Mastering Innovation: Why venture client is the one and only corporate innovation vehicle?

What’s out there?

When it comes to innovation vehicles for corporations, there are several approaches and strategies that companies can adopt to foster innovation and drive growth. Here are some commonly used innovation vehicles for corporations:

Innovation Labs:

Dedicated spaces within an organization where cross-functional teams can work on new ideas, prototypes, and experiments. In my opinion this is just another way to do R&D. The disadvantages of R&D I have already described in my last article.

Corporate Incubators:

Programs or initiatives that support start-ups and early-stage ventures by providing resources, mentorship, and access to networks.

Corporate Venture Builders:

Organizations that create and develop multiple start-ups from scratch, providing resources and support to help them grow and become independent entities.

Corporate Venture Capital (CVC):

Investing in external start-ups or ventures to gain access to new technologies, markets, and innovative ideas.

Venture Client Model (VCM):

A collaboration model where corporations engage with start-ups as clients to test and validate their innovative solutions before scaling up or making further investments.

What’s the overall goal of corporate innovation done with start-ups?

Let us keep this paragraph very short. For corporations the goal is profit meaning innovation needs to either increase revenues or reduce cost. BS like it needs to be the mirror for the company to reflect upon itself is just a disguise for a non-existent mission or the lack of ownership.

For start-ups it is only and will always be revenue. While there has been an increased focus on profitability for the last 2 years there will never be any profitability without revenues.

So, the following considerations regarding the different corporate innovation vehicles will use these goals in order to assess them.

What are the disadvantages compared to the venture client model?

Corporate Incubators

Demand for Stability: Corporates with a certain size need stability when it comes to supply of services and goods. Early-stage start-ups per definition cannot ensure delivery reliability. This minimizes the chance to do business with the very corporation that potentially runs the incubator.

Unclear Goals: Start-ups in a corporate incubator may face challenges related to internal conflicts and politics within the parent company. Different departments or stakeholders may have competing interests or conflicting priorities, which can impede the start-up's progress and decision-making autonomy.

Force of attraction: The objectives and strategic direction of start-ups within a corporate incubator may need to align with the goals of the parent company, not the best business model. This alignment requirement can limit the ability to explore innovative ideas or pursue opportunities outside the scope of the parent company's existing business.

Limited External Appeal: A solution that is very focused on one customer probably cannot be sold to many other customers. But why then starting a new company?

In their struggle with the challenges mentioned above, corporate incubators inadvertently hasten the demise of the start-ups they seek to foster. These outlined difficulties collectively lead to a fatal outcome for the young businesses within the corporate incubation ecosystem.

Corporate Venture Builders

Resource Allocation: Corporate venture builders require significant resources, including funding, talent, and infrastructure. Allocating these resources to the venture builder may divert them from the core business, potentially impacting its growth and competitiveness. Moreover, this may result in more resistance from corporate stakeholders.

Organizational Culture and Structure: Integrating a venture builder within a traditional corporate structure can be challenging. Different cultures, decision-making processes, and risk tolerance levels may clash, impeding the agility and entrepreneurial spirit necessary for start-ups to thrive. Can we really let employee a go for a while to build a company? Why do we allocate resources to ventures that are not at least 90% sure to succeed?

Conflict of Interest: Corporate venture builders may face conflicts of interest between the parent company's goals and the start-ups' objectives. The parent company may prioritize short-term financial returns or strategic alignment, which could limit the start-up's autonomy and hinder its growth potential.

CVCs

Force of attraction: The objectives and strategic direction of start-ups with a CVC investor may be influenced by this very CVC and its parent company. This influence can limit the ability to explore innovative ideas or pursue opportunities outside the scope of the CVC.

Integration Difficulties: Integrating start-ups into the parent company's operations and culture can be challenging. Start-ups may struggle to fit within existing processes, hierarchies, and decision-making structures, which can slow down their progress or hinder their ability to remain agile and innovative.

Limited Market Access: While CVC programs provide financial resources, start-ups may have limited access to the broader market or customer base of the parent company. This lack of market access can restrict the start-up's growth potential or make it difficult to scale their operations. This is especially true as startups might focus on the CVC’s parent company as a client until they realize their mistake.

Does the venture client model really defy all those challenges?

Corporate Incubators vs VCM

Demand for Stability: Usually the start-ups attracted by the VCM are later stage, mostly even scale-ups and therefore do show a certain level of delivery reliability.

Unclear Goals: Corporates using the VCM don’t fiddle around with start-ups goals as there is no relationship between the the corporate and the startup at the beginning of the start-up's existence. Only later the corporate finds and procures the solution via the VCM.

Force of attraction: Obviously a large customer has influence on the development of a company in general as well as on the product roadmap, but this is only happening at a much later stage and with the scale-up having also other clients.

Limited External Appeal: Per definition the VCM only connects corporates with start-ups that already have some traction on the outside market. The VCM exhibits a distinctive characteristic of heightened autonomy from corporate influence. This autonomy translates into a departure from the common occurrence of sudden setbacks or failures typically associated with corporate-driven initiatives.

Corporate Venture Builders vs VCM

Resource Allocation: The VCM is just so much cheaper than a corporate venture builder as there is no need to build an entire startup. The relationship at the beginning is just a buyer-supplier one. So, the costs involved result from running the VCM and usually the pilots.

Organizational Culture and Structure: By being cheaper and much less prone to failure the VCM is closer to a corporate mindset. Plus, it is easier, while not easy, to integrate it into existing processes. Just buying a innovative solution is just so much easier than building it.

Conflict of Interest: Both parties, the startup and the corporate don’t need to align or even take care about the other party’s interest or strategy. Either the corporate wants to buy the startups solution or not.

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CVCs vs VCM

Force of attraction: Obviously a large customer has influence on the development of a company in general as well as on the product roadmap, but this is only happening at a much later stage and with the scale-up having also other clients.

Integration Difficulties: Here I even see great synergies between the VCM and CVCs. In case a corporate has both, as VCM and a CVC, the VCM will even integrate the CVC’s investments into the parent company's operations, because that’s what the VCM does.

Limited Market Access: Establishing access to the broader market or customer base of the parent company is also one of the VCM’s core capabilities, hence this disadvantage of the CVC can be counter-balanced by the VCM.

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Conclusion

Examining the arguments for and against various corporate innovation vehicles reveals distinct advantages for the venture client model. It boasts low risk, a comparatively modest investment, high speed, and the acquisition of solutions not only tailored to the limited needs and knowledge of your corporation but also developed collaboratively with the external world.

That’s why in the end I would always suggest using the VCM at least at the beginning of your corporate innovation journey.