As a corporate venture builder we are operators of a very specific instrument within the larger toolstack of corporate innovation overall and even within corporate venturing more specifically. Quite frequently we are confronted with different scenarios of how corporates can work with or invest in startups overall. To give some guidance and to also share our opinion on the purpose of these different scenarios we would like to give an overview of the most relevant forms and discuss their applications.
As an overview of the field we have built a matrix visualized below. In this matrix all major forms of corporate venture equity scenarios are sorted. The X-Axis distinguishes between the possible initiators. In a corporate startup context there are only two options: either a startup emerges from founders or initiators which are not affiliated with the company or the corporate itself initiates a new venture (together with internal or external staff). On the Y-Axis the depth of equity engagement is listed. This ranges from non-equity related engagement up to a majority share position.
In the article below we first give a quick explanation of what it actually is. We then differentiate them further by giving you an overview of the drivers behind using a certain mode and insights that speak in favor or against it.
High equity share.
1. Corporate-led Company building ( > 50% or larger )
In the typical applied company building scenario applied by Bridgemaker, a corporate or a group of corporates initiates a venture for strategic reasons and at least initially maintains a majority position between 51% and 100%. Company Building partners as well as leadership personnel may hold a minority share. The strategic rationale is usually either the need to protect a certain business branch and generate revenue for consolidation in the group P&L or to venture into new business realms for growth in equity value.
Who is this approach for? It is the superior choice when the new business model is of high strategic importance and the incumbent intends to contribute the major amount of resources while needing support with entrepreneurial experience, digital expertise, and hands-on management support to build it. In follow-on investment rounds other investors (see 4. below) can be brought on board to speed up market penetration and expansion. Successful examples include our Bridgemaker ventures Ben and VAI.
2. M&A (51%–100%)
Acquiring a controlling stake (i.e. 51% or more) in a target company can be the method of choice if the long haul of building a new venture over many years does not move the needle quick enough or the competition is simply too far ahead. You are paying a considerable premium, but in return you can realize your strategic or financial targets within a shorter time frame.
It may be necessary to go this way if the needed knowhow and capabilities are not yet in the venturing corporation and cannot be built up within an acceptable period of time. However, as we know from Peter D., “culture eats strategy for breakfast”. The premium you pay is not just monetary but also in the risk of managing the cultural and strategic fusion. A challenge that few have really aced so far due to the typically very different mindsets, organizational structures, and processes. Examples are plentiful, for instance when adidas bought all existing shares of the startup Runtastic in 2015.
Low equity share.
3. Founder-led Company building ( 24,9% – 49% )
In a different company building scenario, the corporate only holds a minority stake. Here the found- ing team is in the lead and holds the majority stake - either the corporate decides to give the shares to employees now leading the new venture or external founders which are to take over the execution of the initial idea.
This brings with it a couple of implications for the corporate. Due to the lower equity stake, you can’t fully realize strategic opportunities and exercise the same level of control while still taking over the major chunk of the risk with the early investment. You need to trust a team completely which you often have not really worked with. If you are transferring equity to former employees the topic of equal treatment in terms of compensation has the potential to poison internal innovation activities. These are major downsides. On the other hand you get the upside of not having to consolidate the venture into the P&L and having the opportunity to (at least in theory) attract more types of investors with a more conventional cap table. Porsche Digital’s Team Forward 31 follows this kind of approach for example.
4. Corporate venture capital ( up to 33% )
For corporate VCs the focus is usually on obtaining a non-controlling stake in a still young but not super early-stage company (acting as a LP in regular VC is also a priority not of relevance for this overview). The motivations for this include getting a headstart on good deals at a later point in time, access to new technology and market information, as well as plain equity value increase.
Whether engaging as a corporate VC is an efficient use of resources is a topic of diverse opinions, e.g. due to huge adverse selection risks in the deal flow. Reviewing the actual performance reveals that only the top 15% of VCs can call their investments profitable, assuming that profitability is defined as an IRR of > 7%. And there are cases where an even higher one is needed, depending on the VC’s partners. The statistical long tail of the majority of VCs never gets to cash out on the exit of a unicorn that makes up for the lost investments on startups that never reached critical mass (TechCrunch, Kauffman Foundation).
This approach differentiates from company building as it focuses more on the financial benefits of the investment and less on the strategic ones. Heating startup Thermondo for example received CVC support from e.on and Eneco as well as Vorwerk.
5. Corporate accelerator ( 3% – 10% )
Traditional accelerators support early-stage startups with mainly coaching, infrastructure, network, and some investment in exchange for a small amount of equity and are a vital part of the ecosystem. Then came the corporate accelerators, which used to be quite the hype. After it started around 2010, many larger companies started one in order to kickstart digital innovation and cultural transformation. However in many cases entrepreneurs were not overly enchanted by the approach due to a misalignment of the speed and perception of acceptable risk between startups and incumbent supporters. In a now more present accelerator model, the corporate teams up with an external accelerator, which directly works with the startups while the corporate mainly provides the resources.
Running an own corporate accelerator today seems to be only worthwhile for very large organizations which can provide a very clear value proposition to startups through an accelerator. If you can provide that you will in return profit from effective market screening, a motivation for startups to innovate for you, and the chance to help a startup become a more attractive acquisition target. Otherwise this model will mainly help the corporate to some extent with their innovative image.
DB StartupXpress and APX from Axel Springer and Porsche are among the successful corporate-run accelerators.
No equity share.
6. Venture client (no share)
Acting as a venture client is distinctly different from the above mentioned venture investment and collaboration modes. That is, because there is no investment or equity position. Instead of acquiring equity, the corporate becomes an early client of a startup when its product is still in its early stages. They are thus supporting it with first revenue and valuable experience in exchange for preemptive product purchase rights and the chance to become an early adopter. One main goal the venture client can achieve in this model is to introduce new technology or products into the company with fewer procurement obstacles.
This is a good concept to create your own innovative products leveraging internal efficiencies. Setting up a venture client unit aims to make the company more accessible to startups by reducing process complexity and administrative barriers. The corporate venture model is also an important part of the screening stack of a corporate digital hub. BMW startup garage pioneered this model and 27pilots now helps corporates set up their own unit.
As Bridgemakers our focus seems clear: We build ventures with corporates. On a second thought it is not so easy: Some validations become minority investment scenarios while others only require a cooperation model with a start-up. Over the last four years we have thus acquired significant experience working with all of these models and acting as advisors next to our building capabilities. If you are struggling to find your ways through the jungle of opportunities feel free to reach out and discuss your roadmap.
Author: Thies Hofmann