Corporate Venturing done right: Aligning Incentives for Innovation

Corporate venturing is a promising avenue for innovation where large corporations leverage their strategic assets (cash reserves, intellectual property, client networks, industry knowledge, etc.) to build new startups. This approach should give these corporate-born startups unfair advantages compared to the proverbial “Startup founded in my parent’s garage” and thus a higher chance of success. The list of potential benefits for corporates is long: access to new technologies and innovations, diversification of revenue streams, enhanced market competitiveness, cultural transformation towards entrepreneurship, enhanced investor perception, brand strengthening, talent attraction, etc.

However, the reality has been somewhat sobering. Despite the sound rationale described above and the formation of an entire industry aimed at facilitating corporate ventures, the big success stories are rather scarce. Over a decade has passed since consulting giants began offering corporate venturing services, and the landscape is still largely devoid of the anticipated unicorns. While some of these consulting firms might advertise higher success rates than the average venture capital portfolio — in carefully put together slide decks that cleverly push the limits of truth to fit the narrative — the skepticism among corporates is growing.

The fundamental issue at hand is the misalignment of incentives, a critical factor in why many corporate ventures fail to achieve their potential. Let's break down the main problems:

• Fee Frenzy vs. Equity Engagement: The venture building landscape is dominated by firms with a consulting background, used to billing by the hour rather than investing in the success of ventures through equity and outcome-based commercial models. This creates a divergence in objectives, with these service providers prioritising immediate financial gain over the long-term success that equity participation could bring.
• Order Takers, Not Risk Makers: In a system where the partners of consulting firms are rewarded with bonuses tied to the billable hours they sell, there's little incentive to rock the boat. This results in a dynamic where service providers, focused on fee generation, act more as subcontractors than partners willing to challenge the status quo. Such a stance is detrimental to corporate ventures, which thrive on innovative thinking and a willingness to take calculated risks.
• Equity Misallocation: Allocating equity in a way that fails to adequately motivate the team working on the venture is a recipe for mediocrity. The venture building space is notorious for assembling teams that, without a significant stake in the outcome, default to risk-averse behaviours. Moreover, the absence of meaningful equity for the team is a red flag for investors, who look for motivated, committed players.
• Challenging Valuations: Corporate ventures are more expensive to build than “normal” startups (risk mitigation in a corporate environment has its costs), leading to inflated expectations around valuations. This misalignment becomes apparent when these ventures seek additional funding, only to find the market balks at their pre-money valuations. Corporates need to recalibrate how they view these initial investments, recognising that not all dollars spent translate directly into value created and that part of their expenditure is essentially the cost of entering and playing in the startup arena.
• Asset Advantage in Theory Only: Despite the theoretical benefits of tapping into a corporation's vast resources, practical barriers often prevent these assets from being leveraged effectively. Internal politics and logistical hurdles can turn what should be a startup's superpower into a frustrating battle for resources.

Addressing these issues, MakerX adopts a refined approach to corporate venturing:

• We’re Co-founders, Not Contractors: Aligning our success with that of the ventures we build by combining equity alongside fees, tied to business outcomes.
• Building the Right Team: Focusing on assembling teams that are not only skilled but also have a vested interest in the venture's success, ensuring they have meaningful equity stakes to keep them motivated to take the bold steps necessary for breakthroughs.
• Realistic Approach to Valuation and Costs: We guide corporates to understand the true value of their investments and the realistic market expectations, helping to set ventures up for successful future funding rounds.
• Leveraging Strategic Assets Effectively: Working closely with corporates to navigate internal barriers and fully utilise their strategic assets, ensuring that ventures can truly capitalise on these advantages.

This strategy not only addresses the primary issues that have historically undermined corporate venturing efforts but also strengthens the model by realigning interests and redefining how ventures are built and grown. We believe corporate venturing can be a powerful engine for innovation - get in touch if you want to learn more about how we partner with companies to build ventures that move the needle.