Many executives are interested in starting a corporate venture capital (“CVC”) program to change the corporate culture as part of a digital or innovation transformation. To achieve culture change, the corporation must be ready both “physically” and mentally. Here are five considerations to help you prepare:

1. Establish Clear Objectives 

First, it is important to understand what you are trying to achieve with the new venture program. A corporation can reap many potential benefits from starting a CVC. A CVC program can provide market intelligence and new start-up commercial partnerships. It can also help a corporate launch and grow new businesses. Before starting your program, establish a framework for setting and measuring your strategic objectives. 

2. Understand Your Organization’s Risk Profile 

Venture capital is one of the riskiest forms of investing. Any corporation seeking to invest in start-ups must go in with eyes wide open regarding the fact that venture capital investments can and will lose money. At Cerity Partners Ventures, we recommend a portfolio approach to diversify risk. Most corporate venture capital investors seek to co-invest with other institutional investors, which allows risk sharing among investors in a syndicate. 

3. Give Yourself Enough Time 

On average, a venture capital investment can take 7 or 8 years to realize an exit, and seed-stage deals usually take longer. So, an investment made in year 5 of a program may not be acquired or go public until year 15. Organizations need to have the mindset that this is not a short-term activity and establish expectations of the long-term nature of venture capital investing. Practically speaking, educating the organization can help the program succeed. 

4. Establish a Realistic Budget 

Venture capital requires capital to invest in start-ups. We often get asked the question, “How much is the right size for the first fund?” The answer often depends on what stage of investment the corporation is focusing on (later-stage venture investments can require more capital). Also, a strategy of being a lead investor typically requires more capital than being a follow-on investor as part of a syndicate. 

The budget should include capital for new investments and reserves for follow-on investments in portfolio companies. A best practice would be to develop a model portfolio that allocates the capital between new and follow-on investments over the course of the life of the venture program. The budget should not only include the capital to invest in start-ups but also the operating expenses to run the program, which would include the team. 

5. Secure Executive Support 

Corporate innovation expert Soren Kaplan writes in INC magazine about the correlation between innovation and executive support. He notes a report from Innovation Leader finding that “73% of innovation, strategy, and R&D executives say that leadership support is the biggest enabler of innovation. Over 55% of executives report that politics, turf wars, and a lack of alignment are the biggest barriers to innovation.” It is critical that the CEO and other senior executives on the management team are not only behind the venture program but (per point 4 above) have made a long-term commitment. 

By addressing these five prerequisites, you may be more prepared to build your corporate venture program and set up for success.  

Please read important disclosures here.