Large corporations don’t often lead the charge on innovation – but it’s not from a lack of desire. In fact, 84.9 percent of corporations acknowledge that innovation is the key to remaining competitive.
Corporate innovation is slow.
Sixty percent of companies said it takes a year or longer to create new products – and this timeframe is detrimental. Keeping up with customer demands becomes difficult, and competing against the innovation of challenger startups becomes nearly impossible.
The lack of speed comes from a common corporate quirk: most corporations would rather build than buy when it comes to innovation. This insular approach takes significant amounts of time and resources, and often, corporations don’t have the necessary processes in place to drive innovation. By refusing to look for partners outside of the company, corporations are missing out on a hoard of resources that are only too willing to provide quick and innovative solutions.
Corporations should try outsourcing venture investing, creating an innovation pipeline to fuel the solutions they need.
For corporations, outsourcing venture investing takes the form of investing in a “fund of funds.” This is exactly what it sounds like – a fund that invests in other venture funds, as opposed to one that makes direct investments into startups.
This type of investment is incredibly useful for corporations for a few reasons.
Additional capital leverage
First, and perhaps most important, this type of innovation investment is both less financially taxing and less risky. Instead of a heavy investment of both time and money internally, a smaller investment into a fund of funds goes further as it joins with investments from other corporations. For example, a $5M capital investment combined with other corporate capital may pool to $100M or more, creating a significant investment machine.
Because less capital is required per individual to make a bigger impact, your company has less money on the line. Your investment is also spread wider, increasing your chances of being part of a growing startup’s success story.
It’s not just additional financial capital that corporations can leverage through this investment – it’s human capital as well. Investing in a fund of funds reduces a corporation’s human capital burden to execute and administer investments, further cutting down the cost of innovation. Instead of hiring a dedicated innovation team or reallocating current talent, corporations are able to outsource investment management to the experienced fund of funds team.
Increased network access
After a group of corporate companies invest, the manager of the fund of funds invests that capital into VC funds. Ideally, these funds should be financing startups that are creating solutions relevant to the corporate investors. As a result, corporations increase their access to a large network of innovation.
This access to a vast network is key for corporations looking to be disruptive in their industries. Once a corporation decides it needs an innovative solution to XYZ problem, they can tap into this network and get connected quickly to a startup that has the answer they need. This structure alleviates the burden on corporations to dedicate resources to development, while also creating valuable opportunities for startups. A win-win.
New learning opportunities
After investing in a fund of funds, you have access to more than just a network of startups – you are also connected to other corporations with a similar interest in innovation, and therefore, with similar challenges and opportunities as well. These connections provide opportunities to learn, share experiences and help each other adopt new processes to better incorporate innovation.
Outsourcing venture investment via a fund of funds structure works for corporations of all shapes and sizes, regardless of their current innovation strategies. If done correctly, venture investment outsourcing can also help reinforce internal innovation creation as the necessary talent gets involved and learns how to structure idea development processes.
A fund of funds is a powerful vehicle, paving the way for innovation that could not otherwise be achieved alone.
As Managing Director of the Cintrifuse Syndicate Fund, Sarah Anderson is responsible for the Fund’s investments and bringing fund managers to the region to engage with Cincinnati startups and strategic corporations. She actively engages portfolio managers both nationally and internationally to create relationships between funders, founders, and corporations.