Thought Experiment #42: Government Venture Studio (GVS)

The previous thought-experiments were all about questioning and proposing new models and instruments for better government execution:

• Thought-experiment #38: Government Models: Govups - Government Startups
• Thought-experiment #39: Government Models: Government PolicyStore
• Thought-experiment #40: Government Models: Government business-models?

This next series focuses specifically on Government Venture Studios.

1. Introduction to Government Venture Studio (GVS)
2. The business-case for a GVS
3. How to setup and run a GVS?

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tl;dr - Governments are well experienced in their roles as lawmakers, service providers, early adopters, regulators, and funders of the last resort, but very few governments have a structured approach that enables them to effectively act as venture creators.?

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Before explaining the why, what and the how of ‘Government Venture Studios‘ (GVS) let’s look at a few ‘dots’ - discussions, observations, thoughts - that led to the penning of this post.?

Dot 1: The Corporate Venture Studio (CVS) model appears to be in vogue, with 625% growth in the last seven years. It is yet another tool in the arsenal of big corporations that they can deploy in service of their innovation agenda. Companies agree - from BP aiming to create 5 low-carbon unicorns by 2025, to Goldman Sachs’ venture studio creating digital consumer banking ventures that brought in $860 million in revenue in 2019, up from just $2 million in 2016. Yet there is no real equivalent within the government sector. Each government entity that creates or invests in a venture is learning on its own. It is creating its own process, which is often not repeatable.?

Dot 2: There is a challenge around the public perception of what governments should and should not do. We agree with many leaders that we discussed with, that governments shouldn’t be competing with the private sector. But perhaps there is an argument to be made that this should only apply to ventures the private sector is already doing well - where there is already an existing competitive market, and a pipeline of innovative startups operating. There are many areas, however, in which the private sector, with its shorter-term project margin centric view, isn’t best suited to creating ventures. One example was articulated in a previous post: fewer startup accelerators, more market incubators. It is important to understand the government's vital role in launching Govups that can, for instance, help create new markets and industries or solve for system-change problems. In short, in the words of a16z, it’s time to build.?

Dot 3: Governments are very experienced with launching big projects and with long-term (decades) focus, typically through public-private partnerships models. For example, the creation of a billion-dollar oil pipeline, or the construction of a multi-billion dollar power plant.? In this model, it’s largely the private sector doing the creating and the government acting as an investor, regulator of returns, or perhaps the early-adopting customer. Yet governments should also look at creating ventures that, although small to begin with, have potential to generate billion-dollar value. This will be a powerful role reversal, where the government is the majority creator and the private sector acts as the majority investor.?

Firstly - let’s address the ‘why’ of GVS

There are specific types of ventures that particularly make sense for governments to help create. Examples include situations where there is:

1. no real existing market (e.g. drones). If governments created a venture that would create and monetise drone highways, it could signal an intent for the wider market to flourish.??
2. untapped data (e.g. health data, land data) which could support the creation of new products and services.?
3. a need to create infrastructure in tandem with regulations (e.g. a UK regulator is investing ￡300m+ in building a new network of electric vehicle-charging stations).?

Most government entities are not structured to launch lean ventures. All of the following challenge the way governments think and operate. The GVS model requires a wholly different approach to the status-quo:?

Less government-employee, more government-founder mentality: The deployment of the right talent model is the hardest problem to solve. The default government talent model of the ‘job for life’ as a civil servant creates a relatively risk-free environment. It’s less about creating intrapreneurs and more about hiring for the founder-mentality. Conversely, some governments end up having a ‘let’s use contractors and consultants to fill the gaps’ mindset. Both of these talent models don’t have the critical skill (and permission) required to pivot and iterate to success. In short, GVS requires a fundamentally different talent model - without balancing incentives with corresponding risks, it is hard to create meaningful ventures.

Less policy mindset, more venture mindset: The tools governments most frequently deploy are policies, regulations, and laws. They are typically not well versed in deploying the creation of new ventures. New venture creation requires a wholly different mindset: from developing a nuanced understanding of market needs, all the way to unit economics of customer acquisition. Policies and regulations can be launched as documents and enforced over time, but creating ventures requires the deliberate development of new capabilities and capacities, leaving the building, and starting with an ‘angel-esque’ level of funding.?

