The New Corporate Alchemy: How Giants are Forging Innovation with Startups
By: Babak Nemati, Ph.D.
Introduction
In the quiet corridors of multinational giants, a transformation is brewing. This shift isn't heralded by grand unveilings or media spectacles; it’s more subtle yet profoundly consequential.
Picture a world where corporations are no longer just the providers of goods and services but are instead the architects of future industries, acting as both incubators and accelerators of innovation.
This shift is evident in how Corporate Venture Capital (CVC) has morphed from a side venture into a critical component of corporate strategy, reshaping how companies grow and compete.
Consider the case of Google’s parent company, Alphabet, which transitioned from dabbling in investments to creating entire ecosystems through its “Other Bets” initiative. This is a prime example of how large corporations are reimagining their roles, not just as investors but as builders of the future. As we delve into this transformation, we'll explore how companies like Google, Johnson & Johnson, and Siemens are leading the charge in redefining CVC.
I. The Changing Landscape of Corporate Innovation
In the early days, CVC was a straightforward affair. Companies would allocate a portion of their capital to invest in promising startups, hoping for a financial windfall. It was a side project, a hedge against disruption. However, as the global market became more saturated and competition intensified, these traditional strategies began to show their limitations. Investments in R&D became more uncertain, acquisitions grew riskier, and the straightforward paths to growth began to disappear.
This evolution was driven by several factors. Globalization opened markets but also increased competition. Technological advancements meant that small startups could disrupt entire industries, seemingly overnight. For corporations, the message was clear: adapt or become obsolete.
Google’s “Other Bets” division is a perfect illustration of this shift. Originally started as a way to explore new business avenues beyond search and advertising, it evolved into a breeding ground for entire new industries. Companies like Waymo, Google’s self-driving car project, and Verily, its life sciences arm, originated from this approach. These aren’t just side projects; they are strategic ventures aimed at creating entirely new markets that align with Google’s core strengths in data and AI.
This strategy has turned Google’s CVC efforts into a core part of its innovation engine, driving growth in areas far beyond its original business (Mack Institute for Innovation Management).
II. The Rise of Venture Clienting and Venture Building
As companies began to realize that traditional CVC wasn’t enough, they started experimenting with more integrated approaches—namely, venture clienting and venture building. These models go beyond mere financial investment, allowing companies to play a more active role in the development and success of the startups they engage with.
Venture Clienting: The BMW Startup Garage Example
Take BMW’s Startup Garage, a prime example of venture clienting in action. Unlike traditional CVC models, where corporations might simply invest in a startup, BMW engages with startups as clients. This means that instead of just providing capital, BMW integrates the startup’s technology directly into its supply chain, giving the startup immediate business and valuable market feedback. For instance, the company worked with Silicon Valley startup, CelLink, to integrate their flexible circuit technology into BMW’s electric vehicles. This partnership gave CelLink access to a major market while allowing BMW to stay at the forefront of automotive innovation. The result? A symbiotic relationship where both the startup and the corporation benefit from the immediate application of new technology (Global Venturing).
Venture Building: The Siemens Next47 Example
On the other hand, Siemens took the concept a step further with its Next47 initiative, which embodies the venture building model. Rather than just investing in startups, Siemens creates them from scratch, targeting specific strategic needs. Next47 operates as a separate entity within Siemens, with the autonomy to build and scale startups that align with Siemens’ long-term goals. A notable success from this approach is the creation of Spinoff, a startup focused on developing cutting-edge 3D printing technology for industrial applications. By building a startup that directly addresses gaps in Siemens’ portfolio, the company can ensure that the new venture is perfectly aligned with its broader strategic objectives (World Economic Forum).
These examples illustrate a fundamental shift in how corporations view their role in the innovation ecosystem. They are no longer passive investors but active participants, shaping the startups they invest in to ensure that they deliver strategic value. This shift is transforming CVC from a financial tool into a powerful engine for growth and innovation.
As more companies adopt these models, the line between corporate and startup is becoming increasingly blurred. The result is a new era of corporate alchemy, where the right mix of investment, strategy, and innovation can turn even the most established companies into pioneers of new industries.
