Comment from Patrick Flesner, partner, LeadX Capital Partners and Stephan Bank, partner, SMP
Many executives that want to initiate corporate venturing activities or that are dissatisfied with the performance of their existing corporate venture capital (CVC) units struggle to answer the question of how to set up a CVC organisation for success. The six guiding principles that we describe in this series of short articles are supposed to help answer this question.
Although other structures can lead to successful outcomes too, we have suggested in our first article that establishing a CVC unit under a traditional VC fund structure is in our view the most promising approach.
In our second article, we stressed the importance of setting a clear sector and stage focus.
But these guiding principles will not do the trick if a CVC unit’s decision-making is characterised by slow waterfall processes that do not resonate with the fast-paced VC environment, in which decisions are to be made quickly on an incomplete information basis. Therefore, irrespective of whether the CVC unit is established under a traditional venture capital fund or an evergreen structure, the investment team must be put into a position in which it can make decisions fast and reliably.
When setting up a CVC unit, the questions often arise who will decide on investment matters and how fast and reliably decisions can be made. Is the CVC unit able to move quickly and be agile when it comes to important decisions or does the startup risk being slowed down by corporate bureaucracy, delays in information and misinformed counterparts on the corporation’s side? If founders and traditional VCs perceive the CVC unit as unreliable and slow in terms of decision-making, they will avoid working with the respective CVC investor. Traditional VCs will not share valuable dealflow with the CVC investment team and eventually the CVC unit may only be able to invest in startups that cannot find any other sponsor (adverse selection).
In order to avoid the startup being slowed down and to ensure that the CVC unit can act fast and in a typical VC manner, even on the basis of incomplete information, we recommend establishing independent decision-making processes under which – in line with traditional VC market practice investment and divestment proposals of the investment team need to be approved only by an investment committee which can decide independently and in a binding manner on all topics within its competence without any influence of any external body or the corporation.
The investment committee may consist of members of the investment team, top management and relevant senior management from the digitalisation, strategy or innovation departments. Such a composition ensures top management buy-in as well as alignment with the overall corporate, digitalisation and innovation strategies. At the same time, such composition ascertains that the corporation’s interests are duly represented within the investment committee. The communication between the investment team and the investment committee should
be institutionalised and take place on a regular basis with fast-track and ad-hoc procedures for decisions that need to be made in a timely manner.
All decisions pertaining to a startup’s business operations should be handled by the investment team without any corporate intervention and without any investment committee approval being required. Investment professionals know that startups need to act and decide fast and therefore embrace fast decision-making themselves.
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