A while back, we ran a private equity-focused event to have an open discussion about what venture building could be for the portfolio companies of PE firms. We met interesting people and learned a lot and are, therefore, sharing the main points of discussion and questions raised with you. We hope it is helpful to a broader audience.

1. Introduction to Corporate Venture Building

Question:

What exactly is Corporate Venture Building (CVB)?

Answer:

• Corporate Venture Building represents a strategic approach where companies create new business ventures, either to be spun out or integrated into the business. This method leverages a company’s unique assets, market position, and “unfair advantages” to innovate and grow. The essence of CVB lies in identifying and utilizing these inherent strengths to build ventures that are not only viable but also synergistic with the company’s core competencies.

• CVB is more than just a business expansion tactic; it’s a visionary strategy that adapts to rapidly changing market trends and addresses the decreasing life expectancy of businesses. By developing new ventures, companies can diversify their portfolio, reduce dependency on their core business, and stay ahead of disruptive market forces. This proactive approach is particularly crucial in today’s fast-paced, innovation-driven business landscape.

2. Venture Building vs. Core Investment

Question:

Why should companies consider building ventures instead of solely focusing on their core business?

Answer:

• Venturing into new business areas allows companies to explore opportunities that the core business might not pursue. This strategy is crucial in an era where industries are constantly reshaped by megatrends and technological advancements. Companies that stick solely to their core business may miss out on lucrative opportunities and leave themselves vulnerable to industry disruptions.

• Diversifying through venture building is not just about risk management; it’s about seizing growth opportunities in new and emerging markets. By embracing venture building, companies can create new revenue streams and innovate beyond their traditional boundaries. This proactive stance is essential for staying competitive and relevant in a rapidly evolving business environment.

3. Essentials of Successful Venture Building

Question:

What are the critical requirements for a successful venture building?

Answer:

• Successful venture building does not necessitate a colossal corporate structure. Even companies with revenues upwards of $100 million can effectively engage in this strategy. However, the cornerstone of success lies in securing a clear, top-down mandate, ensuring C-level backing, and having a well-defined strategic rationale. This top-level support ensures alignment with the company’s broader goals and provides the necessary resources and protection for the ventures to thrive.

• Venture building is a multifaceted process that requires a blend of creativity, strategic foresight, and operational acumen. It’s crucial to foster a culture of innovation and flexibility, allowing ventures to pivot and adapt as needed. Regular communication with stakeholders, continuous market analysis, and responsiveness to feedback are essential for navigating the complexities of venture building and achieving long-term success.

4. Starting Points in Venture Building

Question:

What is the best approach for companies to begin their venture-building journey?

Answer:

• The initiation of venture building should be strategic yet nimble. Rather than constructing a large, cumbersome infrastructure, companies should start with one well-thought-out venture. This approach allows them to learn the intricacies of venture governance and development processes without overwhelming resources. Choosing a venture that aligns closely with the company’s strengths and market opportunities is crucial for early success.

• The first venture acts as a pilot project, providing valuable insights and lessons that can be applied to subsequent ventures. It’s essential to establish clear objectives, performance metrics, and a scalable model that can be replicated. This iterative learning process ensures continuous improvement and lays the foundation for a sustainable venture-building program.

5. Venture Development Timeline

Question:

What is the expected timeline for venture development, considering the typical 5–10-year exit period of PE firms?

Answer:

• Venture building can be a relatively expedient process, with the potential to reach Series A funding within 12–16 months and progress to Series C in 28–36 months. This rapid development is particularly attractive to Private Equity firms with a 5–10-year return horizon. The key is to align venture development timelines with the investment and exit strategies of the PE firm, ensuring a symbiotic relationship between the venture’s growth and the firm’s investment cycle.

• To optimize the timeline, it’s crucial to have a structured yet flexible approach. This involves setting clear milestones, maintaining agile development practices, and being responsive to market feedback. Regular evaluation and adjustment of strategies aligned with evolving market conditions and venture performance are essential to keep the development on track and aligned with the PE firm’s objectives.

6. Financial Aspects of Venture Building

Question:

What level of investment is typically required in the venture-building process?

Answer:

• The investment scale for venture building varies, but a general benchmark for a venture reaching Series A is around $2 million. This figure aligns with what similar independent ventures would necessitate, ensuring competitive positioning. The goal is to structure the venture in a way that makes it attractive for external investment post-Series A, thus enabling further growth without overburdening the original investors.

• Effective financial planning is key. This includes setting clear budget parameters, ensuring efficient use of resources, and establishing a transparent funding structure. The aim is to build ventures that are not only innovative but also financially viable and attractive to external investors, thereby maximizing the return on investment for the parent company and any involved PE firms.

7. Managing Risks in Venture Building

Question:

How can risks be effectively managed in the venture-building process?

Answer:

• Effective risk management in venture building involves a multi-faceted approach. First, it’s essential to conduct thorough market research and due diligence before initiating any venture. This helps in understanding the market dynamics and potential challenges. Diversifying the types of ventures built, in terms of industry and scale, can also mitigate risks associated with market fluctuations or sector-specific downturns.

• Secondly, setting clear performance metrics and milestones for each venture allows for continuous monitoring and quick response to issues as they arise. It’s also crucial to maintain a balance between resource allocation to the ventures and the core business, ensuring that neither is neglected. Lastly, fostering a culture of agility and adaptability within the venture teams can help navigate unforeseen challenges, keeping ventures responsive and resilient in a dynamic market environment.

8. Strategic Alignment with Portfolio Companies

Question:

How can PE firms ensure Corporate Venture Building aligns with the strategies of their portfolio companies?

Answer:

• Alignment between venture-building initiatives and portfolio company strategies is essential. PE firms should start with an in-depth analysis of the portfolio company’s strengths, market position, and potential growth areas. This analysis informs the selection and development of ventures that complement and enhance the existing business model, ensuring strategic synergy.

• Regular strategic sessions involving both the PE firm and portfolio company leadership are crucial. These sessions should focus on aligning the venture-building efforts with long-term goals, identifying opportunities for integration, and leveraging mutual strengths. Ongoing communication and adaptive planning are vital to ensure that the ventures evolve in tandem with the portfolio company, maximizing value creation and strategic fit.

9. Benefits of Venture Building for PEs

Question:

What are the primary benefits of Corporate Venture Building for Private Equity firms?

Answer:

• One of the most significant benefits for PE firms is the creation of dynamic and diversified growth stories within their portfolio companies. These stories can significantly enhance investor appeal, potentially leading to higher company valuations. By investing in ventures, portfolio companies can tap into new markets and revenue streams, making them more robust and resilient to market changes.

• Additionally, venture building can lead to the development of innovative products and services, fostering a culture of continuous improvement and adaptation within the portfolio company. This not only drives internal growth but also makes the company more attractive to potential buyers, thereby increasing its exit value. The diversification and innovation achieved through venture building are key to driving long-term, sustainable growth for both the portfolio company and the PE firm.

10. Exit Strategies in Venture Building

Question:

What exit strategies are possible for corporate-built ventures?

Answer:

• Two main scenarios usually play out in corporate venture building. One likely scenario is that the venture, once mature enough, gets brought back into the corporation that built it originally and becomes a business unit of that company. The other is that the venture is sold to another company where it finds a stronger portfolio fit — creating financial returns for the company that built it.

• It is important to appreciate both the financial and strategic returns that a venture-building approach can deliver to a corporation. Even if a venture ends up being sold to another company, the process of building it and the learnings from that journey can still deliver significant strategic value, beyond the financial exit value, to a company and its leadership.