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Venadar’s CEO Shares How Corporate Innovators Can Manage Startup Relationships

Venadar Founder & CEO Mark Kaiser

The following interview was recently featured on Enterprise Innovation
Startups and corporate innovators often have a tenuous relationship. While enterprise leaders fear the disruptive threat of innovative startups, the nimble nature of a startup offers massive opportunity for forward-thinking innovators. Sometimes the most impactful way to solve a problem facing an enterprise business is to find an external agency or startup partner already solving that problem on a smaller scale.

It is sometimes overlooked that a primary responsibility of corporate innovators is to discover and partner with emerging startups, and also to make recommendations on investment and acquisition. finding startups that meet corporate criteria – whether that be in size, scope, scale, or staff – that can help meet corporate innovation objectives is                                                             not always easy. That’s where the help of corporate venturing firms like Venadar come in.

We recently spoke with Mark Kaiser, Venadar’s founder & CEO, about how corporations have changed their M&A priorities; where startups sit within the corporate innovation spectrum, and to solicit advice for intrapreneurs struggling to secure buy-in on a startup engagement strategy.

What prompted you to start a corporate venturing firm in 2005?

Prior to Venadar, I served in four other executive positions, including several times in the CEO role, so I became painfully aware of the constant pressure to drive growth. In the early 2000s, I became curious as to why, outside of a few IT partnerships, my organization didn’t seek or maintain working relationships with any startups or entrepreneurs. The more I thought about it, the more of a good idea I thought it was to engage with startups. That’s when I decided to start Venadar – to help connect corporations with startups that could move business priorities forward faster than they were equipped to do.

In the 12 years since, what have been the biggest changes in how corporations determine where, when and why to invest in startups? 

Until about five years ago, organizations put a lot of effort toward learning and understanding technology. There was genuine interest in disruptive tech, but unfortunately, IT, C-Suite and even business units had a bias towards startup innovation. In plain terms – they didn’t want to acknowledge that the startup might be creating something that the organization didn’t have the resources, skills or time to do.

Since about 2011 or 2012, Fortune 500s, in particular, began to view the  acquisition of startups as a means to drive growth. As such, some of the biggest brands in the world extended their reach through M&A in ways once never imagined. For example, Tyson’s Foods acquired its way into having an entire division dedicated to proteins other than chicken. Hershey’s acquired jerky maker Krave with an explicit mandate to transform the $30 million brand into a $500 million brand.

The prioritization of growth via M&A is not all that’s changed. As we all know, the modern consumer and customer now demand products and services expeditiously. And if it’s not working, we demand a pivot. But typical corporate R&D is very slow, sometimes taking years from design thinking to implementation. Consumers don’t have patience for such slow innovation anymore. With this reality, corporations took notice of people flocking to startups for speed and convenience, so they knew it was time to act or risk losing market share and revenue, potentially for good.

So then, are you saying that corporations view startups more as threats than as opportunities?

Not in every situation. Wise corporations see startups as an opportunity, not as a threat. Startups are closer to the consumer than big companies can be. That puts them way ahead of the curve in knowing what will show up down the line when the enterprise conducts consumer market research. Historically, most big companies would never admit to being threatened by an entrepreneur. There is a certain level of arrogance that says, “We won’t be beat out by the small guy.”

But corporations did start to get beat, and they continue to. About 10 years ago, I was in a meeting between a Greek yogurt startup and a corporation that laughed them out of the room, dismissing any idea that Greek yogurt could emerge into the mainstream. Today, whenever I meet with that company, we talk about avoiding the next “Greek yogurt moment.”

Where do you see corporate venturing as part of the bigger corporate innovation puzzle? That is, how are companies prioritizing in-house dev vs. investment/M&A? Are there any patterns based on industry, company size etc.?

Corporate venturing is hot, and I see it continuing to explode. Prioritizing in-house dev versus startup engagement isn’t as difficult as it might seem so long as corporate innovators can clearly define internal and external priorities.

One emerging best practice for intrapreneurs is to make an evaluation of build vs. buy. For every idea, before starting with a blank sheet of paper, intrapreneurs should conduct due diligence to determine if any entrepreneurs are already solving this problem. If they are, perhaps a partnership or acquisition is in order. This line of thinking will become ingrained moving forward because the eight-year enterprise average from inflection point-of-scale is too slow and no longer viable. Why should a corporate innovator start down an eight-year path when they can engage with a startup that is already five years down the line? It’s such an easy way to avoid those costly and painful first years.

