Increasing the Odds When Betting Big

“Why should we partner rather than do this ourselves?”

As a corporate venture builder, this is a question we routinely face.

In fact, we would ask any business in our portfolio the same question if we were critiquing their business model: why would you partner on such a critical activity for the future of your business?

The simple answer is to save time, money, and increase your chance of success. But why does partnering with a corporate venture builder de-risk the process of creating new businesses? But why does partnering with a corporate venture builder de-risk the process of creating new businesses?

The job of any venture builder is to systematise disruptive innovation*. To build a repeatable capability of creating new high-growth business models, at desirable economics, with enviable velocity, over again, and in the face of considerable uncertainty.

To achieve this, there are 3 critical elements, each of which has to be honed and applied in unison:

1. People & Skills: Does each team have the right mindset, passion, experience, and skill-set needed to rapidly and reliably build their specific venture?

2. Process & Structure: Are you set up to support a portfolio approach, with a rigorous process to determine a go/no go at each relevant stage of maturity, while also following best in class Lean Startup methodology? Can you scenario plan, and are you comfortable with repeatedly testing as you build?

3. KPIs: How are you managing incentivisation? Are you able to apply the same incentivisation models as venture-backed startups? Do you have permission to do so? Can you sustain a new way of tracking value?

Creating new high-growth scalable ventures is extremely risky – 75% of all startups fail. If any element of the three core tenants above are sub-optimal, this increases the risk of what is already an exceptionally risky process.

Weakness in any one of the three elements will slow your progress, increase your risk of failure, and spiral your costs as your time to market and first revenues lengthen. Meanwhile, your startup competitors will not be slowing but accelerating past you and the available gap in the market will be closing.

Weakness in multiple elements is effectively a death knell. The question is no longer if you will fail, but when will you fail?

People & Skills

How do you find, recruit, and retain the best startup talent?

The recruitment element is crucial – by definition, this is not the talent you can find in-house.

Firstly, it’s more price and time-efficient to recruit a team of serial entrepreneurs who know and have practiced the craft of building new businesses: systematically de-risking the inherent assumptions in new ideas. Building a business is both an art and a science, and you want people who have studied both.

Secondly, trying to train corporate employees to understand and practice the entrepreneurial mindset and toolbox while also executing on an idea, increases both the cost and the time to achieve meaningful results. You have to pay for training, while the pace of execution slows because teams simply can’t move at speed when learning while doing. You also have to entirely free them from any perception that this might damage their corporate career if they don’t succeed.

Without real personal experience, internal talent will fall into common and expensive pitfalls. This is necessary to build their own muscle memory and cement their learning, but as an approach, it will not create new future-proof business models at speed.

Real-life experience is key to understanding when to kill, progress, or pivot an idea, when to double down and how to navigate the many moving dependencies which are entirely opposite to those they have come across in the corporate world. Even more fundamentally, first-time founders lack the emotional recall of having chased their own ideas through tough times, and without this, have less EQ to deal with the inevitable tough choices. The hardest of which is knowing when to kill your idea.

Betting Your Innovation Budget: Why Risk It On CVC?

To move at speed, you have to have exceptional talent with both the skills and the experience. This type of talent is undeniably harder to attract, but dramatically reduces your risk of failure and accelerates speed to revenue for new ideas.

This is why we only recruit proven founders – who have built multiple venture-backed startups and thus learned how to successfully scale new business models.

Often corporate employers think attracting top talent is about the package and benefits that can be offered. But, for the best entrepreneurs, and you need the best, it’s much more than this – it’s the opportunity of the specific venture, the funding available, the environment and, above all, genuine ownership and autonomy.

Thus, the challenge for corporates is sourcing, attracting, evaluating and ultimately hiring such talent. Where do you find proven founders? How do you compete with other offers they’re undoubtedly getting? How do you select the best from the keen but mediocre? How do you create a package that will not only appeal but ensure they behave as real entrepreneurs should?

Structure & Process

Real entrepreneurial talent is perhaps best embodied by their ability to navigate and thrive under uncertainty. With this comes another challenge: they resent and actively push against any bureaucracy that slows their pace.

To attract real entrepreneurs, more important than any package you can offer, is the environment and protection from corporate inertia. Do you have a truly entrepreneurial culture? A culture where real entrepreneurs can feel part of a tribe with peers they respect?

Instead, we make sure our venture teams are housed under our roof, away from corporate ways of working, with the freedom to execute at speed. Venture building isn’t a zoo to inspire others across the organisation to come and see the entrepreneurs-in-residence and admire their post-it covered walls, clickable prototypes, and code filled screens.