Less regulations, more business models:? Many government initiatives have the luxury of a tax or fee-payer-funded business-model behind them. One example is the creation of regulator sandboxes, which are used to allow experimentation licenses to be given to innovative organisations who wish to test their solutions within carefully defined boundaries. This is all great, but if you look carefully there is an incessant focus on regulations - why? Because this concept is executed from a regulator’s perspective, rather than that of the venture creator. Now, some of these sandboxes could be ventures in their own right. Their goal would be to charge for experiment licenses e.g. per mile of autonomous car driven, or per mile of drone flight. It’s a more realistic way of understanding the demand in the economy. The revenue generated would then help fund, not just the regulation-writing, but the infrastructure, physical or virtual, that allows that regulation to flourish. Ultimately, the aim is to create economic sustainability - where the venture doesn’t need taxpayer funds or a government cash injection to drive growth.?

Less quick-win, more sustained-win: Business-building can be learned, yet individual government entities don’t possess the quantity or velocity of venture creation to make learning really impactful. As low as the success rate might be, Mckinsey’s recent survey shows that “companies that have launched at least four new businesses in the past ten years were upward of twice as likely to generate returns of five or more times their investment than less frequent business builders”. This is extremely important; it suggests that governments need a model that is centralised and builds collective learning over time to improve the rate of venture creation success.?

Secondly, let’s address the ‘what’ of GVS

Now, let’s address the ‘what’ in terms of the structure of a Government Venture Studio.?

There needs to be a shared, somewhat centralised GVS acting as a service to all the different government entities. This is most likely a better option than having individual government entities creating their own. This is because venture creation is high-risk and this risk needs to be mitigated by:

1. Embedding a diversified, portfolio-driven approach to success
2. Building on the experience of the Corporate Venture Studio model, with more and more corporates spinning theirs out
3. Being able to create very effective ‘abort’ mechanisms for venture concepts, and learning fast from failures
4. Shared investment and shared exits creating value for both GVS and government entities
5. Creating a delicate balance between entrepreneurial energy, investment discipline, and societal impact. Individual entities can quickly be skewed in one direction at the expense of the others
6. Building a virtuous model - a centralised GVS can give government entities access to talent, funds, market insights, IP, brands, and data that can give a decisive edge. In return, the individual government companies can expect to receive new revenue streams, capabilities, business models, products, and services. When this virtuous circle gets going, it can be extremely powerful for value creation, whether that is measured in economic or citizen (e.g. wellbeing, mobility) growth.

Thirdly, let’s address the ‘how’ of GVS

The Government Venture Studio model can deploy a spiral approach to launching ventures.

Why spiral? Because, like most great ventures, it starts off small to minimise risk, reputation, investment, and complexity. Both discipline and rigour is required to operate within this simple yet flexible model - which is broken down into search, start, and scale phases. Within each phase there are 4 quadrants of focused activity: creation and mobilising of progress, people, fund, and solution. Please reach out to us to discuss the detailed model behind it.?

This codified model, or any other one for that matter, is necessary for a Government Venture Studio to increase efficacy. In particular, a model needs to be a:

Repeatable model: A rigorous approach to the entire venture-building process, from initial hypothesis to scaling, is important. According to Mckinsey’s research in why business building is the new priority for growth, “of the companies that successfully scaled up new businesses, 47 percent reported having clear processes in place for the whole journey, compared with only 25 percent of companies that failed to scale their new businesses successfully.” It is important to channel the energy and excitement of the search phase of venture creation into structured milestones, with a sprint-like cadence to ensure a higher probability of success.?

Mutually-beneficial model: There are a number of global consultancies that have tried to support organisations to create ventures. However, the issue here is often that there is a conflict of business models with risk models. The fundamental business model of consulting is growing service fees, which is at odds in creating new ventures. On the risk front, you can’t simply advise in venture creation (where advice is a ten-a-penny) or make recommendations without taking a shared risk/reward structure. That’s why Rainmaking, a Corporate Venture Studio (CVS) pivoted their co-investment business model. A mutually-beneficial model is critical for success.?

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In short, very few governments have a structured approach that allows them to act as venture creators. Government Venture Studio (GVS) as a model could help unlock billions of dollars of economic, environmental, and civic value for society.?

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