Investment in startups also allows for cross-pollination of products and services that otherwise wouldn’t have merged together. For example, I participated in the acquisition of a home security technology to be used in baby monitors. The home security entrepreneur didn’t have the time or resources to scale into the baby industry, but the corporation did, and it turned out to be a big success for all involved.

Aside from budget, what do you see as the biggest challenges to corporate innovators? What lessons have you learned in your career that you can share with aspiring intrapreneurs?

Two main thoughts come to mind here:

  1. Be strategic – Don’t let serendipity drive corporate venturing or innovation. Many companies go to trade-shows seeking leads and are excited by the possibilities at hand. But often times they don’t come back with as many leads as they would have liked, yet there is little questioning the ROI because attending these shows has become the norm. There are no norms for intrapreneurs, so they must present opportunities, recommendations and ROI in much more strategic ways. Failure to do so could impact the perception and outcomes of the project before one even gets off the ground.
  1. Keep away corporate antibodies – To me, the hardest part about being an intrapreneur is to not let “corporate antibodies” attack your investment or project. The big difference b/w high growth companies and mature businesses is that stakeholders of mature businesses can have a propensity to try and prove everything new as bad. For example, with any new innovation, margins will most likely not be as good as they are for the core business, but that doesn’t mean that the margins are bad. Unfortunately, the perception might be as such. Mitigating the effect of “corporate antibodies” takes proactivity. Intrapreneurs must make stakeholders understand that what they are doing is different from the core business and that is OK. Doing so requires what I call being a sophisticated rebel; knowing when to push back against standard business processes. Knowing how and when to say, “We appreciate X, but that won’t work for Y, and here’s why,” is imperative to the success of an innovation team long-term.

Author – Robert Berris, VP, Strategy & Founder, Enterprise Innovation

The Rapid Rise of Corporate Venture Investing: Will This Be the Answer to Large Company Growth?

The Rapid Rise of Corporate Venture Investing
Startups, Innovation, and Low Barriers to Entry

At the large corporate level there has been a lag in innovation.  At the same time, the marketplace has sped up. Consumers expect rapid innovation.  System re-engineering at scale can take a long time and big companies can’t move fast enough.  This conundrum forces large companies into a make or buy decision.  Do companies develop the product or service internally, should they buy an existing company or product (M&A), or do they partner with someone else to make the product?

Entrepreneurs often identify unmet needs long before big companies are aware that these needs exist. Their size allows for agile movement and rapid prototyping.  Technology has reduced entrepreneurial barriers to innovation and scaling across more and more business sectors.  Contracted manufacturing, distribution and sales forces have replaced the need to build these processes internally enabling production , sales and distribution to be done just-in-time and on-demand.  Small companies can now scale their business without needing to build out their infrastructure.  In addition, they can now join forces with a larger corporation and benefit from the scale, capital, synergies and other resources a big company partner can offer.  Entrepreneurs and large companies alike must continue to identify needs and provide products and services to match those needs.   Early success partnering with entrepreneurs is accelerating the pace of corporate venture investing across a number of sectors including consumer products, manufacturing, industrials and financial services, leveraging the long-standing success of corporate venture investing in the technology sectors.

Independent VC versus Corporate VC: What’s the Difference?

The US Small Business Association defines Venture Capital as “a type of equity financing that addresses the funding needs of entrepreneurial companies…generally made as cash in exchange for shares and an active role in the invested company. VC focuses on young, high-growth companies, takes big risks, and expects high returns.”  Traditionally, independent Venture Capital (VC) helps startups scale quickly and optimize profits.  However, VCs pressure and incentives for fast returns, can create a mismatch between longer term innovation expectations and the desire for financial return.  VC fund managers typically receive 2/20 terms, a powerful incentive that can drive a single-minded focus – maximizing financial returns – and cause strategy and mission to take a backseat.  Corporate VC can help circumvent these problems by designing an investment strategy, and a set of processes and structures designed to meet the larger corporate need for meaningful growth.

The Kaufman Foundation describes Corporate Venture Capital (CVC) as “an equity investment by an established corporation in entrepreneurial ventures. In contrast to individual venture capitalists, which are purely focused on financial returns, most corporations seek strategic benefits in addition to financial returns.”  While CVCs still need to focus on return on invested capital, it should not be their immediate metric of success.  CVCs need to foster innovation, keep up with markets and trends, grow products and services to scale, and integrate them into the core parent business to generate meaningful positive impact for the corporation.   CVCs can be more patient with their investments and need not be concerned with immediate return on invested capital.  Instead, CVCs can tap into their existing infrastructure and expertise (scaling, supply chain, marketing, sales, etc.) to bring new businesses along at an accelerated pace compared to the same business backed by a financial VC.

