Corporate Venture Building: Embracing Disruptive Innovation
- September 1, 2020
“Houston, we have a problem.”
Apollo 13 was to be the third mission to land on the Moon. After a premature engine shutdown and a busted oxygen tank crippled the spacecraft during flight, the crew was forced to orbit the Moon and return to the Earth without landing — letting down the hopes of many Americans watching over national TV.
Corporate innovation of today is not dissimilar to a space mission — it is a leap of faith venture into unchartered territories and the mission is riddled with uncertainties at every step of the risk-reward spectrum. Organisations of today are caught in the paradigm of adopting radical innovation or risk getting left behind. Thankfully, a plethora of corporate innovation vehicles of different characteristics have emerged in the face of increasing disruptions from new business models from start-ups (Figure 1).
Identifying the best weapons for the right battle is critical to optimising for success. Current business landscape can be characterised by a dynamic where attackers have the upper hand with their relentless focus and agility to disrupt while the defenders (legacy organisations) are saddled with legacy and bureaucracy. Corporates understand this — which is why the region has witnessed an uptick in CVCs (growing at 63% CAGR 2010–2018)¹, accelerators/incubators, and the likes. However, these vehicles have struggled to create breakthrough and meaningful enterprise value:
- Internal transformations are often only effective in improving efficacy and optimising the productivity of the core business but not creating new, transformational disruptions.
- Accelerators and incubators are useful in exploring new/early business ideas. However, with limited involvement/incentives from corporates experts , start-ups struggle to reap corporate partnership benefits.
- Mergers and acquisitions are exposed to risks of cultural mismatch, bureaucratic processes, and incentives may asphyxiate the newly acquired innovation culture.
- Corporate venture capitals primarily serve a financial objective.The corporate-start-up relationship extends to sales channel at best. CVCs mostly enter at Series A, at a premium than if they were to enter during pre-/seed.
You see, these corporate innovation vehicles are not fruitless. In a recent survey, where about 30 startup ecosystem members in SEA shared their view, Reputation impact was considered higher for accelerators and CVCs but not same level for incubators. Speed to market was rated lowest for incubators with high risk of failure while strategic impact was considered lowest for the CVCs. There is a gap in the approaches as they do not solve the underlying problem that corporates need to address — to innovate better than the disruptors.
Corporate Venture Building: Becoming the Disruptors
We find McKinsey’s Innovation Frontier Framework a fitting framework to elaborate on the fit of the different innovation models. However, we have adapted it (Figure 2) to reflect the disappearing boundaries of delivery time as the growth horizons are no longer restricted by deployment speed in the current era.
H3 innovations refer not to the long time but to the potential of the innovation to disrupt the industry it operates within.
We already see this happening: streaming services upending the OTT industry, gig economy players charting entirely new markets, rental services cannibalising the fashion players, and many more. These H3 innovations are not only gaining market shares but also profoundly shaping customers’ expectations and interactions with traditional players. The long-believed “70/20/10” rule of allocation to H1/H2/H3 innovations no longer optimises outcomes. If anything, it jeopardises corporates to trail behind competitors². CB Insights found financial performance leaders have 25–30% of innovation budget invested in H3 disruptive ideas³.
How does corporate venture building fit into H3 innovation?
H3 innovations are fundamentally about the radical disruption that happens when product and business model innovation are accelerated by a corporation’s assets and capabilities. Herein enters corporate venture building. Corporate venture building is about unlocking a corporate’s unfair assets at the speed, tenacity, and agility of a start-up, to launch truly disruptive ventures. Bain reported that corporates have significantly higher odds to create large-scale new $100M businesses (at 1/8 probability) relative to your typical start-up (at 1/500 chance)⁴. Notable corporate examples around the SEA region include Axiata’s Boost, Indosat’s Eureka, FWD’s Bolttech, Lippo Group’s OVO, and more are starting to engage with the strategy.
Every day new entrants and challengers are rapidly deploying H3 innovations, refashioning and repurposing their assets and capabilities to single-mindedly disrupt and replace incumbents but without the burden of navigating around legacy infrastructures, bureaucratic processes, and managing reputational risks. Corporate venture building stands out in impact & ROI, among the multiple innovation approaches that corporates can deploy. Prime examples across the world include Amazon and AWS, Grab and GrabFood, Moody’s and Moody’s Analytics. These businesses went on to become the main profit drivers, with some outgrowing the parent organisations in terms of valuations.
They are not lucky strikes and the numbers back this up. According to PitchBook Data, corporate-backed start-up commands 77% higher valuation step-ups, has a 47% lower chance of bankruptcy, and exits at a 38% higher rate than comparable, VC-backed start-ups. An even more eminent number: a whopping 13 out of 14 unicorns in Southeast Asia are backed by corporations and/or their corporate venturing funds such as OVO (Lippo Group) and Bigo (YY Inc.). These stats are testaments that with the right formulation of principle, talent, process, governance and funding, corporate venture building truly creates a non-zero-sum game for both the corporates and ventures to unlock innovation at speed and subsequently, at scale whilst increasing the odds of profitability.
Given that the coronavirus pandemic has accelerated digitalisation to the extent that it has compressed several years of trends into a short few months, corporate innovation is and can no longer be about embracing the latest technologies through one off PoCs, digitisation of channels, and sponsoring short term incubators/accelerators, although these are the table stakes. Corporate innovations are at a watershed moment and the case for corporate venture building as the vehicle to create truly new and transformational businesses have been and are continually proven. The virus is our “black swan” as to how Apollo 13 was NASA’s. The mission’s failure costs the organisation billions, but they were able to re-attempt the mission afterward. The question for corporate innovators then becomes: when the next black swan hits, where do you want to be?