Four strong columns for our four CVC strategic themes.

Since the beginning of the ‘fourth wave’ of Corporate Venture Capital (CVC), heralded by the founding of Google Ventures in 2009, we’ve seen CVCs popping up everywhere. There’s a surge in new players – from 2016 to 2018, the number of CVCs making their first investment doubled from 133 to 264. And in 2018 alone, CVCs were involved in 2,740 deals, contributing $52.95bn in funding, and accounting for 23% of total venture deal spend. Their impact on the venture landscape is palpable and the world is paying attention.

In 2018 alone, CVCs were involved in 2,740 deals, contributing $52.95bn in funding, and accounting for 23% of spend.

Over the course of our new series on CVC investment strategy, we’ll take a look at four overarching, strategic themes, inspired by some of the most successful CVC investment decisions we’ve seen in the market to date…

1.         Hedging against disruptive competitors by investing in them

2.         Increasing defensibility of the corporate’s core product offering

3.         Taking opportunities to acquire new or expand existing revenue and profit lines 

4.         Enabling a broader digital transformation.

What does great strategy look like?

When one of the core differences between Venture Capital (VC) and CVC investment is the addition of strategic benefits for the corporate parent, there’s always going to be the question of what this strategy should actually look like. David Horowitz, Founder and CEO of Touchdown Ventures who offer CVC as a service, suggests using a collaborative process to create strategic goals and KPIs for success. This involves longlisting and then shortlisting strategic priorities before identifying qualitative and quantitative success factors. Still, the quantification process remains a challenge.

When asked how to measure strategic returns in a meaningful and ongoing way David Mayhew, Chief Investment Officer of GE Ventures, remarked to the Harvard Business Review that “nobody has cracked the code”. Nevertheless, this shouldn’t distract us from trying to define a cohesive investment strategy which delivers value to the core business, while also generating a return on investment from a valuation perspective.

If we think of the most active of investors in CVC, it’s usually the big players. Some of the names which typically crop up include Google Ventures, Intel Capital, Salesforce Ventures, Legend Capital and Fosun RZ Capital. But, looking past the deal numbers, what does a great strategy look like? Let’s take a look at the first of four strategic themes we’ll be discussing in this series.

Hedging against disruptive competitors by investing in them

By investing to acquire new business models, the strategy directly supports internal diversification. Fundamentally, this reduces the reliance of the core business on the existing model to deliver profitability. When so many industries are experiencing disruption from new players, strategic investment in a competitor which operates under a different business model offers a means to hedge against potential threats.

By investing to acquire new business models, the strategy directly supports internal diversification.

In May 2018, AVP (global insurer AXA’s CVC arm) led the $10m Series A financing round of US Direct Care platform Hint Health. In the US, ‘Direct Care’ involves transparent payment and pricing arrangements between the healthcare provider and patient, eliminating the ‘middleman’ (insurer) from the payment model.

As the direct care movement gains even more momentum in the US, Hint Health strategically positions AXA in two ways. First, to capitalise on the profits associated with this new model of delivering healthcare. Second, as the landscape continues to change, it has hedged against potential threats to its core health insurance business.

Similarly, the millennial-driven trend in the global food industry towards organic, free-from and ‘better-for-you’ food and snacks, has led many consumer packaged goods companies (CPGs) to hedge against declining demand for existing products.

In 2018, the UK alone saw £2.33bn of organic food and drink sales, up 5.3% on 2017 – its 8th consecutive year of growth. In 2018 General Mills’ Venture arm 301 Inc. led the $19.5m Series B financing round in plant-based, organic food startup Urban Remedy. This follows their clear strategy to invest in this disruptive market segment. All three of 301 Inc.’s 2018 investments involved the organic, free-from and ‘better-for-you’ space: Urban Remedy, NextFoods and Kite Hill.

No industry is untouched by disruption. How do you deliver what your customers really want before they know they want it? If you wait until they demand it from you, they can already get it from the new, innovative companies out there. So, why not hedge against disruption by investing in them?

Targeting other business models is a powerful strategic driver that shouldn’t be underestimated.