While Venture Capital (VC) and Corporate Venture Capital (CVC) may sound similar, a few key differences have developed between the two venture investing approaches.  In fact, some say that if CVC firms follow the VC playbook too closely, they could risk failing to deliver the required growth in spite of achieving results that most VCs would envy.   For example, if a VC fund invests $1 million in an early-stage company and turns that investment into $10 million in three-to-five years, that’s considered a huge success.  If a CVC invests $1 million and turns that investment into to $10 million in three-to-five years, they haven’t moved the needle in the context of impacting the large corporation’s revenue or profits in any meaningful way.

Successful CVC investments leverage the insights, creativity and speed of the entrepreneur while accessing corporate skill and capabilities to achieve scale.    For example, within about a year of acquiring the beverage company, Glaceau, The Coca-Cola Company was able to leverage its distribution power to enable Vitamin Water to quickly become a billion-dollar brand, something the younger company could not have done on its own.

From Pharmaceuticals and Technology to Consumer Products

Corporate VC isn’t new: CVC funds helped pharmaceutical companies catch up with rapid advances in bioscience in the 1990s.  CVCs have steadily invested in technology startups since the mid-1980s.  Tech investments, however, are relatively “safe”.   In contrast to consumer goods, tech requires comparably less up-front investment and promises substantial returns in very short periods of time.

Consumer goods have a longer product development cycle, as they need to be manufactured, and distribution is often based on retail “seasons” and buying cycles.   To make matters worse, it is also more difficult to tell if a consumer good is going to be a “fad” or a long-term success story.   As a result, venture firms have historically avoided early-stage investing in consumer goods staying on the sidelines until a consumer product or service reached $10 million in revenue or more (giving more confidence in the longer-term sustainability of the product or service).   With market pressures rising and cycle times speeding up over the last few years, Kellogg, Campbell Soup, Coca-Cola, and General Mills have all developed and enhanced CVC capabilities.  Why has the CVC trend caught fire?   Because consumers are changing how they buy and how they interact with companies, products, and services resulting in the big companies product portfolios coming under attack by a wide range of new, entreprenruial competitors.

Market Pressures Driving Corporate VC

The following three trends are reshaping the consumer marketplace and driving action and innovation by consumer goods based CVCs.

  1. The Rise of Natural, Organic and Sustainable Products.   Consumers want products and services that reflect their values.    They like locally produced products, products that are natural & organic, and they want the companies that produce what they consume to be socially responsible and authentic.
  2. The Changing Face of Retail.   The consumer’s decision journey has changed dramatically. Online offerings have disrupted retail and financial services and the act of purchasing itself has shifted to include far less interaction.   While customers are still willing to pay a premium for brand loyalty, their spending patterns are increasingly influenced by customer reviews rather than advertisements.  Preferences are also getting more sophisticated.  In the future if we want to buy a laundry detergent we may not select Tide or Arm & Hammer, but results oriented preferences such as “highest quality”, “whiteness”, “cheapest”.   Shopping automation will be the future of retail.
  3. Ease of Building Virtual Companies.   In the past, owning assets like big manufacturing plants was a huge advantage and the key to driving low cost, high margin products.   Today, any and all business capabilities from formulation and design to manufacturing and distribution can be outsourced easily and efficiently.    These new “asset lite” companies don’t have to wait months or years to reconfigure a manufacturing process so they can be agile and cost-effective competitors who can move fast to capitalize on changing consumer and customer preferences.   By CVC investing in start-ups and entrepreneurial companies, not only do corporations gain access to new products, services but new business models that can potentially revolutionize their core businesses.

CVC Will Be the Answer to Large Company Growth

Sooner or later, all businesses, even the most successful, run out of room to grow.   CVC when done right, will enable large companies to leverage their core capabilities (things like sales, marketing, manufacturing, supply chain, distribution, etc.) by partnering with innovative entrepreneurs who see the future and create products, services and solutions to meet tomorrow’s needs.    Pairing these two important sets of skills will enable forward-looking companies to periodically reinvent themselves.   The ability to pull off this difficult feat—to jump from the maturity stage of one business to the growth stage of the next—is what will separate high performers from those whose time at the top is all too brief.

Download a pdf of this article: The Rapid Rise of Corporate Venture Investing