Why corporate venture capital programs are more important than ever

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.

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

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.