Venture capital (VC) remains a cornerstone for early-stage enterprises, empowering them to ascend to new heights of growth and innovation. A rising titan in this domain is corporate venture capital (CVC).
Unlike traditional VCs, corporate venture capitalists are usually subsidiaries of large firms, investing in startups not just for financial gains but also to attain strategic benefits.
The question then arises: How do CVCs measure the success of their investments?
Enter the meticulous science and art of benchmarking coupled with the support of the best portfolio management tools on the market.
Benchmarking in the Venture Capital Realm
At its core, benchmarking is a process of juxtaposition. It involves comparing the metrics of a venture capital fund’s performance against a chosen standard, reference, or peer set. This relative evaluation lets venture capitalists discern their investments’ standings in a broader context.
Benchmarking isn’t just a rudimentary comparison; it’s the compass by which CVCs navigate the investment seas. By delving deep into VC performance via benchmarking, corporations can achieve the following:
Enhanced Resource Allocation: Discerning the high-flyers from the underperformers in a portfolio enables CVCs to allocate resources, both monetary and human, more judiciously.
Refined Investment Strategies: Historical performance, set against benchmarks, can shed light on emerging trends, guiding future investment routes.
Stakeholder Assurance: Transparent and regular benchmarking can instill confidence in stakeholders, assuring them of the investment’s value generation.
The Venture Capital Metrics That Matter
A benchmark is only as good as the fund metrics it evaluates. Here are the salient metrics pivotal to any VC benchmarking endeavor:
Internal Rate of Return (IRR)
The IRR is the discount rate that makes the Net Present Value (NPV) of all cash flows from an investment equal to zero. In essence, it denotes the annual growth rate where the investment neither gains nor loses value.
Determining the IRR isn’t always straightforward due to its inherent mathematical complexity. While it’s defined as the rate at which the NPV of future cash flows equals zero, finding this rate requires iterative methods. One commonly used approach is the Newton-Raphson method. Alternatively, many professionals prefer using financial calculators to determine the IRR.
In layman’s terms, the IRR can be thought of as the interest rate that equates the value of the investment’s projected cash inflows to its initial cost.
Multiple on Invested Capital (MOIC)
The MOIC offers a direct comparison of an investment’s present or concluding value with the original amount invested. Essentially, it supplies a clear measure of how successful an investment has been relative to its initial cost.
To compute the MOIC, one divides the current or exit value of the investment by the initial amount of capital invested. The resulting figure indicates how many times the original investment has multiplied. For instance, a MOIC of 2 means the investment’s value has doubled compared to the initial outlay.
Return on Investment (ROI)
The ROI is a fundamental measure that compares the net gain from an investment to its original cost. By doing so, it presents a straightforward reflection of the investment’s profit efficiency.
To determine the ROI, one subtracts the initial cost of the investment from its final value (net profit), then divides that result by the initial cost. This is then multiplied by 100 to get a percentage. A positive percentage indicates a gain, while a negative percentage points to a loss. The ROI effectively quantifies how well an investment has performed in terms of profitability.
Distribution to Paid-in (DPI)
The DPI metric sheds light on a fund’s cash liquidity. It showcases the cash returns distributed to limited partners relative to their initial financial contributions.
To compute the DPI, one divides the total distributions received by limited partners by the sum of capital they committed. The resulting value indicates the amount of cash returned to investors for every dollar they committed. A DPI greater than 1 signifies that investors have received distributions exceeding their original commitments, while a DPI less than 1 denotes that they have yet to recover their initial contributions in full.
The CVC Perspective: A Unique Benchmarking Paradigm
With their dual objectives of financial returns and strategic growth, CVCs bring a distinct flavor to the VC benchmarking table. Here are some additional benchmarks pertinent to the CVC realm:
Strategic symbiosis delves deeper than mere numerical measures. It evaluates the synergy and alignment between the portfolio’s direction and the overarching strategic objectives set out by the parent corporation.
To gauge strategic symbiosis, one must assess the extent to which the portfolio’s ventures complement and further the broader corporate mission, vision, and strategic imperatives of the parent corporation.
This can be done through qualitative reviews, stakeholder feedback, and the examination of collaborative projects or initiatives that bridge the portfolio and the parent company. A high degree of strategic symbiosis indicates a well-aligned and harmonious relationship, promoting mutual growth and benefit.
Innovative Impetus serves as a testament to a CVC’s pursuit of groundbreaking innovations. It measures the successful introduction and assimilation of pioneering technologies or methodologies from the portfolio into the parent company’s operations or offerings.
To measure innovative impetus, tally the number of novel technologies, products, or methodologies that have been sourced from the portfolio and then effectively incorporated into the parent company.
This can also be complemented by examining the speed of integration, the scale of adoption, and the tangible impact these innovations have had on the parent company’s business processes or market position. A high Innovative Impetus indicates a proactive stance in harnessing disruptive solutions for the betterment of the parent company.