III. Strategic Integration of CVC with Core Business Units
As corporations increasingly recognize the strategic value of Corporate Venture Capital (CVC), they are moving beyond mere financial returns and focusing on how CVC can be integrated with their core business operations. This shift reflects a deeper understanding that for CVC to truly drive growth, it must be tightly aligned with the company’s overall strategic goals.
Salesforce Ventures: Aligning with the Core
Salesforce Ventures is a prime example of this strategic alignment. Unlike many traditional CVC arms that operate independently, Salesforce Ventures is deeply integrated into Salesforce’s broader strategy of expanding its cloud ecosystem. By investing in startups that either build on or enhance the Salesforce platform, Salesforce Ventures not only secures financial returns but also drives growth in its core business. For instance, its investment in DocuSign—a company that has become the go-to solution for digital signatures—has seamlessly complemented Salesforce’s cloud services, providing value both to Salesforce and its customers (Mack Institute for Innovation Management) (Global Venturing).
Another notable example is the partnership between Intel Capital and Intel’s business units. Intel Capital, one of the most active CVCs globally, has strategically invested in startups that advance Intel’s core technology areas, such as artificial intelligence, 5G, and cloud computing. These investments are not just financial but are carefully chosen to align with Intel’s product roadmaps and future market needs. The result is a symbiotic relationship where the startups benefit from Intel’s technical expertise and market reach, while Intel accelerates its innovation pipeline and market leadership (World Economic Forum).
IV. The Role of Agile Methodologies in CVC-Driven Innovation
In today’s fast-paced business environment, the ability to pivot and iterate quickly is crucial. This is where agile methodologies come into play, allowing corporations to manage their CVC portfolios with the same level of dynamism as startups. By adopting an agile approach, corporations can de-risk their investments and ensure that only the most promising innovations are scaled.
Google’s Approach to Agile CVC
Google Ventures (GV), the venture capital arm of Alphabet, is a masterclass in applying agile methodologies to CVC. GV operates much like a Silicon Valley startup, with a strong emphasis on rapid iteration, data-driven decision-making, and real-world testing. One of GV’s most celebrated investments is in the life sciences company 23andMe. GV applied its agile investment model, which included a rigorous focus on data analytics and iterative product development, to support 23andMe as it navigated regulatory challenges and market shifts. This agile approach allowed 23andMe to pivot and adapt its business model, ultimately leading to its success in the consumer genetics market (Global Venturing).
Johnson & Johnson’s JLABS: An Agile Incubator
Johnson & Johnson’s JLABS takes the concept of agile methodologies even further by providing startups with access to a fully equipped laboratory, office space, and connections to J&J’s global network—all without taking any equity. This incubator model allows startups to iterate on their products rapidly while receiving feedback from one of the world’s leading healthcare companies. For J&J, this approach de-risks its innovation pipeline, as it can closely monitor the progress of these startups and choose the most promising ones for further investment or acquisition. Notable successes from JLABS include Auris Health, which was acquired by J&J for $3.4 billion, underscoring the effectiveness of this agile approach (World Economic Forum).
V. Collaborative Innovation: The Symbiosis Between Corporations and Startups
The traditional view of startups and corporations as fundamentally different entities—one agile and risk-taking, the other large and risk-averse—is rapidly changing. In today’s innovation ecosystem, these two entities are increasingly collaborating, creating a powerful symbiosis that benefits both.
Source: https://commons.wikimedia.org/wiki/File:Microsoft_buildings_EU.jpg
Microsoft’s Corporate VC Strategy
Microsoft’s venture arm, M12, exemplifies this collaborative approach. M12 focuses on startups that align with Microsoft’s strategic interests, particularly in areas like AI, cybersecurity, and enterprise software. However, the relationship goes beyond financial investment. Microsoft often integrates the technologies of these startups into its own products, offering them access to Microsoft’s vast customer base and technical resources. One example is its investment in the cybersecurity firm RiskIQ, whose threat intelligence capabilities were later integrated into Microsoft’s own security offerings, enhancing its value proposition to enterprise customers (Mack Institute for Innovation Management).
