We all know that venture capitalists help entrepreneurs create and grow great companies. They know how businesses can grow, having seen the rise and fall of many. They connect them with big industry names and teach them how to build operations. Those great companies create jobs and help the economy to grow. 

Yet what many don’t realize is that the traditional venture industry is evolving.

The spectacular fall of SVB Financial Group, whose Silicon Valley Bank did business with startups, raises an uncomfortable question: Does venture capital still offer value? 

Startups have an alternative to traditional VC funds – corporate venture capital (CVC). They can be strategic investors.

Over the past few years, that’s been happening. 

Most promising startups are getting funded because of the rise of corporate venturing. And their engagement in the ecosystem is growing.

Not only do these investment arms of large corporations fill a funding gap, but they also provide their companies with contacts, customers and product insights. In return, the corporate groups get an early look at the most promising products, services, and innovations being developed.

“Corporate venturing enables established companies to invest in, collaborate with, or acquire innovative startups, providing them with access to new technologies, business models, talent pools, and market opportunities,” says Mark Zaleski, Managing Director & Partner at BCG X, the tech build and design unit of Boston Consulting Group.

Additionally, corporate venturing promotes growth and diversification for the company, job creation, and innovation. “It enables businesses to maintain a competitive advantage in a fast-paced market by embracing and incorporating disruptive innovations,” he adds.

WHAT IS CORPORATE VENTURE CAPITAL?

CVC arms differ from traditional VC firms in several ways. CVC operations are a division of a large corporation. They invest on behalf of their parent companies to strategically increase innovation and up the game with a new level of competitiveness. 

CVC achieves these aims by investing in promising startups that can either “build on their strengths,” such as expanding competitive holds on specific market segments, or “fix their weakness” by improving areas of the business with deteriorating performance.

In contrast to traditional VC, CVC is not driven purely by financial return. Many CVC investors say they consider strategic alignment when investing in a startup. Given that viewpoint, a valuable exit opportunity for CVC could take the form of an acquisition, a new OEM partner, or product integration.

WIN-WIN SITUATION

BCG X, with their experienced startup practitioners and its corporate partners, have pioneered a model that solves this problem by melding the strategic competitive advantages that most big companies have spent years developing with the lean approach and processes that most startups follow. 

This model can help overcome the “superincumbent’s dilemma” – high market share, low revenue growth, and investors that frown on corporate diversification. Big companies need to grow with disrupted business models.

That’s not all. Today, big businesses are facing big challenges, such as how to reduce greenhouse gas emissions and how to meet ESG goals. To tackle these challenges, they must innovate new products, processes, and business models. If a startup doesn’t exist or isn’t available to a corporation to build on its strengths and fix its weaknesses – or fill an opportunity/gap in the market, they can engage specialists like BCG X to build a product or business. 

For big companies, there is a lot of value that can be obtained through these venturing activities – gains on investments by maintaining one’s market share, gaining access to new markets, technologies, or business models, and allowing opportunities for workers to acquire new competencies and experiences.

“Enhanced capability to react quickly and effectively to shifts and fluctuations in the market is one of the benefits of accelerated innovation. Access to technology refers to the capacity to continually innovate and produce cutting-edge technology that can be leveraged by the corporation in a straightforward manner,” says Zaleski.

WHAT’S THE SUCCESS RATE?

According to Zaleski, the success of corporate venturing programs mainly depends on strategic alignment – ensuring that the venture’s overall strategy, objectives, and core competencies align with those of the corporation; providing adequate financial, human, organizational, and access to assets to support the venture; establishing transparent structures for governance, decision-making, and facilitating collaboration between the company and startups to maximize mutual benefits and synergies.

Although the success rate for corporate venturing is hard to quantify, since companies typically maintain a mix of ventures and incubations – on average, around 15% of a venture portfolio, 40% of early-stage investments and about 45% of later-stage investments, Zaleski says “BCG X has delivered a success rate of 66%, compared with success rates of 20% to 30% by traditional venture capital and corporate venture capital.”

In the Middle East, BCG X, a hybrid unit that brings together technologists, builders, and designers, collaborates with the public and private sectors, assisting them in realizing their innovation potential. 

“Our work spans across multiple industries such as megacities, energy, banking, healthcare, and deep tech,” says Chantal Chalouhi, Venture Architect Principal at BCG X. “We have been actively involved in fostering green ventures, deep tech startups, and human-centric design products, allowing our corporate partners to leverage all their relevant assets to create new innovative products and ventures.”

BCG X provides businesses with a turn-key solution to help them create new businesses, and products or accelerate the growth of existing ones. 

Chalouhi says with a team having a strong background in serial entrepreneurship and technology experience that prototypes ideas in a matter of weeks and launches a business in a matter of months, corporates who partner with BCG X have a very high success rate. “Our battle-tested, human-centric methodology enables us to rapidly de-risk investments, achieve product-market fit, and build great ventures.”

AN INCLUSIVE APPROACH 

More importantly, corporate venturing may be able to lead the way to achieve gender equity in entrepreneurship by promoting diversity and inclusion within the startup ecosystem.

Increasing women’s involvement is critical for an equitable future, especially in Web3 companies developing innovative applications involving the metaverse, Gen AI, blockchain, and crypto.

According to a recent BCG report, all-male founding teams raise nearly four times as much, on average, as all-female teams (almost $30 million compared to about $8 million). And only 13% of Web3 startups include a female founder.

“Women are grossly underrepresented among entrepreneurs and financiers. Thus, we risk continuing to construct an online world that replicates the same prejudices that plague the physical world, rather than combating them,” says Chalouhi.

Gender equity is a massive untapped resource in the entrepreneurial ecosystem. The good news is this problem can be fixed. 

“Corporate venturing can contribute to gender equality in entrepreneurship,” says Chalouhi. “Actively supporting female-led startups, providing mentorship and networking opportunities, and investing in initiatives that promote gender equality in the entrepreneurship space are all ways for corporations to promote gender equality.” 

In addition, companies that prioritize gender equality can cascade it to their new portfolio companies, resulting in a more inclusive and equitable startup landscape.

Recently, BCG X collaborated with People of Crypto Lab, a creative and innovation studio whose mission is to increase diversity, equity, and inclusion in the Web3 ecosystem, to analyze the gender diversity of founders and investors using a database of nearly 2,800 participants from around the world.

Now, BCG X intends to continue expanding its presence in the region to assist organizations in gaining access to new emerging technologies such as AI, blockchain, and the IoT, while accelerating the adoption. And to encourage innovation, human-centered design, and the transfer of knowledge, connecting local players with its global network of companies, strengthening partnerships with local ecosystems, including governments, investors, and accelerators is paramount. 

“We will maintain efforts in our corporate venturing to promote diversity, inclusion, and environmentally responsible business practices. This will help move the agenda of gender equality and social responsibility forward,” says Zaleski.