In addition to the correct environment, you need a broader structure to support these entrepreneurs: one without middle management or hierarchy, where pivoting or killing an idea is viewed as a success and where there’s space to playfully explore.

Entrepreneurs need the ability to obsessively focus on building a venture and cannot be pulled off to engage in day-to-day activities of the corporate, however much you might want to. This broader structure is incredibly hard to set up and, harder still, to safeguard within a corporate. Too often, teams feel bound to continuously report to multiple managers, and keep one foot in the old just in case the new thing doesn’t work out. The time lost to traditional stakeholder management is only outweighed by its toll on passion and flow.

Beyond process and environment, are the elements of structuring the venture itself, which needs to be a new company. Corporates without experienced early-stage venture capital arms do not have the expertise in structuring these kinds of term sheets, and many don’t have the appetite.

The ability to correctly structure multistage financings, capital tables, governance, founder vesting, employee share ownership trusts, and restrictive covenants for both early-stage and growth-stage ventures. The venture capital industry has existed for over 40 years, evolving a set of best practices and structures. These should not be ignored or, more typically, “tweaked” to make things more comfortable for the corporate parent.

KPIs

All of your work setting up the perfect team, creating a conducive environment, getting the term sheet correctly structured can be undermined if you spend too long chasing the wrong idea.

People default to behaviours that mirror their incentives. The wrong incentives create the wrong practices and actions; overriding the inherent expertise of individuals. Corporates tend to reward behaviours that lead to their success today and are less sure about how to incentivise what will bring success tomorrow.

So how do we incentivise the right behaviours?

Entrepreneurs must be incentivised to use their time most effectively – even if this means killing an idea they are passionate about. To do this, they need to have a significant stake in the business; to ensure their focus is on long-term enterprise value creation. Furthermore, they need to be actively incentivised to rapidly kill ideas that will not ultimately succeed at scale – incremental improvements are not enough. This is only possible if entrepreneurs have real personal opportunity costs.

Therefore, to achieve this, they need to be paid below market (employed, freelancing or consultancy) ensuring that the only means of wealth creation is directly linked to their equity stake within the new business. Without both of these elements, entrepreneurs, even the best ones, will not rapidly kill bad ideas.

Because the cost of a team, and you need a team, working on an idea is high from the first day, it’s key to the success of any venture builder that they prioritise the quality of ideas over quantity. Moreover, the opportunity cost of overly investing in the wrong idea can be enormous.

Thus, venture builders need to measure the right KPIs at each stage to judge which ideas warrant investment or further investment. This requires their own muscle memory of having built and scaled many different business models. Ensuring that the ideas being pursued have the potential to become successful businesses that can contribute significantly to group profits.

Given their investment thesis, venture builders need to focus on the right ventures and avoid wasting time, which equates to both a massive financial and opportunity cost. They need to avoid getting caught up in continual investment committees, scope creeps, or gut-feel based decision making. In short, their investment decisions need to be embedded as a repeatable process with the right structure and stage relevant proof points or KPIs

Conclusion

Building ventures takes many years of hard work and dedication to truly master the craft. Venture building, like the extreme sports of entrepreneurship, should not be taken lightly and it’s not for everyone. It demands respect, and it cannot be short-circuited, cost cut, and compromised if you are going to achieve the substantial returns expected, given the high risk involved.

Furthermore, it is a craft that has not historically sat within the corporate. There are outliers, but the majority of large organisations simply do not have the capability to form the right combination of people & skills, process & structure, and KPIs to repeatably create new high-growth, profitable, and scalable business models.

To build this new capability in-house is not impossible. However, to achieve the level of competence required, it will likely take 3-5 years of determined effort tirelessly sponsored by the senior leadership.

You can just do it – but it will cost you a lot more time and money, and may only result in failure.

Drive Growth Faster and With Less Risk

*In this article, disruptive innovation is understood as innovation developments that businesses undertake to solve a customer problem, in a new way and through mechanics that are highly scalable.

Written by

Jordan Schlipf

•

April 27, 2020

Founder & CEO, RVS Rainmaking Venture Studio, UK

Jordan is a serial tech entrepreneur, venture capital investor and an expert Lean Startup trainer. Today, he is Venture Partner at Vectr Ventures and Founder & CEO of the Rainmaking Venture Studio, where he partners with large corporations to de-risk the process of creating new high-growth digitally-enabled businesses. Prior to Rainmaking, as a co-founder of Founder Centric and Entrepreneur-in-Residence at University College London, Jordan designed and taught startup education at organisations like Oxford University, Seedcamp and Tech City UK. Jordan began his career with Gleacher Shacklock LLP, an independent corporate finance advisory firm focused on European M&A.

js@rainmaking.io