We recently talked to Guy Newton, Director of Artesian’s VCaaS business, about how Corporate Venture Capital and innovation is providing financial and strategic returns to both corporations and startups.
Guy Newton, the Director of Artesian’s VC-as-a-Service business, has had a varied career in innovation. From running commercial operations at an Indonesian fintech scale-up, to working as Google’s Head of Monetisation Partnerships in Southeast Asia, Guy has been seated at both sides of the innovation table. Guy recently sat down with Vicky Lay, Partner and Head of Impact at Artesian, to talk about corporate innovation and venture capital. Here are some of the insights he shared:
How are corporations approaching startup-related innovation?
There are four broad ways for a corporation to formally involve themselves in startup-related innovation.
Open innovation This involves a degree of internal innovation, as well as heavy exposure to external markets, whether core or adjacent to business, which then drives internal idea generation. A difficult concept to achieve since it can be hard for internal teams to secure consistent leadership support.
Corporate Venture Capital (CVC) The specific allocation of funds to a particular long term project. CVCs often act as the eyes and ears of the parent company, helping to identify future challenges that may threaten the company, or indeed opportunities for growth.
Balance Sheet Investment This involves a corporation using an unallocated pool of funds for investment opportunities, allowing them to act like a CVC, though not necessarily with long-term approval or funding.
Venture Capital as a Service (VCaaS) A VCaaS model allows external partners to work with the corporation on certain VC-related activities.
What is VCaaS?
To explain what VCaaS is it may be useful to share some context on our business. Artesian has had a VC focus for the past decade, working across a number of agnostic technology opportunities, and becoming Australia’s most active early-stage VC investor, with around 550 portfolio companies and over $400 million under management. Over that time, we have had the opportunity to work with a large number of government and industry groups, assisting them with their exposure to VC-related activities and ultimately, leading them into the startup community. Over the past few years, we have begun to formalise that part of the business as VCaaS.
How does VCaaS assist different groups with their VC activities?
We work with a variety of partners, including corporations, industry bodies, state and federal government departments, universities, institutional investors and family offices. Our goal is to augment the internal capabilities and skill sets of our partners by doing things such as:
Managing bespoke VC funds for a single investor or a small suite of investors.
Curating an M&A pipeline or co-investment deal flow.
Various startup assessment activities such as scouting, innovation mapping, due diligence and investment or exit negotiation.
Establish and operate integrated scale-up programs.
Why are corporations increasingly interested in startup related innovation?
Closed-door innovation can work for some organisations, but the larger and more complex they are, the harder it can be to have an entirely internal approach to innovation. Often these larger companies aren’t best equipped to identify the next series of disruptive challenges. They do a great job of innovating within their core, but it’s the adjacent known or unknown dimensions that can be overlooked. Startups, however, thrive in the unknown. They exist, at least initially, to focus on one specific part of an industry and work hard to improve it, or indeed to even create new industries. Imagine if Blockbuster had better understood the opportunity of online subscription-based video consumption. Investing in, or at least having visibility into startup related innovation can provide benefits such as:
A more affordable pathway to M&A activities.
Access to distributed R&D.
Access to fast-moving technology innovation.
Exposure to a potential new customer base via an emerging company.
How can corporations measure the success of startup investment activity?
There may be a range of soft, easily-identifiable metics, including:
Immediate or expected financial returns, or a commercial component beyond just equity.
Immediate or short-term value-add to an existing customer base.
Internal efficiency improvements or cost savings. Not all innovation is related to revenue generating activities around the product or services of a business. Often, greater profitability can come from improving internal processes and systems.
But broadly speaking, there are two key considerations: strategic and financial returns.
Strategic returns are generally seen as more important, particularly by corporations, but rarely do we see CVC decisions excluding some form of financial interest. Financial returns naturally appease certain levels of the executive leadership and allow for a fund or a balance sheet investment strategy to be self-financing as the investment grows to maturity. However, it is important for us to recognise that profit and revenue generation are key enablers of innovation, despite the heavy interest in the strategic value of a startup investment.
Are there any recurring challenges that you are seeing amongst corporate VC groups?
Some of the challenges seen amongst corporate VC groups include:
Justifying financial return timelines Strategic returns can be faster to identify than financial returns, since a startup may be able to quickly provide strategic value to a larger organisation even though profit remains a couple of horizons away.
Maintaining course through leadership changes Changes in leadership and the environment of support surrounding corporate startup investment can be damaging. Artesian, for example, invests with an exit that may be 7 or 8 years from the initial investment. In that time, several C-level leaders and key stakeholders could easily exit, move elsewhere or come into new roles with their own vision.
Navigating resourcing difficulties
Managing risks, both financial and reputational
Aligning startup involvement with an evolving and often uncoordinated approach to corporate innovation
There are indeed plenty of challenges, and not just those normally associated with investing in growing companies. What is really important is a consideration that Eric Scmidt has helped raise, “You can systematize innovation even if you can't completely predict it.” So a key point is being able to build an adequate model that systemises exposure to startup related innovation.
What interest do you see from startups, regarding corporate investments?
Startups equally have to consider their investors from a strategic and financial perspective. Financial considerations are probably an easy checkbox to tick if the investor meets their valuation expectations, but some of the strategic components to decision-making are really important for the startup’s own growth. Some strategic or tactical considerations could include:
What can the corporation provide in terms of testing or piloting services/facilities?
Is there product development knowledge, data or R&D capabilities that may be of use to the startup
Is there access to mentors, particularly if both the startup and the corporation are focused on a particular sub-industry?
Is there an opportunity for access to new markets via the larger corporation?
Is there a commercial partnership available, for example, granting the startup access to new customers?
Is there a pathway for an exit via an acquisition option?
Is there a cultural alignment between the startup and the larger corporation? Ultimately, if the startup is going to be acquired and embedded deeply into the larger Corporation, are there foreseeable hurdles from a cultural integration perspective?
From a macro perspective, what are the trends you are noticing and what do you think the future of CVC looks like?
In 2020, around USD$73.1 billion was invested by corporations into the broader VC world, which highlights the increasingly important and significant role that corporations are playing in the broader venture capital space. More and more corporations are starting to look at earlier stage companies for investment. Investing earlier allows for a more diverse portfolio and increased flexibility around potential business integrations.
Another interesting trend that we've seen in the Asia Pacific region, is global or multinational corporations looking to partner with an external firm to serve as an innovation outpost in the region, providing them with exposure to that particular market.
What are you most excited about? What is inspiring you in your work at the moment?
There is a lot of fantastic work being done by corporations in terms of how they can bring more positive impact to their communities and their own value chains. This includes ESG issues, Impact and corporate sustainability. What's really exciting are some of the conversations that we're starting to have around how we can potentially partner with corporations and help them in terms of meeting or contributing to their corporate sustainability objectives. Being in between and in the middle of those conversations is really fantastic. It's exciting. It's inspiring. And artesian is really central to this in so many ways. And that helps me get to work.
To learn more about corporate innovation and venture capital, listen to the full conversation on the Artesian podcast.
The following video provides an overview of Artesian's VCaaS offering: