To achieve an optimal mix, it is important for companies to break down silos and become more purposeful in synchronizing these investment types with each other. Build, buy and partner decisions should not be made in isolation; rather, they should align with overarching corporate and business unit-specific objectives.
Leading practices for inorganic investments
Companies can lose value by choosing the wrong investment vehicle and not fully weighing the benefits and drawbacks of each option. Likewise, setting up the right incubation structure and building an operating model that links each investment vehicle will improve transparency, efficiency and effectiveness of investments across various stages of maturity.
These considerations can guide decisions:
Partnerships
This investment vehicle is used to support new market expansion, strengthen customer relationships, close capability gaps and leverage startup solutions.
Benefits
Partnerships typically represent less financial burden compared to other inorganic vehicles.
Considerations
- Companies should consider partnership constructs that require commitment from both parties, such as equity joint partnerships.
- It is important to choose the right partnership vehicle (e.g., equity partnership or joint venture, commercial agreement) based on a company’s unique situation and goals.
- In some cases, certain partnership options (e.g., licensing, research and development) may yield greater returns in a shorter time frame.
Potential risks
While partnerships can help drive value by leveraging the other companies’ capabilities, drawbacks may include the sharing of business decisions, culture mismatch, misaligned commercial or go-to-market aspirations, splitting profits, and losing full rights to intellectual property.
CVC
Companies often structure corporate venture funds as a separate entity or “branded CVC” fund to operate with autonomy and keep off-balance sheet investments to capitalize swiftly on venture opportunities.
Benefits
Companies can use CVCs to learn from startups, identify future M&A opportunities and build an ecosystem of incubators.
Considerations
- Define governance and operating models that link to the parent company with a dotted line to the chief executive officer (CEO) or chief financial officer (CFO) to empower future-think investment decisions
- Determine investment strategy in terms of fields of play, technology gaps and strategic goals that tie into larger outcomes.
- Build off-balance sheet investment structure to avoid impacting financial reporting
- Develop an attractive compensation package to secure high-quality venture capital and startup talent and maintain a differentiated incentive plan to foster innovation
- Build strong industry relationships to be able to tap into the startup ecosystem