Unilever’s Foundry Program
Unilever, a global consumer goods giant, has embraced collaboration through its Foundry program, which connects startups with Unilever’s brands and business units. The program allows Unilever to tap into the creativity and innovation of startups while providing those startups with the resources and market access that only a global corporation can offer. This collaboration has led to numerous successful products and innovations across Unilever’s portfolio, including the development of sustainable packaging solutions that align with Unilever’s commitment to environmental sustainability (World Economic Forum).
Siemens and the Innovation Ecosystem
Siemens, through its Next47 initiative, not only builds its own startups but also actively collaborates with external ones. This dual approach allows Siemens to maintain a flexible and responsive innovation strategy. By partnering with startups, Siemens can quickly adapt to new technologies and market trends, while its venture building efforts ensure that the company is always at the forefront of innovation in its core industries. This combination of internal and external innovation efforts has enabled Siemens to stay competitive in fields as diverse as energy, automation, and digitalization (World Economic Forum).
In summary, this symbiotic relationship between corporations and startups is not just a fleeting trend—it's becoming a cornerstone of modern corporate strategy. By engaging deeply with the startup ecosystem, companies like Siemens and Microsoft are not only staying ahead of technological advancements but also ensuring that they remain competitive in an increasingly complex and fast-paced market. This collaborative approach is setting the stage for the next phase of corporate innovation, where the focus shifts to the intricate balance of risk and reward. As we move forward, the question becomes: how can corporations effectively manage the inherent risks of these new venture strategies while maximizing their potential for groundbreaking success? This brings us to the emerging trends and future directions of CVC, where the interplay of innovation, risk management, and strategic foresight will determine the next wave of corporate leaders.
VI. Emerging Trends and Future Directions in CVC
As Corporate Venture Capital (CVC) continues to evolve, the landscape is becoming more complex and nuanced. Corporations are no longer content with merely investing in startups; they are actively shaping the direction of innovation within their industries. However, with these new opportunities come new challenges, particularly in managing the balance between risk and reward.
1. The Growing Complexity of CVC Operations
CVC operations have become increasingly intricate, requiring a higher level of expertise and specialization. As industries become more technologically advanced, corporations are finding that they need to deepen their engagement with specific sectors. For example, Qualcomm Ventures has carved out a niche in the rapidly evolving 5G and AI sectors, investing heavily in startups that align with its technological roadmap. By focusing on these high-tech areas, Qualcomm is able to stay ahead of the curve and ensure that its investments are not only financially rewarding but also strategically valuable in maintaining its leadership in the semiconductor industry.
Another trend is the rise of sector-specific venture funds, where corporations partner with traditional venture capitalists (VCs) to increase their exposure to early-stage companies. For instance, the partnership between UBS Next and various VC funds allows the Swiss bank to tap into cutting-edge fintech innovations without directly managing the complexity of early-stage investments. This collaborative approach also mitigates the risks associated with investing in nascent technologies by leveraging the expertise of established VCs.
2. Venture Building as the Next Frontier
Venture building, where corporations create startups from scratch to address specific strategic needs, is emerging as a powerful tool for driving innovation. This approach goes beyond traditional CVC by allowing corporations to control the entire lifecycle of the innovation process, from ideation to execution.
Consider BP’s Launchpad, a venture-building arm designed to create and scale new businesses that can drive the energy transition. Launchpad focuses on building startups that are aligned with BP’s strategic goals of reducing carbon emissions and transitioning to renewable energy. One of its notable successes is the creation of Finite Carbon, a platform that helps landowners generate revenue from carbon offset projects. By building this venture in-house, BP not only advances its sustainability goals but also positions itself as a leader in the emerging carbon markets.
Similarly, Standard Chartered’s SC Ventures is another example of venture building done right. SC Ventures has launched several startups, such as Mox, a digital bank in Hong Kong that is redefining banking in the region. By building Mox from the ground up, Standard Chartered was able to tailor the business to the specific regulatory and market conditions of Hong Kong, ensuring its success in a highly competitive environment.
