CVC vs. New Business Building – What's the difference?

In recent years, Finnish companies have struggled with innovation, often lagging behind their global counterparts. This has led some to view Corporate Venture Capital (CVC) as a quick fix for their innovation woes. However, it’s crucial to understand that CVC is not synonymous with innovation; it is primarily a form of risk investment. While CVC can provide valuable market intelligence and potential financial returns, it does not directly drive innovation within the company.

New business building, on the other hand, has a direct impact on corporate revenue and, consequently, company valuation. By creating new ventures internally, companies can leverage their existing assets and capabilities to generate new revenue streams and enhance their market position. In contrast, CVC investments mainly affect the balance sheet, offering insights into market trends and emerging technologies but often falling short in terms of integrating these innovations into the core business.

At Shift Actions, we specialize in helping companies balance these innovation approaches to achieve maximum impact. In this blog post, we compare the pros and cons of both approaches.

The Appeal of CVC: Why Corporates Are Adopting It

Corporate Venture Capital offers companies a fast track to innovation by enabling investments in external startups. With CVC investments reaching $190 billion in 2021 across more than 5,000 deals, its popularity stems from the ability to:

• Access Emerging Technologies: Startups serve as hubs for innovation, offering new technologies and disruptive business models.
• Diversify Risk: A portfolio approach spreads risk across multiple startups, lowering exposure to any single failure.
• Gain Strategic Options: Corporates can use CVC as a scouting mechanism for future acquisitions or partnerships.

For organizations, CVC offers the allure of staying at the forefront of innovation with seemingly less risk and lower internal resource demands. However, this surface-level appeal often obscures deeper challenges.

Fund sizes can vary widely, but many fall within the range of $50 million to $200 million, with some larger funds exceeding $200 million. Leading CVC firms like Google Ventures, Intel Capital, and Salesforce Ventures are known for their strategic investments in high-growth startups. Finnish companies are somewhat active in the CVC space, with a strong focus on deep tech and sustainability.

The Challenges of CVC: Why It Often Falls Short

Despite its promise, 70% of CVC programs operate sporadically, delivering poor alignment with corporate strategy. Moreover, only 14% of these programs consistently create value.

Common Challenges in CVC:

• Short-Term Focus: Many CVC programs prioritize quick returns or near-term market insights over long-term impact.
• Cultural Misalignment: Corporations and startups operate with different priorities and speeds, often leading to friction.
• Limited Integration: While startups may deliver insights or technological advancements, corporates often fail to integrate these effectively into their core operations.

CVC alone cannot build the deep organizational capabilities required to sustain competitive advantage. This gap underscores the need for complementary strategies like corporate venture building.

Corporate Venture Building: A Catalyst for Enterprise Value

Corporate venture building, by contrast, involves creating new businesses internally, leveraging the corporation’s assets, capabilities, and expertise. Research shows that organizations excelling at venture building see 20–30% of their revenue generated from ventures established within the past five years.

The Case for Venture Building:

• Alignment with Corporate Strategy: New ventures are designed to address strategic priorities, ensuring tight integration with long-term goals.
• Maximizing Internal Resources: Corporates can utilize existing assets—brand equity, infrastructure, and market access—to build ventures more efficiently.
• Driving Cultural Transformation: Building ventures fosters entrepreneurial thinking and agility within the organization.
• Enterprise Value Creation: Surveyed investors view new businesses built internally as less risky than external startups, often valuing them on par with small-cap companies.

For many companies, venture building represents a tangible path to not only growth but also resilience in the face of disruption.

Comparing Venture Building and CVC

The Enterprise Value Link

Research highlights a direct correlation between the number of ventures built and enterprise value creation:

• Organizations that build three to five new businesses over five years see significant revenue growth, with new ventures contributing up to 30% of total revenues.
• Public-equity investors view corporate-built ventures as less risky and more predictable than startup investments, reinforcing their role in driving valuation.

This data underscores the importance of a portfolio approach—investing in both CVC and internal venture building—to achieve a diversified and balanced growth strategy.

Why a Dual Strategy is Critical

To maximize the impact of innovation, companies must integrate CVC and venture building into a dual strategy:

CVC as a Discovery Engine:

• Provides access to disruptive innovations and ecosystems.
• Serves as an experimental platform for exploring untested ideas.

Venture Building as a Growth Engine:

• Scales insights and technologies into fully realized businesses.
• Anchors growth in ventures closely aligned with corporate capabilities and goals.

Together, these approaches form a powerful innovation ecosystem that balances risk, agility, and enterprise value creation.

How to Build an Effective Innovation Portfolio

For companies aiming to adopt this dual strategy, here’s a roadmap:

1. Set Clear Objectives: Align CVC and venture building efforts with the corporate mission. For example:
   1. Use CVC to scout for disruptive opportunities.
   2. Leverage venture building to scale strategic ideas into revenue-generating businesses.
2. Develop a Portfolio Mindset: Adopt a portfolio approach to venture building, aiming to launch multiple ventures over time. Research shows that organizations building more businesses see greater success rates.
3. Prioritize Talent and Infrastructure: Invest in entrepreneurial leaders and internal venture-building capabilities. Build frameworks for governance, market testing, and scaling.
4. Measure the Right Metrics: Evaluate success through both short-term (e.g., market insights from CVC) and long-term metrics (e.g., revenue contributions from venture building).
5. Embrace Active Patience: Investors recognize that ventures take time to mature, often requiring four or more years to reach profitability. Maintain a disciplined approach to tracking progress and adapting strategy.

Conclusions

In summary, while Finnish companies have faced challenges in innovation, adopting a balanced approach that integrates both Corporate Venture Capital and corporate venture building can drive sustainable growth and enhance enterprise value. CVC provides access to emerging technologies and market intelligence, but it is not a substitute for the deep, strategic innovation that comes from building new businesses internally. By leveraging both strategies, companies can create a robust innovation portfolio that balances risk, agility, and long-term value creation.

At Shift Actions, we specialize in helping companies navigate these innovation strategies to achieve maximum impact. We invite you to join the conversation and share your thoughts on the pros and cons of CVC and venture building. How has your organization approached innovation, and what challenges have you faced?

If you’re interested in learning more about how to effectively balance CVC and venture building, or if you need guidance on developing a comprehensive innovation strategy, contact us at Shift Actions. Let’s work together to drive your company’s growth and innovation forward.