Innovation is not only necessary to thrive in the corporate arena - it is essential for survival. Under constant pressure to stay relevant, corporates must compete with agile start-ups and adapt to major societal shifts as they arise. Flexible corporates emerged from the financial crisis of 2008 leveraging fresh concepts, such as lean startup, and more recently, the Covid-19 pandemic changed the playing field once again, as it proved to be an unlikely accelerator for digital transformation. While some corporates embraced these major curveballs and grew stronger because of them, others have struggled to cope and evolve accordingly - resulting in a much shorter lifespan.
While increasing the profit and efficiency of the core business remains top of the agenda for corporates, investment in innovation must also be prioritized. Innovation done right increases competitiveness, improves shareholder trust, and creates brand new revenue streams. In practice, there are two ways to do this; transformation or diversification. However, only one of these innovation methods actually works. Corporate survival requires investing in the core product, but also in building a diversified portfolio of revenue streams. Corporations that simply transform an old business model to stay alive are often wiped out by start-ups that can easily replace old models with new ones. To compete effectively, corporates must move away from transformation and towards diversification by launching their own market-disrupting innovations as fast - if not faster - than startups do.
The aim of innovation is to extend the finite lifecycle of the corporate enterprise. In order to achieve that, the corporate must somehow acquire majority ownership in the next wave of disruptive companies or ventures. Although corporate venture capital (CVC) is often used as a pure financial return strategy, from a corporation's point of view it has also survived as a model to cement startup partnerships in adjacent areas. In these areas, corporations don’t see a need to own a majority of the startup because it is seen as merely a complementary feature to their core products. For serious operational results, therefore, corporate venture capital is not an option, leaving only two innovation methods to proceed with: you buy it (M&A) or build it (CVB).
M&As are considered to be a straightforward approach to innovation and driving shareholder value. However, it is a strategy with its limitations. M&A might not always be a viable option due to a lack of appropriate target companies to acquire or be limited simply for financial reasons. Finally, issues may arise in integrating the newly acquired company into a new corporate structure. Although acquisition builds considerable short-term momentum in shareholder value, it does not come without risk - especially if the core business is not healthy and lacking a coherent, consistent strategy. Companies don’t just buy technologies and products - they buy people, cultures, and an unknown environment. Therefore, the acquired company often struggles to integrate into the larger company.
If we remove M&A as a viable solution, the option to build remains. To do this, some corporates use incubators to validate new ideas, but often they don’t have the momentum to scale. Whether it’s due to a lack of resources, minority ownership, or no systematic scaling approach, these failures then amount to a serious dent in the innovation budget. As a result, many corporate incubators and accelerators have shut down or have been outsourced prematurely - often before their products reach maturity. This leaves us with the final and most favorable path to growth: corporate venture building (CVB).
CVB is an innovation strategy whereby an established corporate group builds a portfolio of start-ups from scratch. By building standalone ventures outside of the core business, the corporate can diversify rapidly. Although the ventures are owned by the parent company, they can be fundamentally different in terms of values, business models, and capabilities.
The new frameworks of CVB are designed to handle the risk that is systemic in today’s markets. When conducted correctly, a CVB process begins by defining the innovation gap that can support the parent company economically. Prototypes are then built based on the most promising ideas and are immediately tested in the market to ensure only the most viable are proceeded with. This whole process needs to be data-driven, fast and strategic. With the right governance structures in place, entrepreneurial minds are harnessed in a stable corporate structure to make the parent company's new startup successful.
With the Covid-19 pandemic behind us, we find ourselves on the crest of a digital wave and a new era of CVB. Corporates need to implement a strategy to launch innovations as quickly as possible before challengers disrupt their markets. The result will not just be a new product, but a whole portfolio of tried and tested, future-proof business models that will stand the test of time.