There are three ways large companies can grow their business: build it from scratch, buy it, or gain strategic alignment with other companies through partnerships. However, creating something from scratch is often too long, and M&A is sometimes not an option. When this occurs, there is still a way to leverage someone else's technology for faster growth. In this article, Larry Forman, Senior Manager and head of the ecosystem for Deloitte's New Venture Accelerator, discusses the corporate venture strategy.
"Don't try to be a venture capitalist unless you are going to hire a team of VCs to run the fund for you or you may be disappointed." - Larry Forman
What is Corporate Venture Strategy?
The corporate venture strategy involves interacting and forming relationships with venture funds. It is used by corporations wanting to access different ecosystems and technology without building it themselves or acquiring the company. There are various ways to approach this strategy.
- Arms Length Approach - An agreement or an alliance with the company, through the venture fund, towards a particular goal. In this approach, the venture fund will introduce the company to the larger organization and gain strategic alignment.
- Sponsorship Approach - The sponsorship approach is much like the arms-length approach, with one significant difference. Without taking any equity, the larger company will make a financial commitment to work and help with the fund.
- Investment Approach - This approach invests in the venture fund without strategic alignment with its portfolio companies.
Benefits of the Corporate Venture Strategy
Regardless of what approach a company takes, there are many reasons why organizations should look into corporate venture strategy. Here are the significant benefits:
- Market Intel - Large companies will see the market from a venture capitalist's perspective. VCs typically see products or technologies way ahead of time before anyone else.
- Increase Presence - By affiliating with newer companies with advanced technologies, larger companies can build their brand and increase their presence in the more recent-generation market.
- Building Relationships - Corporate venture strategy is an excellent opportunity to build relationships with portfolio companies that may have the technologies needed by larger companies.
- Potential Ecosystem - Sometimes, investors can leverage the portfolio company's existing relationship with other businesses.
- Potential M&A - Partnerships with the portfolio company will provide insights into their operation and culture, which is a great way to assess potential acquisitions.
- Potential ROI - Aside from the other benefits, corporate venturing also has the potential of earning the invested money back.
Advice for First Timers
While corporate venture strategy is highly beneficial, Larry doesn't recommend companies becoming venture capitalists, especially for first-timers. It is highly complex and would require a team to be effective. Instead, the best way to learn and gain experience is to partner with venture capitalists and see what they're doing first.