider Electric, Alstom & Solvay. He reaffirms the crucial role of CVC strategic watch:
"The first objective of Open Innovation must be to understand the value chains and their potential or programmed evolution. This can be done by studying and confronting the swarm of start-ups in our environment and by identifying possible disruptions in our industry, as well as reconfigurations at work which may turn into either threats or opportunities" (La Tribune , March 11 2016.)
Corporate firms seek to capture breakthrough innovations that might occur in their traditional markets. And that is precisely the problem: they find them hard to hatch and grow within their own teams or R&D departments. The “ships” envy at least two qualities harbored by the “nice pirates”: first, their ability to perceive and understand the new uses and new consumption patterns resulting from digital technology which provide an answer to specific needs; second, their agility, born of an ability to experiment “quick and cheap” (and not too dirty), a capacity to “pivot” rapidly to meet a new market or a perceived trend.
Such qualities are at odds with the large firms genes: any project in the large organization takes time, is discussed and debated, mobilizes a broad spectrum of actors who have different interests and must reach an agreement. In the worst case scenario the project dies before birth because no consensus was made, in the best case scenario a compromise is achieved among protagonists after a long time – too long.
In this context corporate firms, colossi with clay feet, make of CVC a major device in their innovation strategy in order to maintain their supremacy or technological advance despite their weaknesses, to protect themselves from disruptive external technology advancement or new competitors, and to diversify on emerging, uncertain markets in a risk-minimizing strategy.
Is CVC a new kind of governance for innovation that reintroduces the market in the firm?
Beyond its strategic and market purpose, CVC may be considered as an answer to organizational questions, a new form of governance for innovation and maybe new style of governance for the firm…
As an organizational form for innovation, CVC does not replace but complements traditional organizational arrangements, such as the R&D department, innovation department or even bottom-up innovation driven by traditional Business Units. Regarding ASCV, François Robinet states :
“Our objective is to build an ecosystem that will capture as many innovations as possible. Therefore it is important to have as many tools as we can. ” (Les Echos 26/01/2017)
This entails investing in very diversified sectors that, at first appearance might seem at tangents to Axa’s financial services business. But a closer look reveals a coherent approach: there is Fin Tech and Blockchains of course, but also many investments in the Digital Health business, where digitalized preventative medicine enables behavioral incentives for the insured; as well as Sales bots, a crucial development in a B-to-C service industry.
“The insurance industry is not known for its great customer experience, which is in contrast to the societal purpose of insurance (…) We believe that innovation and technology will allow us to bridge that gap. ” (FinTech Finance, Spring 2017).
CVC might even be regarded as a new type of governance for the firm with creative, innovative and autonomous entrepreneurial entities that will form a constellation of (shooting) stars around the Corporation, which provides resources and support to them. This emerging organizational arrangement made of the entrepreneur/corporate venture capitalist duo looks like rejuvenated capitalism, with the market back not inside the firm but at its periphery. Back in the 1950-60s decentralized business units and its corollary management control in MNEs could be considered as the reintroduction of the market into the firm with some autonomy devoted by decision rights ; CVC nowadays might be the early stage of even greater autonomy. It blows a wind of entrepreneurial mindset (and reality!), of renewed liberalism and freedom for “corporate entrepreneurs” who will trade frugality and unlimited work for actual independence. Empowerment is not given top down but decided and enacted by the entrepreneurs themselves. With CVC, they work with the financial resources and customer or distribution networks of the Corporation, but their main concern remains to be neither taken over, nor integrated in the corporate structure.
For instance, Aster, a multi-corporate fund with independent governance, emphasizes its contrast to regular CVC to the entrepreneurs. It reassures the entrepreneurs about the autonomy that they will continue to experience, while relying on the manufacturers support and multiple networks in order to find emerging markets for their technologies. Since 2011 Aster has worked on building trust with the start-ups: the alliance between 3 companies reduces typical suspicions in CVC of investing in order to take over the small company after 5 years. In 2011, J.M. Bally emphasized:
"Since ASTER was created, none of the backed start-ups has ever been taken over by Schneider Electric ."
