5 minute read 17 Jul 2020
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Why corporate venture capital programs are more important than ever

By Chirag Patel

EY Foundry Leader

Proven entrepreneur and thoughtful corporate executive. Seasoned venture investor. Three-time CEO. Avid golfer. Father of twins.

5 minute read 17 Jul 2020

Corporate Venture Capital offers the most direct path to strategic and financial rewards from new business models, emerging technologies and disruptive innovation.

The current COVID-19 crisis is driving the world toward global financial turmoil — forcing CEOs and CFOs to urgently address the immediate financial challenges resulting from this pandemic.

However, forward-looking CEOs and CFOs should use this opportunity to make critical investments through corporate venture capital (CVC) to set up their companies for long-term success and secure their company’s future.

One of the most effective ways for companies to strategically deploy capital to drive future growth and financial returns is through CVC. CVC investing should be a critical growth driver in every CEO’s and CFO’s toolbox — along with M&A, market expansion and new service/product development.

In tumultuous times, when CVC programs are often among the first victims of cost-cutting measures, they are in fact more important than ever.

Need for corporate venture capital in tumultuous times

When businesses and economies hit a bump in the road, the natural instinct is to take defensive measures. But the COVID-19 pandemic will create much more than a bump. All businesses will be forced to expertly traverse a treacherous mountain filled with numerous unforeseen existential dangers.

Taking steps to secure near-term revenue, reducing costs, managing cash flow and maintaining liquidity are of course important actions for all companies. However, now is not the time to be exclusively defensive, but instead, it’s the time to act strategically and seize the opportunity to secure the company’s long-term future.

History has shown that incumbent companies that emerged from recessions stronger than they were before the economy went downhill, all shared one key characteristic: unlike their less forward-looking competitors, these companies were committed to maintaining (or increasing) investments during the tumultuous time.

Data has shown that corporates who have been the most active CVC investors have outperformed their peers and the overall market in both the short term and the long term.

CVC impact

Economic downturns offer forward-thinking companies unique opportunities to invest in the future. Many of these opportunities present themselves only during economic downturns, and missing out may mean not only forgoing tremendous upside potential but also ignoring a potential future existential threat.

The upcoming economic crisis is setting the table for two converging forces to produce an attractive environment for corporate venture investing.

  • Increase in entrepreneurship and startup creation

    Economic downturns have historically resulted in entrepreneurial explosions with many of the most successful companies across a wide variety of industries being born during down cycles.

    The 2007/2008 recession saw the birth of countless startups that became multibillion-dollar global leaders in their respective industry segments. These companies introduced disruptive technologies and business models. As a result, many of these startups took significant market share away from complacent incumbent companies that chose to “batten down the hatches” during the recession.

    If history is any indication, over the next two or three years, multiple “future unicorn” startups will be founded. These startups will not be just valuable enterprises, but they will threaten and disrupt the very corporations that are currently focusing exclusively on cost management.

  • Increase in access to investment opportunities

    Venture capital firms are generally immune to recessions because their funds operate on 8–10-year horizons. VC firms enjoy management fees, which fund their operations during the fund’s life. VC firms will not stop investing during the recession, and because many have raised historically large funds, they will be under enormous pressure to continue aggressively deploying their capital.

     

    With depressed valuations and declining interest in smaller deals from VC firms, it will be a buyer’s market for corporate investors willing to put their capital to work. Deals that might have previously attracted VC firms and locked out many corporate investors will now become available to corporates. Additionally, during tough economic times, early stage companies will seek to accelerate the time to revenue, making

    the strategic benefits of a corporate investor’s access to customers, marketing and distribution critical.

Corporate venture capital drives enterprise transformation and growth

No company is immune to disruption. Dramatic changes to business models are forcing companies across all industries to reinvent themselves to remain competitive and unlock opportunities for future growth.

Corporate venture capital complements existing transformation initiatives by opening the enterprise to embrace and absorb the innovation taking place outside the company.

It’s reasonable to argue that in today’s rapidly transforming and uncertain environment, not participating in CVC programs carries far greater long-term risk to an enterprise than participating in CVC.

A carefully implemented and well-managed CVC program offers incumbent companies five critical advantages in navigating their transformation journeys and ultimately leapfrogging their competitors.

All enterprises differ from each other, and the value they place on the advantages of CVC investing will affect how they set up and operate their CVC programs.

The current environment makes setting up and operating a CVC program the right way more critical than ever, and CFOs must rely on the unique expertise of experienced investors who have consistently delivered returns from venture investments. Experienced investors know how to develop and execute a CVC strategy that will effectively balance the strategic goals of the enterprise against the need for strong financial returns.

A framework such as EY Foundry’s Enterprise Innovation Architecture (EIA)™ can be extremely helpful in defining a company’s comprehensive “Innovation Agenda” and aligning it with the overall corporate strategy.

Enterprise innovation architecture

Summary

Now more than ever, a company’s ability to recognize and extract value from innovation will separate success from failure. Corporate venture capital offers the most direct path to reap strategic and financial rewards from new business models, emerging technologies and disruptive innovation.

Recognizing the potential impact that a well-built and well-managed CVC program can offer companies — especially in tumultuous economic conditions — C-suite executives must answer the critical strategic question: can we afford not to participate in CVC?

About this article

By Chirag Patel

EY Foundry Leader

Proven entrepreneur and thoughtful corporate executive. Seasoned venture investor. Three-time CEO. Avid golfer. Father of twins.