In today’s tech-driven startup world, more CIOs than ever have participated in venture capital meetings and pitches. For those that haven’t, chances are good that they have kept up on the seemingly limitless spending habits of Silicon Valley firms such as Sequoia Capital, Benchmark and Andreessen Horowitz. Increasingly, CIOs are being tasked to manage corporate tech R&D, innovation and perhaps even invest in startups or new technologies to position their company for future success.
Whether or not this role is handed to a CIO or if it’s an effort to increase leadership standing (and budget allocation) among the C-suite, it’s critical to first understand the challenges of taking the reins of corporate innovation investments.
When investing in outside companies or acquiring a stake in their technologies rather than purchasing or licensing products in a standard buyer-role, one has to take on the role of a venture capitalist. This means, understanding how to value, negotiate and develop appropriate investment contracts. Further, it requires a CIO to understand how to oversee and manage this investment through to a net return or to the point to which it’s worth considering a full acquisition of the company or technology. This process may sound like a fun growth opportunity, but it can also cost one’s job if managed poorly.
Some large companies like IBM and Microsoft have implemented internal programs or subsidiary investment groups to manage their own startup investments. Other major brands have taken a different route. To gain the upside of corporate innovation programs, while mitigating the risk, some have chosen to partner with established venture capital firms or investment groups to manage the investment process from start to finish.
By partnering with these organizations that already have the experienced staff and processes in place, the C-suite may still invest in innovative startups and technologies without having to hire or develop their own staff to vet and manage investments and be responsible for net returns. Startups need the funds to develop new technologies, and through their investments, the corporations have the opportunity to acquire a competitive edge, and in some cases, also a great return. Following are a few recent examples of corporate innovation structures.
Venture Capital as a Service (VCaaS)
Pegasus Tech Ventures recently introduced Venture Capital as a Service (VCaaS), through which they manage funds for global corporations hoping to invest in tech startups. Pegasus has over $1 billion in assets under management across their funds for over thirty multinational corporations, including many well-known brands such as Asus and Sega. They have made over 150 investments across the world since 2011 and already have more than 20 exits. Founded by CEO and General Partner Anis Uzzaman, Pegasus Tech Ventures is paving the way for new innovative models in venture capital.
The idea behind VCaaS is to create situations that are both financially and strategically beneficial to both the corporate partner and to the startup:
- The operating costs and time required for the company are significantly lower than if it were to train and pay its own team of venture capital investors
- Because Pegasus is structured as a venture capital firm, it has broader and deeper access to startup companies than a singularly focused corporation, as well as an already established VC community network.
- Startup entrepreneurs are rarely interested in receiving funding from only one corporate investor. A broader base of capital provides more business development opportunities, and finding this base is more likely to occur within a firm that focuses on strategic investment opportunities.
- Startups don’t have to cater to one corporate investor who may try and bend the strategy to suit specific needs. The VC firm can act as a firewall In this way, a multi-fund co-manager is far more attractive than a single investor.
Through this mutually beneficial model, Pegasus’ corporate investors have already demonstrated numerous success cases of corporation innovation through an investment and partnership structure, which enhanced existing products, or created new revenue streams for these corporations.
To further encourage corporate collaboration with promising new companies in entrepreneurial ecosystems around the world, Pegasus organizes regional competitions in more than 30 different countries that culminate in a final event in San Francisco called the Startup World Cup, and offers the winner $1,000,000 investment prize, making it one of the biggest competitions in the world.
The Vinetta Project is another organization encouraging corporations to invest in and support startups. Because of the lack of female representation in the tech world, Vinetta has chosen to focus its efforts on closing the gender funding gap. According to Vinetta’s website, companies with female founders perform 63% better than teams made up entirely of men; however, only 2.2% of venture dollars were dedicated to female-founded businesses.
To inspire collaboration between corporate sponsors and female-led startups, Vinetta provides programmed networking, events and competitions throughout local chapters across North America. They offer opportunities for entrepreneurs to pitch their startups, attend workshops and take classes, and make valuable business connections. They recently partnered with Proctor and Gamble (P&G Ventures) to help find and invest in great female founders. This gives P&G the opportunity to invest in female founders and the added reach to evaluate new ideas and products that they might not know about otherwise.
The theory behind Vinetta is that if women are equipped with the funding, education, mentorship, and leadership necessary to build businesses, more innovative startups will be permitted to thrive. When creativity from more diverse sources is encouraged, both the tech and the startup world will make more significant global changes.
BSH invests in Chefling to enhance Home Connect’s capabilities
The above two organizations help corporations manage funds and designate them towards innovative startups through VCaaS and a funding network. A third option is for corporations to open and staff their own separate venture arm to invest in emerging technologies to help each brand keep pace with the ever-shifting technical environment. Notable kitchen appliance manufacturer Bosch Group, for example, started BSH Startup Kitchen to invest in companies that will help to keep them on the leading edge of technology in their industry.
The company recently invested in Chefling Inc., acquiring a third of the firm’s shares. BSH Home Appliances and XVVC Capital Ltd. are the lead investors. Chefling’s increased capital will go towards developing new functions and capabilities for their Internet of Things (IoT) A.I.-based smart kitchen assistant app. BSH’s Home Connect ecosystem currently features a base of over two million connected appliances worldwide. Because of BSH’s investment in Chiefling, the Home Connect System will be able to develop new service offerings. These developments will further solidify BSH’s position as a top provider of IoT smart kitchen manufacturing.
There are clear benefits to the above-mentioned corporate venture capital investment strategies. The startup is exposed to much-needed funding, along with the support and credibility of an established company. The corporation gains access to innovation, creativity, and it allows large companies to maintain their position as industry leaders in an increasingly competitive market. It’s valuable for CIOs to understand these models as they consider methods to expand their company’s reach for the future, while investing in their own leadership opportunities as well.