Avoid Becoming Dumb Money
The Dos And Don’ts Of Accelerating Innovation With Corporate Venture Capital
One former VC partner I spoke with for my research on corporate venture capital (CVC) — “Accelerate Open Innovation Via Corporate Venture Capital” — said he believed there was a direct correlation between the number of CVCs formed in a year and a looming recession. As he sees it, the likelihood of a recession increases as the CVC market heats up. While this may have been true in the past, we have entered a new era of technology-led innovation. In this new era, some corporate venture funds compete on equal terms with traditional VCs — as intelligent investors.
Historically, many startup founders and VC partners would refer to corporate venture funding as “dumb money.” Corporations would invest in startups without considering the projected internal rate of return (IRR) of the startup portfolio. Depending upon the whim of the company, they might invest based upon an abstract measure such as fit to the existing product portfolio or the gut feel of the fund manager. By contrast, traditional VCs would hyperfocus on IRR and conduct rigorous analysis of any potential investment before offering a term sheet.
But a new breed of CVCs has emerged in recent years, often run by former managing directors from traditional VCs. Some are led by managing directors of former successful CVC funds at other firms. Today’s corporate CEOs have learned lessons from past experiments with CVCs. They now understand experience matters a great deal in the VC world. CEOs no longer appoint an influential leader inside the company as the managing director of a new CVC arm, at least not as often as they used to.
Firms such as AXA strategically connect their CVC arm to broad innovation accelerators across the company. AXA’s CVC team now sits inside a larger business innovation unit called AXA Next.
The CVCs we examined for this report all have clear financial return metrics (some use IRR). Today’s CVC managing directors also use metrics tied to the underlying business strategy of the CVC business unit. And there’s a recognition that CVC investing is a long-term play (10 years). These and other changes suggest that today’s CVCs are no longer the dumb money of prior years — at least not all of them!
Check out the full report to understand the dos and don’ts of using CVC investment to help accelerate innovation in your firm.