Why venture building is the most successful way for big corporates to innovate
As Featured in Sifted
Over the last few years, big corporates have tried out all different ways to capture some of the start-up pixie dust — from accelerators to internal intrapreneurship programmes and corporate venture funds. But one approach appears to be providing the most consistent successes: venture building.
Corporate venture building is a particular approach to building a new business. Where a typical entrepreneurship journey might start with a founder with a passionate idea, venture building starts with the idea first, which is tested and validated by a group of seasoned, professional company builders before it gets taken any further. The team to run the business comes later. Venture builders typically create a number of businesses in rapid succession, like a production line.
It subverts the myth of the ‘heroic founder’ — the idea that breakthrough ideas can only be built through the genius and hard work of a passionate individual.
“A great founder is only one aspect of creating a great startup. You also need a great idea, a strong team, great execution, access to funding.”
“A great founder who is incentivised by high risks and high rewards is one aspect of creating a great new startup,” says Stefan Gross-Selbeck, global managing partner at BCG Digital Ventures. ”But it is only one aspect. You also need a great idea, a strong team, great execution, access to funding. These are all aspects that venture builders can professionalise.”
There are many flavours of venture building. Some are not at all affiliated with any particular corporate. For example, Entrepreneur First, creator of Magic Pony; Barcelona’s Antai Venture Builder, which created Glovo; and Blenheim Chalcot, creator of SalaryFinance all operate independently of any given company.
But many venture builders are backed by a company or set of companies. Axa, for example, is the backer of Kamet Ventures, a healthcare and insurance company builder. Team8 in Israel has Walmart, Airbus, Softbank and Moody’s as backers. Others, like BCG DV, Rainmaking and Founders Factory, build ventures for a series of corporate customers.
Corporates like venture builders because this appears to be less risky than standard VC investing — and the company gets to have more input into the business that is built. All while still tapping into some of the agility and fairy dust of the startup world.
“Our success rate is several multiples better than venture capital,” agrees Gross-Selbeck. “VC fails a lot and as an asset class it is not well suited for corporate investing.”
Corporates are under more pressure than ever to innovate, as the pandemic accelerates moves to ecommerce and digital interactions. But they need better odds than standard VC investing can give them, he says.
Are venture builders really more successful?
This approach doesn’t necessarily create more unicorns, says Michael Niddam, co-founder and managing director at Kamet Ventures. But it does minimise the risk of company failures.
A very high number of the startups that come out of company builders are still alive. At BCG Digital Ventures, which was one of the first to pioneer this approach in Europe, Stefan Groß-Selbeck, says the 150 companies built by his team have a roughly 90% survival rate.
Venture building doesn’t create more unicorns but it minimises risk of failure.
Not all venture builder-created companies go on to raise external money, but of those that go down this path a higher proportion tend to secure funding than startups overall. For example, not only are 19 out of the 22 businesses built by Kamet Ventures still alive, but 9 have gone on to raise a Series A round and beyond. 7 out of 11 companies built by Israeli cybersecurity company builder Team8 have got to this stage.
In comparison, says Henry Lane-Fox, cofounder and CEO at Founders Factory, “Early-stage VC investments are terrifically hit or miss, only one in every 40 deals ends up going on to success.”
Lane-Fox says around 60-70% of the companies Founders Factory builds ends up raising a seed round, and some 30-40% go on to raise a Series A round . Plus, he says, they can get their companies through to an investable stage faster:
“The average startup takes 15 months to get to a seed round, we can do it in 9. The average time to get to a Series A is 12-15 months, we can do 9-12 months,” he tells Sifted. For a pre-revenue startup burning through cash every month, that saved time is saved money.
“Most venture builders are trying to tell the story that they can derisk that early stage of the entrepreneur’s journey and provide a more efficient deployment of capital,” Lane-Fox says.
So how do they do it?
One of the key features of venture building is that they wrap a lot of support around the fledgeling companies. There is considerable upfront financial support. Founder’s Factory will typically put in the first $250,000 into a business.
But equally, there is a team of professionals that help these companies get started — data scientists, designers and corporate finance people who work across all the companies in the portfolio.
There is also a lot of hands-on coaching, says Niddam.
“It also helps reduce the risk of failure,” he says. “This can mean 3-4 hour sessions twice a week to identify challenges. Once the project is launched the team will act like angels intervening when needed. They will also help to negotiate deals with big companies — that is unique compared to what a VC can do.”
Niddam says Kamet is very selective about which ideas they take forward to launch. The vetting process can be brutal. The Kamet team has so far designed around 35-40 companies but launched only 22.
How do venture builders find the right people?
Venture funding may start with an idea, but finding the right team to build it is still a key part of the process. Most venture builders cultivate huge networks of entrepreneurs and people with experience of working in startups which they can tap when they need to staff a startup. Founder’s Factory estimates it has a network of around 300-400 individuals. BCG Digital Ventures has a huge team of recruiters.
“They may be people who have worked in early-stage startups and are looking to be founders themselves. We have experimented with a lot of ways of doing it. Sometimes an entrepreneur comes to us with an idea that fits and Founders Factory can help derisk it. Sometimes we will find someone for an idea,” says Lane-Fox.
“We look for people who don’t panic over small things.”
“Getting the people right is the hardest part,” says Niddam. “There are many ventures we haven’t done because we didn’t have the right team.” Kamet usually launches between three and six startups each year, and would do more if they could find the right people.
“We look for people who don’t panic over small things, who are willing to work in scarce environments, without all the data and support you might have in a big company. They need to be willing to work hands-on and to be coachable. We want them to be able to observe and learn,” says Niddam.
The team that leads the venture may be hired after the concept was created, but Niddam says Kamet still tries to make each of them “feel the company is their baby. Otherwise you can’t expect them to work night and day to move obstacles.”
But VCs don’t love the cap table…
One of the problems for venture builders, however, is that if their companies do go on to look for external funding, VCs can be put off by the way the equity holdings are structured. Venture builders typically keep a sizeable chunk of the equity in the startup — typically 20-30%.
“No VC says ‘oh great, you have 20% of the equity’,” says Lane-Fox with a wry laugh.
A corporate backer might keep a majority share in the business and the team running the business would have relatively little equity. The models can vary a lot, depending on how close or arms-length the corporate backer wants to keep the business. But the cap table rarely looks much like the typical startup, where the founding team has about 60-70% of the equity when they begin fundraising.
Niddam and Lane-Fox says VCs are starting to become more used to the model now that startups created by venture builders are becoming more common. But BCG Digital Ventures, for example, says it rarely seeks external investment for the companies it builds partly for this reason.
“It is a different asset class and it doesn’t mix well with VC.”
“It is a different asset class and it doesn’t mix well with VC. I don’t think VCs are the best form of funding for these businesses,” says Gross-Selbeck.
But this doesn’t matter, he says. It is an asset class well-suited for corporates, and a new asset class means being able to draw in more investment into innovation. Not everything has to go the VC route.
And the concept is definitely starting to catch on among corporates, he says.
“When we started this in Europe seven years ago we had to spend a lot of time in our first meetings with companies explaining how this would work. 80% of the time would just be about trying to explain the process. Now very little time has to be spent on that, we go straight into the thesis,” he says. “We are seeing a mix of old customers coming back and new customers trying it.”