Nothing ventured, nothing gained

Corporate venture capital investments in startups aren’t just focused on financial gains or acquiring a potential disruptor — as three Australian CVCs explain, they’re meant to drive innovation inside the corporations themselves.

Increasingly, corporations are keen to tell disruptors in their sectors that they are very interested in partnerships rather than takeovers. A cynical view is that incumbents are mostly motivated to tie up the best and brightest people, ideas and technologies before their competitors.

Now a more positive view, shared by leaders of corporate venture capital (CVC) offshoots of incumbent organisations, is that these partnerships can be genuinely collaborative. Although the capital exchange is initially one-directional, the idea is to encourage sharing of knowledge and innovation in both directions, while giving talented startup founders agency. These startups are backed to drive change using corporate cash, knowledge and networks to help them grow.

“CVC is important because the simple reality is that big corporates are driving the economy,” says Ben Heap GAICD, chair of CommBank’s venture scaling unit, x15ventures. “A startup can only achieve so much in the early years, whereas if you can create that entrepreneurial spirit within your biggest banks, mining companies and so on, you can really drive big change.”

Any corporate looking to do CVC should have a good think about what they want to achieve, advises Hein Vogel, CEO of Touch Ventures, whose biggest shareholder is Afterpay. “It’s a way for corporates to innovate, but it’s got to be done for the right reasons,” he says. “The companies we partner with are looking for that strategic benefit, and corporate venturing is very difficult to do well in Australia — it’s still an emerging industry.”

Danny Gilligan, co-founder and MD of Reinventure Group, which is partnered with Westpac, agrees CVC is difficult and suggests leaders in corporates read The Innovator’s Dilemma, a 1997 book by Clayton Christensen, who coined the term “disruptive technologies” in the mid-1990s.

“I don’t think large enterprises, particularly publicly listed companies with higher-end CEOs, are capable of authentic entrepreneurship and disruptive innovation,” warns Gilligan. “Just full stop. All disruptive innovation has to happen outside the organisation completely.”

Risk-taking inside corporates

Every corporation aspires to innovate more, although as Toby Norton-Smith, managing director of x15ventures notes, they’re often stuck in the classic incumbent’s dilemma of serving large, diverse customer bases — and having to serve those broad cohorts consistently using legacy systems, all the while maintaining regulatory and social licences. “It’s not because people inside corporations don’t have the capability, but they have a huge set of constraints to entrepreneurialism,” he says. “Ventures outside traditional corporate structures can be an effective way to focus talent and problem- solving when you give a team agency to unleash that entrepreneurialism in an environment that’s not the all-in, quit-your-job, garage startup.”

The idea that someone can only be an entrepreneur by quitting their job to focus on a startup full-time is skewed towards people who are privileged, adds Norton-Smith. He acknowledges it takes guts and grit to go all-in, but typically it’s only done by people who can afford to take that leap. “What I love about x15 is that we’re seeing people discover they’re an entrepreneur,” he says. “We make no bones about having a performance culture that heavily incentivises them on success — they have to succeed or the venture will be switched off — but we also have a bit more balance of risk/ return in our model than the classic 100 per cent of equity with complete risk exposure.”

Gilligan accepts risk differently. As an all-in co- founder of Reinventure, he’s prepared to live with it to reap bigger rewards. He says while entrepreneurs are the “ultimate metabolisers of risk” he’s found it difficult to have the risk conversation with people inside corporations. “I feel ‘risk’ gets used in a very unsophisticated way and quite often it’s used as a mechanism to shut down conversation around a topic. Corporations unreasonably weight short-term risks over long-term risks. While they attempt to minimise and often have a zero risk bias in the short term, the amount of risk they’re stacking into the longer-term horizon is enormous and undiscussed.”

Touch Ventures manages risk with a hybrid model of shareholder backing for its ventures. Afterpay has the largest holding and Touch has a collaboration agreement with Afterpay to share deals. “Afterpay is our major backer, but at the end of the day, we work for all shareholders, so we’re really aligned to creating value for them,” says Vogel. “We get to work with Afterpay, although we can also act independently when looking at opportunities — and whether we feel the opportunity will deliver financial returns to us — in addition to perhaps providing some synergies between Afterpay the portfolio company.”

Executive performance and board oversight

CVC boards are very aware that — according to the ABS — most Australian startups will fail at a rate of 60 per cent within three years, and up to 97 per cent overall. Every venture capitalist accepts some risk, although they also aim to keep losses low by adopting a “fail fast” mindset. “You’re going to fail more often than you succeed,” says Heap. “If you’re not failing more often than you’re succeeding, you’re probably not pushing as far as you should.”

Any corporation looking to get into CVC needs to be very clear on its venture portfolio objectives and risk settings, he suggests, and boards need to ensure management delivers more regular updates to help make calls on failing fast versus injecting more capital. “I will candidly say our strategy has changed in the past 20 months,” adds Norton-Smith. “We’ve adopted an OKR (objectives and key results) framework to measure performance, which gives a nice blend of ambitions while accepting you won’t consistently achieve them all. So it’s been useful to discuss it with the board a number of times — much more than the typical annual cycle.”