With 1% to 30% equity taking, Axa SVC never holds majority share positions but is always sitting on the Board with a minimum of one seat. The fund does practice neither interventionism nor synergies. Their strategy is to invest in a broad portfolio, not to absorb and take control of the start-ups.
“One of our end goals when we talk to start-ups is to say that we will help their development by connecting them to the Axa ecosystem .” (FinTech Finance Spring 2017)
Back to payback
The financial objectives of CVCs are different to the regular payback ratios that one imagines. In the end, it is all about limiting market and financial risks for the Corporation which invests in innovation. ASCV again provides a good example: the insurer seeks higher “protection” and hedges through portfolio diversification. “We want to create options (…) To be diversified and to be able to capture different technology, different possible changes, either short-term or long –term so that we can be part of any major evolution. (…) What I am trying to do for Axa Strategic Ventures, and also the wider Axa Group and even the wider financial services industry, is to create options. We know that there are all these technologies that are coming into play. But what we don’t know is how they will combine among themselves, and therefore what effect they will have on our industry.» (FRobinet, FinTech Finance, Spring 2017).
This financial objective is even clearer at the multi-corporate, highly diversified fund Aster. The fund insists on the increase of shared financial resources enabled by the multi-corporate approach; it also reaffirms its venture capitalist role, with a forefront economic objective, for themselves, for their sponsors and for the young start-ups:
“Our goal is to build successful companies allowing good financial returns! ”
Such a financial objective drives the preferred investment criteria: of course, the quality and complementarity of the entrepreneurial team, a common criteria in VC and major key success factor. Aster also seeks “different and unique insight into a market or a problem and thus providing a new value proposition”.
“We need to be convinced that there exists a sizable market, and take advantage of it thanks to a sound business model. We are enthusiastic about companies that are working on innovative products and business models that have the potential to change the game in their market ." (website, Aster, june 2017).
Funding is limited in time, and released stage by stage. This financial logic (seed, early stage, venture capital, growth capital) allows the entrepreneurial team be as innovative as possible within the cash boundaries governed by a frugality that characterizes entrepreneurship. Aster has the ability to invest from early to growth stages, “typically between 1 and 5 million euros as a first investment, with the ability to follow up with 10 million euros in later rounds .”
CVC is growing at a time when most corporate firms question the return on investment of their R&D departments, and wonder how much they should invest in research, as opposed to development. After decades of Development prevalence, Research seems to be needed again. However, companies have no idea about the payback from their projects and therefore invest in a very discretionary and volatile manner, which is governed by economic conditions. CVC offers a welcome alternative option with clearer limits and greater efficiency. Some academic studies in the 1990s and the first wave of corporate venture have shown that $1 invested in CVC pays back 3 to 4 times more than $1 invested in R&D…
However, because of its financial nature and its heightened protection of the start-ups’ independence, CVC does not easily achieve the organizational objective of infusing an innovative and entrepreneurial mindset into traditional organizations. Although CVC is a new organizational form, it is rarely transformative of existing practices in the firm. This paradox is largely due to the well-preserved autonomy and independence of the young businesses.
In the end, the most significant added value of CVC lies in the ability of the corporate firm to accompany the start-up in its large-scale growth and international development. These assets rely on the corporation’s networks (distribution, clients, suppliers…) and its efficiency and methods in managing large-scale and volume markets. This is emphasized by a well-established venture fund like Aster which insists on “the close relationships we entertain with our industrial sponsors. We actively leverage our networks inside (and outside) those companies to help entrepreneurs find partners and new business opportunities. With a diverse set of experiences and nationalities, the Aster team will step in and help through our extensive network and support start-ups during their journey until they become successful companies. "