3. Balancing Risk and Reward
As corporations delve deeper into venture building and complex CVC strategies, managing the inherent risks becomes paramount. The challenge is to strike the right balance between fostering innovation and protecting the core business from potential failures.
One approach is to apply rigorous innovation accounting, a practice that involves tracking the return on investment (ROI) of innovation efforts with the same precision as financial investments. Companies like Procter & Gamble have adopted this approach, using detailed metrics to evaluate the performance of their innovation initiatives. This allows them to make data-driven decisions about which projects to scale and which to abandon, reducing the risk of costly failures.
Additionally, corporations are increasingly using scenario planning and stress testing to assess the potential impact of their CVC investments. This method, often employed by financial institutions like JPMorgan Chase, involves simulating various market conditions to determine how their investments would perform under different scenarios. By doing so, these companies can better anticipate potential risks and make more informed investment decisions.
4. The Role of Geopolitical and Regulatory Risks
In today’s globalized economy, geopolitical and regulatory risks are becoming significant factors in CVC decision-making. Companies are finding that their investments can be dramatically affected by changes in government policy, international trade tensions, or shifts in regulatory environments.
A prime example is Huawei’s venture arm, Hubble Technology Investment, which has had to navigate the complexities of U.S.-China trade tensions. The imposition of sanctions on Huawei by the U.S. government forced the company to reevaluate its investment strategy, leading to a greater focus on domestic startups that could help Huawei develop alternatives to U.S. technology. This shift highlights how geopolitical risks can drive CVC strategies in new directions.
Similarly, European venture arms like Siemens Next47 are increasingly factoring in regulatory risks related to data privacy and environmental sustainability. As the European Union implements stricter regulations on these fronts, Siemens is focusing its investments on startups that not only comply with these regulations but also offer innovative solutions that can give Siemens a competitive edge in navigating this complex landscape.
Conclusion: The Future of CVC
The future of Corporate Venture Capital lies in its ability to adapt to an increasingly complex and interconnected world. As corporations continue to refine their CVC strategies, the focus will be on integrating these efforts more closely with core business operations, leveraging agile methodologies, and navigating the risks and opportunities presented by a rapidly changing global landscape.
The future of Corporate Venture Capital lies in its ability to adapt to an increasingly complex and interconnected world. As corporations continue to refine their CVC strategies, the focus will be on integrating these efforts more closely with core business operations, leveraging agile methodologies, and navigating the risks and opportunities presented by a rapidly changing global landscape. For senior business executives, the challenge will be to stay ahead of these trends, ensuring that their CVC efforts not only deliver financial returns but also drive the strategic innovation needed to maintain a competitive edge. In this new era of corporate alchemy, the most successful companies will be those that can blend financial acumen with strategic foresight, turning innovation into a powerful engine of growth.
This article was extensively informed by the writings of the late Professor Edward Roberts of the Sloan School of Management, as well as the publications of the World Economic Forum, Global Corporate Venturing, and Mack Institute for Innovation Management. For more of our latest articles on corporate innovation models, please visit www.sicorporation.net.
About the Author
Dr. Babak Nemati, President and CEO of Strategic Intelligence, Inc. (SI), is an experienced leader in the life science industry with over 30 years of experience. His experience includes serving in C-level positions in emerging biotech and medical device companies. Previously, he held key roles at Johnson & Johnson, including Director of Surgical Oncology, where he was instrumental in developing strategies and executing licensing and acquisition transactions. As the founder of Strategic Intelligence, he leads corporate venture and business development advisory services. SI helps companies that want to grow one or more of their businesses, are frustrated with the pace of internal R&D, and are open to leveraging external innovation. SI has successfully managed the externally facing functions of seed funds for leading companies like Alcon and Johnson & Johnson, providing strategic innovation and venture advisory. He previously served as a Venture Partner at XSeed Capital Management and is currently a Commercialization Advisor for DARPA, a Catalyst Advisor for UCSF Medical Center, and an Innovation Technology Committee Member for the University of Washington's Department of Ophthalmology.
Contact: bnemati@sicorporation.net