Vogel agrees that it’s vital for CVCs to update their boards more frequently. He says the Touch Ventures management team has put in a lot of work refining its performance-tracking processes. “Our board has been fantastic at focusing on the right things at the right time. They make sure our team stays inside our mandate and is delivering on our objectives to our agreed timelines. Where appropriate, the board will give advice, of course, but there’s a proper separation between management and board, which is quite typical for public companies.”

Reinventure’s co-founders have skin in the game, which Gilligan suggests can mean they set more long-term targets than their counterparts at other CVCs. He argues this could be because executive incentives are tied to a set of strategic objectives, rather than financial returns, which is a mistake because it signals to entrepreneurs that the fund doesn’t care if they make money.

“Most executives are working on a three-year horizon until the next rung on their career ladder. There is no next rung for us,” he says. “We get paid exactly as the entrepreneur gets paid, which means from the second we invest, we’re fully aligned to their success. It gives you that depth of focus on building your craft, expertise and networks. We’ve been doing this for nine years and have seen five CIOs at Westpac on our investment committee in our time there — while we’re still in the same job.”

The future is disruptive

Before fintech made switching services and accounts so easy, customers tended to wait until the last straw before dumping their bank. Gilligan suggests that companies in any sector get disrupted because they have cultures of complacency — teams simply aren’t incentivised to innovate.

“If your executive team’s incentives are not aligned to long-term innovation, you’re already behind the curve,” he says. “The amount of intellectual capital that boards and executive teams put towards designing incentive mechanisms across an organisation is negligible.”

CVC structures

Reinventure

Launched:  2014, backed by Westpac.

Structure:  Reinventure was set up as an independent “founder-first” CVC with Westpac as a limited partner providing a contractually dedicated pool of risk capital.

Reinventure operates autonomously and its team decides which investments to make. Co-founders Danny Gilligan and Simon Cant have their own capital invested in the CVC.

How it plays out:  “Our incentives are fully aligned with those of the entrepreneur rather than the enterprise,” says managing director Gilligan. “We have skin in the game, which is essential. I don’t think any other executive at a CVC has their own capital at risk in their ideas.”

Touch Ventures

Launched: 2019, backed by Afterpay.

Board: Michael Jefferies FAICD (chair), Jim Davis, Sophie Karzis, Associate Professor John McBain AO and Hugh W Robertson.

Structure: Touch Ventures has a collaboration agreement with its largest shareholder, Afterpay, until at least 2025. To date, most investments have been originated by Afterpay, and the CVC’s management mainly seeks opportunities that could benefit from Afterpay’s experience, merchants and customers.

Touch Ventures became a publicly listed company in September 2021.

How it plays out: “We are very closely related to Afterpay and act in their best interest, but Afterpay isn’t looking to influence the outcome,” says CEO Hein Vogel. “Afterpay backs our team and board to act independently, to do things a bit more creatively, without worrying what it means for Afterpay.”

x15ventures

Launched: early 2020, backed by CommBank.

Board: Ben Heap GAICD (chair), independent non- executive director Tracy Whybrow GAICD, and senior executives Stuart Munro, Monique Macleod GAICD, Jacqueline Schrader MAICD and Toby Norton-Smith.

Structure: x15ventures is a wholly-owned subsidiary of CBA with its own management team and delivery model. It builds, acquires and invests in early-stage digital ventures, which it identifies as capable of scaling through CBA’s assets to create value for the bank’s core business and its 15 million customers. The bank partnered with Microsoft, KPMG, Square Peg, StartMate and Zetta.

How it plays out: “The purpose of a CVC is to drive change, which can be different to the organisation’s idea of change,” says Heap.

“CBA has some really mature lines of business and its job is to continue to deliver for customers. Venturing is about looking at opportunities differently. It involves mentoring innovation, and by the time something is even close to mature, it should be getting pushed back into the mothership.”

What CVCs are watching

CVC leaders nominate innovation trends they’re keeping a close eye on.

Danny Gilligan Co-founder Reinventure Group

“Web3, which is a protocol broader than crypto. Web3 models are being built as open-source, composable blockchain constructs, which means every problem only needs to get solved once — so the rate of innovation is exploding. And they have powerful incentive mechanisms built into them natively. These young entrepreneurs have this beautifully innate understanding of behavioural economics that I don’t see broadly in business at all. It  really stems from our core thesis that protocols are eating corporations. That’s probably not what Company Director readers want to hear, but for us, the evidence is compelling.”

Toby Norton-Smith MD x15ventures

“We’re focused on very broad areas relevant to CommBank’s customer base, such as money management, home buying and loans. Our strategy is premised around making sure we can provide advantage to those ventures by leveraging the brand and assets of CommBank. We’re especially focused on ventures that will appeal to Gen Z customers. I don’t think we’ll land the next Gen Z mega-app — the next Tik Tok — but we are looking at trends in transactions, savings and financial wellbeing.”

Hein Vogel CEO Touch Ventures

“We look at sectors that are going to operate well in the future economy, as consumer behaviour is obviously changing and even COVID-19 set up significant impact on how SMBs operate. The way in which companies operate and scale is very different to what it was 10 or 20 years ago — it’s never been easier or cheaper to launch an online retailer. We’re not looking to invest in bricks-and- mortar retail. We focus on companies that operate in the retail innovation space, consumer finance and data-related businesses, particularly where there’s some relevance to Afterpay.”