In our inaugural post in the What Corporations Need To Know series, I covered corporate venture capital – how common it is, why corporations should consider it, and how to develop an investment thesis and execute on it. In this post, let’s dig a bit deeper … What do corporations need to know about being data driven?
Zooming out a bit, data is one of the main currencies of large businesses. Fortune 500 corporations generate more data in a day than they may know what to do with, and the most efficient corporations analyze data constantly in order to streamline operations, improve revenue, decrease costs, and optimize for employee retention. So when it comes to corporate venture capital, it should be no surprise, then, that one of the biggest questions we are asked is “How can we measure success?” Corporations track metrics, OKRs, and KPIs across all business lines, and corporate venture capital and innovation need not be an exception.
In conversations with the C-Suite of prospective corporate partners, we address the question of measuring success with another question: “What do you want to achieve?” Corporations approach corporate venture capital for a variety of reasons, and each reason will have different results to measure. We’ll evaluate these in two buckets: strategic rationale and financial rationale.
Strategic Rationale & Results
Most corporations that invest in venture capital are doing it for some strategic reason – they want to be one step ahead of the innovation in their industry, and they recognize the need to invest in collaboration with early-stage companies. Here are some strategic success metrics to consider:
- Strategic Fit: Assess how well the portfolio companies align with the corporation’s core business objectives. Are these investments helping to advance the company's strategic goals? A successful venture ecosystem initiative should create synergies with existing operations.
- Innovation Impact: Measure how venture investments contribute to the company’s innovation efforts. Are the startups providing new technologies, products, or services that can be integrated into the corporation’s offerings? This metric can be quantified by tracking the number of collaborations, pilot projects, or new product developments stemming from venture ecosystem investments. We can also break this down to how venture investments increase the revenue or decrease costs for a company, therefore impacting the company’s bottom line.
- Market Insights and Trends: Venture investing can serve as a window into emerging market trends and consumer behavior. Corporations should evaluate how their investments enhance their understanding of the market landscape and inform strategic decision-making.
Financial Rationale & Results
Though strategic returns are certainly a consideration, most corporates who invest in venture capital are also cognizant of financial returns. For traditional venture capital firms, the definition of success is the financial return on investment (ROI). Corporations typically evaluate ROI through various metrics, such as:
- Internal Rate of Return (IRR): This metric assesses the profitability of the investments over time, considering cash inflows and outflows. A higher IRR indicates a successful investment strategy.
- Multiple on Invested Capital (MOIC): MOIC measures the total value generated from investments compared to the initial capital invested. This ratio is crucial for understanding how well the investments have performed relative to the amount spent.
- Exit Metrics: Successful exits—through acquisitions or initial public offerings (IPOs)—serve as strong indicators of venture investing performance. Tracking the number and value of successful exits can provide tangible evidence of success.
Being data driven around venture investing is critical for corporations. This forces upfront alignment by the C-Suite and Board about what the corporation is trying to achieve and brings ongoing accountability to the program on whether or not it is achieving those goals.
If you are working to be more data-driven around your corporate venture capital efforts, or you’d like to learn more about the TechNexus approach, please reach out to Kaitlyn Doyle, VP at TechNexus.