A version of this article was published in Oliver Wyman Brazil
In recent years, corporate venture capital (CVC) has become an essential tool for companies seeking to boost innovation and maintain competitiveness in increasingly dynamic markets. Despite their strategic potential, CVC operations will face difficulties without proper structuring and clear business alignment.
An analysis of the Brazilian CVC ecosystem offers some key lessons. In partnership with ABVCAP, a nonprofit group that represents private equity and venture capital, we conducted a study that provides a comprehensive view of the practices, challenges, and expectations shaping the future of CVC operations in the country.
While the number of CVCs in Brazil has been increasing, particularly since the pandemic, the market is still in its maturation phase. Brazil invests approximately 10 times less in CVC-backed deals per million dollars of GDP than the US, and eight times less than the UK. For markets in any stage, however, a look at the experience of Brazil can be instructive.
Our report, “Lessons From The Brazilian Market: The Role Of CVC In Transforming Business,” underscores the importance of corporations clearly defining their CVC strategies, establishing explicit goals, and developing a long-term vision that aligns with corporate interests, as many still lack adequate structuring.
Achieving corporate venture capital success through aligned strategies
Defining a solid and realistic strategy is the first step to CVC success. Unlike initiatives like mergers and acquisitions (M&As) or innovation pilot projects, CVC should be viewed as a long-term strategic initiative with significant associated risks. The strategy should be that invested resources not only generate financial returns but also foster innovation and sustainable growth avenues for the parent company. The success of this phase depends on deep alignment with the organization's strategic objectives, the commitment of the corporate board, and the flexibility to adapt the strategy as the market evolves.
Building strong governance and structure for effective CVC operations
This phase involves fundamental structural decisions such as choosing an operational model, including the legal structure, team size, and governance form. Companies implementing CVCs with a clear structure and well-defined processes are more likely to generate long-term value, while those neglecting this phase face greater challenges, such as excessive dependence on individual figures and lack of integration with corporate areas.
Creating value through investments and innovation in CVC
CVCs naturally consider the identification of synergies with a parent company as the most relevant factor when making investments. It couldn't be otherwise, since without synergies there is no purpose for a CVC. For CVC structures within a company, this is the prevailing factor. More separate structures include the entrepreneur's profile and the potential financial return of the investment as equally relevant factors, which shows how separate CVCs operate with a much more evident financial return bias than CVCs with internal structures.
Measuring the success of a CVC
A CVC operation can only be considered successful when it can demonstrate the impact of its investments over time. Evaluating this impact involves measuring both financial and strategic returns, as well as considering from the outset the possible exit paths for investments. Although it is difficult to have a fully clear exit strategy at the time of the initial investment, it is crucial for companies to consider viable options and align them with the corporation's objectives. The keys here are measuring financial and strategic KPIs; balancing financial and strategic return, and capital reserve; and defining investment success.
Boosting Brazilian CVC success through strategic vision
As Brazilian CVC moves into a new phase of maturation and corporations are increasingly pressured to demonstrate concrete results, examining the factors of success is timely. For CVCs to reach their true potential, corporations need to clearly define their strategies. This involves creating explicit objectives and building a long-term vision that aligns with the parent company's strategic interests, as well as the implementation of mechanisms that ensure the integration of invested startups into corporate operations.
Read the article in Portuguese (Brazil) here
