Forecasting the Next Big Disruption Through Venture Capital

Melissa Anderson – Nearly three quarters (72%) of directors polled in a recent survey by PwC said the biggest threat to their business is strategic and disruptive risk — the top risk category identified by the study. One way directors are working to get ahead of this risk is through corporate venture capital (CVC) investing.

Proponents say corporate investment in start-ups can help board directors and executives identify emerging strategic risks. According to Accenture’s global survey of 561 chief strategy officers, 80% of companies are not highly prepared to face industry shifts. Three quarters of current S&P 500 companies face extinction within the next 10 years if they can’t get a handle on disruptive technology, the report says.

“You’ve got this perfect storm, a tsunami of innovation coming peoples’ way, and you can’t sit on the sidelines,” says Mark Radcliffe, a partner at DLA Piper. “If you sit on the sidelines, you’re going to be dead.”

Radcliffe advises boards on corporate venture capital, and he says establishing an innovation strategy — composed of venture capital investments and other partnerships — is one way companies can stay afloat and even thrive in a disruptive environment.

New CVC Funds Graph

Once considered mainly the domain of tech giants seeking the next big acquisition, corporate venture capital is quickly being recognized as a way for company leaders to peer into their industry’s future and gain strategic insight into how their company could beat disruptive trends. In fact, according to venture capital data provider CB Insights, last year saw a 20% increase in the number of newly launched CVC funds, including JetBlue Technology Ventures, Kellogg Company’s eighteen94 capital and the Sony Innovation Fund.

“I think a lot of companies are seeing investing as a core piece of their innovation strategy and their drive to transform their companies into whatever the next generation of their company is,” says Busy Burr, vice president of innovation at Humana and head of Humana Health Ventures and Open Innovation.

Meanwhile, a pilot study by Touchdown Ventures, a venture capital firm, shows that establishing a corporate venture program may also produce tangible returns for stockholders.

Faster Share Growth Graph

The firm tracked the 35 U.S. public companies most active in corporate venture investing from the time they established their CVC program through the end of 2016, then compared the stock performance of each to its market index performance during the same time frame. According to the report, the median compound annual growth rate of these companies was 29.5% higher than the time-weighted median growth rate of their market index.

Scott Lenet, co-founder of Touchdown and head of the firm’s Los Angeles office, cautions that the results are preliminary. However, he thinks the correlation hints at the characteristics of the type of firm that would enter the venture industry.

“These companies are more forward thinking; they’re working with start-ups, trying to be less stagnant and trying to anticipate what’s happening in the market. Generally, better intelligence and relationships with start-ups leads to better growth in the marketplace,” Lenet says.

“If you’re a large incumbent company, you have to take disruption from start-ups seriously. Venture is a way to work with start-ups to see what they’re going to do years before it happens,” he adds.

Of course, there are enough tales of start-up meltdowns in the recent past to give pause to any board director who may be interested in launching a new CVC program or ramping up existing investments. The last two years have seen scandals damage several once-promising Silicon Valley darlings, including Lending ClubTheranos and Zenefits.

“Venture capital can be a very ‘cowboy’ type of effort where people think, ‘Let’s throw some money around,’ and I think that’s irresponsible,” says Lenet, whose firm helps companies run CVC programs. He advises board directors to establish a clear policy toward innovation and CVC investments.

“I think it’s important for directors to be aware of how the program is being run and to know that it’s being run professionally and according to industry best practices,” he says. Lenet expects the amount of money in CVC to grow in the coming years, pointing to the historic amount of cash sitting on U.S. corporate balance sheets. According to FactSet, at the end of the first half of 2016, companies of the S&P 500 held $1.456 trillion in cash.

This is an excerpt; the full article was published on Agenda, a Financial Times service.  The full article can be accessed here.