Market mastery assesses the influence and dominance a portfolio exerts in shaping industry dynamics, trends, and trajectories. It highlights the portfolio’s role in propelling the parent corporation to a position of market leadership and trendsetting.
To determine market mastery, one must evaluate the portfolio’s contributions to the industry’s pivotal shifts, innovations, or market trends that the parent corporation has championed or leveraged.
This involves analyzing market share growth, pioneering products or services launched, industry accolades received, and competitor responses to these initiatives. Key stakeholder feedback, press mentions, and industry reports can also shed light on the portfolio’s market influence.
Strong market mastery suggests that the portfolio plays a critical role in bolstering the parent corporation’s market prominence and in driving industry innovation.
Customizing Metrics for the Corporate Venturing Program
Every corporate venturing program is unique. There’s no universal set of metrics that fits all. Instead, metrics and dashboards for gauging CVC program performance are tailored to the company’s distinct needs and evolve over time. Here are some crucial factors to consider:
Program Charter: Depending on the venture team’s focus, whether it’s internal tech adoption or exploring future innovations, metrics will vary significantly.
Program Maturity: The phase of a CVC program shapes its benchmarking metrics. An initial startup phase focuses on operational milestones, the expansion phase centers around momentum and strategy validation, and the resilience phase hinges on measurable successes and holistic impact.
Program Operating Model: Inherently tied to the charter and maturity phase, the operating model guides performance priorities. It’s important to note that while all CVCs are strategic, their performance metrics might have a financial inclination, particularly if the venture’s financial returns are expected to cover its operational costs.
For teams that align closely with the objectives of their parent companies, key performance indicators often revolve around the synergy between portfolio firms and the parent company.
On the other hand, thesis-driven teams, which have earned corporate leadership’s trust, may find it challenging to quantify short-term strategic results. They might instead rely on anecdotal evidence highlighting their influence on the parent company’s strategic trajectory.
The Roadblocks in the Benchmarking Journey
Benchmarking, an indispensable tool in the corporate venture capital (CVC) landscape, comes with its own set of challenges. One primary hurdle is the struggle for standardization. Given the diverse objectives that CVCs have, crafting a universal metric matrix proves difficult.
Here’s how to address the standardization struggles:
- Tailored Metrics: Instead of aiming for a universal metric, CVCs can design metrics that cater to their specific goals while maintaining certain standard measures for broad comparisons.
- Collaborative Frameworks: Engage with other CVCs to collaboratively develop frameworks that capture the majority of shared interests, thus standardizing some aspects of the benchmarking process.
Furthermore, data acquisition is another stumbling block. Many startups tend to be reserved about their operations, making it challenging for CVCs to obtain timely and relevant data for benchmarking purposes.
Here’s how to tackle data dilemmas:
- Transparency Agreements: Establish agreements with startups from the onset to share certain data points that are critical for benchmarking, ensuring they understand its importance for both parties.
- Leverage Third-party Platforms: Utilize platforms or services specializing in collecting and analyzing startup and market data, which can fill gaps in internal data.
- Anonymous Data Pools: Create or join industry-specific pools where companies contribute anonymized data. This can be a middle ground, ensuring startups’ confidentiality while still providing CVCs with aggregate insights.
Moreover, even CVCs within the same industry may be guided by varying strategic goals, which complicates direct comparisons.
Here’s how to overcome objective oscillations:
- Categorization: Classify CVCs based on their core objectives. By comparing CVCs within these categories, it ensures more accurate and relevant benchmarking.
- Regular Strategy Reviews: Continuously assess and clarify the CVC’s strategic goals, ensuring they’re well-understood internally. This will make comparisons more aligned and purposeful.
- Educate and Collaborate: Engage in regular discussions and workshops with other CVCs. Sharing insights and understanding differences in strategic goals can pave the way for more nuanced benchmarking methods that consider these variations.
By proactively addressing these challenges, CVCs can better navigate the complexities of benchmarking and extract more meaningful insights from the process.
Augmenting Benchmarking with Edda
The journey of benchmarking, particularly in the realm of corporate venture capital, is no smooth sailing. Challenges abound, ranging from the elusive quest for standardization to the nuances of data acquisition. However, with technology at our disposal, the landscape of benchmarking is rapidly transforming.
Enter Edda. Edda’s state-of-the-art portfolio management features injects agility into the process, enabling CVCs to swiftly adapt to changing market dynamics. With its deep insights, CVCs can carve out tailored metrics that truly resonate with their unique strategic goals, overcoming the standardization challenge.
Collaborative frameworks take on a new dimension with Edda. It facilitates seamless collaboration, allowing teams to share, compare, and refine their metrics, fostering a community of shared insights and best practices.
Moreover, Edda’s robust analytics suite is not just about number crunching; it’s about deriving actionable insights that guide informed decision-making. This is pivotal as corporate venturing takes center stage in driving business innovation and growth. In this ever-evolving landscape, benchmarking ceases to be just a tool; it becomes the North Star.
And with Edda lighting the way, CVCs are well-equipped to navigate the complex seas of investment, ensuring they remain at the forefront of venture excellence.