The time is ripe for CFOs to lead their companies on a new avenue of growth: corporate venture capital, says EY executive Chirag Patel.
Traditionally, small-to-medium size companies have grown three ways: organically, entering new markets, and purchasing long established businesses. But Patel thinks corporate venture capital, or CVC, the purchase of parts of start-ups with attractive long-term growth potential, should be a fourth pillar for firms.
The time is particularly ripe because interest rates are low, many companies are sitting on mounds of cash, COVID-19 is making the acquisition of parts of numerous start-ups cheap and the rate of technology is accelerating on a wide range of business tools from blockchain to robotics that are going to become essential for firms in the coming years, he predicts.
"Most businesses can't keep up with the pace," he says.
Under Patel’s leadership, Foundry has helped the consulting firm make purchases in parts of two businesses in the last four years. "They are doing well: one has expanded into the UK, Canada and Brazil," he said.
While CVC and venture capital might sound similar, the EY executive says there are important differences.
"Corporations should not seek to mimic or attempt to recreate a venture capital firm inside their walls. Instead, an effective CVC strategy will specifically address the challenges and structural constraints of investing inside a large corporate environment," says a recent EY report Patel co-authored.
Take diversification. A VC firm might buy a whole host of start-ups in a wide variety of industries in expectations that a handful of profitable unicorns will overwhelm the losses from the large majority of investments.
An internal CVC, on the other hand, might set a goal of buying parts of 10 companies in a set number of years with perhaps two being highly speculative, three or four in customer segments the parent company is interested in and the rest in businesses with operational synergies for the parent.
The leadership needs to be different too. VCs rely on fund managers. On the other hand, CVCs need employees who understand a parent's business and strategic direction along with the regulatory environment it is in.
The CVC staffers also should have operational experience as well as credibility in the VC and start-up worlds. "They're hard to find," Patel acknowledged, adding that operational savvy may need to be taught to people hired to run a CVC.
He says a mistake would be to put overly aggressive and overly cautious attorneys in a CVC; the chemistry could be toxic. Focusing exclusively on the short-term challenges of COVID-19 could also be dangerous.
"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," the EY whitepaper says. "Corporate venture capital investments cannot be side projects for operating executives but must tie directly into the Board of Director’s or CEO’s long-term strategy and vision... Pursuing growth through corporate venturing is critical to long-term viability and prosperity."
The paper points out successful CVC investments require carefully balancing long-term strategic goals with financial returns. The ingredients essential to a methodically developed CVC program, according to the study, include a clear investment thesis, well-articulated objectives and rigorously managed metrics. Patel urges CVCs to take parts of start-ups, with VCs being the leaders.