Table of Contents

1. Introduction

2. The Case for Enterprise Venturing

3. Choosing Your Path in the Startup Ecosystem

4. Common Problems and Challenges

5. Case Study: Lessons Learned from Roivant Sciences

6. Additional Factors for Success in Enterprise Venturing

7. Conclusion

Introduction

In the bustling realm of business today, companies large and small are eager to tap into the vibrant energy of the startup world and unlock fresh growth opportunities. As a former Principal at Roivant Sciences, where I spent five rewarding years, I'm excited to share insights on how enterprises can join the startup game and create substantial value for their shareholders.

We'll explore both the direct and indirect ways to dive into the startup arena, highlight the perks of enterprise venturing, and address some common roadblocks organizations often face on this path. Roivant Sciences serves as our practical example in this journey, a company that, from my firsthand experience, managed to raise over $3 billion from notable investors like the Softbank Vision Fund and Founders Fund. During my tenure, we built and scaled over 35 startups in the biotechnology and healthcare technology sectors, saw numerous incubations make their debut on the NYSE and NASDAQ, and exited them to strategic buyers including Sumitomo Dainippon.

So, grab a cup of coffee and join me as we dive into the lively and sometimes unpredictable world of corporate venturing.

The Case for Enterprise Venturing

Engaging in the startup ecosystem can offer numerous advantages to traditional enterprises. Here's why organizations should consider this approach:

• Enhanced Shareholder Value: The potential for startups to significantly boost shareholder value is immense. The global startup ecosystem's market capitalization adds up to trillions of dollars. Enterprises that choose to invest in or partner with startups can claim a slice of this pie, resulting in substantial returns for their shareholders. Just take a moment to recall the world-changing products of the past few decades; how many were the brainchildren of startups? Industry giants like Apple, Google, Amazon, Microsoft, and Tesla all started small and made a profound impact. But let's also remember the legacy businesses that got disrupted by these startups, such as Nokia, Kodak, BlackBerry, Blockbuster, and Yahoo. These examples serve as a stark reminder of the disruptive power startups wield. The shift is visible even in the S&P 500, where the average lifespan of listed companies has declined significantly over the past decade, thanks to disruptors replacing legacy businesses.

• Revitalized Product Portfolio: Collaborating with startups grants enterprises access to innovative products and solutions, breathing new life into their existing offerings. As current products reach the end of their lifecycle, startups bring fresh innovation to ensure the company remains relevant and competitive.

• Refreshing Go-to-Market Strategies: Startups are known for their unique go-to-market strategies and willingness to experiment. By allying with startups, enterprises gain insights into different approaches to sales, marketing, and customer acquisition. This knowledge helps refine their go-to-market strategies, enhancing overall competitiveness. Venturing can serve as 'revenue R&D'—hard to achieve within established organizations due to fixed budgets, entrenched strategies, and prevalent short-term thinking—but startups can provide valuable lessons here.

• Talent Attraction: A dynamic work environment that actively engages with startups can be especially attractive to younger generations. Offering the opportunity to collaborate with innovative startups and be part of a corporate venturing team can attract top talent and foster an entrepreneurial culture within the organization.

• Talent Retention: The chance to interact with the startup ecosystem can be highly rewarding for employees. HR departments can create rotational programs centered on venturing initiatives, helping to train, retain top performers, and provide a platform for high-potential 'misfits' who thrive in less structured, bureaucracy-lite environments.

The ultimate aim of any enterprise venturing stream should be to invest in startups that can increase the enterprise’s revenue by at least 10% a decade from now. It's an ambitious target unlikely to be reached with current products, and its impact on the top line will likely surpass any benefits from cost-cutting measures on the bottom line. The prospect of boosting revenue by 10% over the next 10 years is an opportunity too valuable to ignore, and it might just be the compelling reason enterprise leadership needs to venture into the startup world.

Choosing Your Path in the Startup Ecosystem

To make their mark in the startup world, enterprises have two primary routes: direct and indirect. The direct route, further divided into "finding" and "building" startups, requires a hands-on approach. On the other hand, indirect methods offer ways to engage with startups without claiming full ownership (at least initially). Let's dissect these options further:

Direct Options

• "Finding Startups"

  • Strategic Investing: This method entails directly investing in promising startups. It necessitates a scouting team, a robust due diligence process, an investment committee, and portfolio management capabilities. Such strategic investments can grant access to innovative technologies, intellectual property, talented teams, and potentially lucrative returns if the startup succeeds. Strategic investment activities are sometimes bundled in so-called Corporate Venture Funds. Yet, risks exist. Strategic investments can often get overshadowed within large enterprises and fail to make significant impact. This may result in resource misallocation and a tarnished reputation among startups over time. For startups, having a strategic investor on board also has its pros and cons, often limiting their ability to work with the investor's competitors and potentially making them less attractive for venture capital investors.

  • Startup Acquisition: This approach involves acquiring startups outright for their customer relationships, IP, data, or talent. This strategy facilitates a quick entry into the startup sphere with immediate access to valuable resources. However, acquired startups may struggle to thrive within the larger organization, and the enterprise may not fully leverage their value. Moreover, key talent, particularly founders, may exit once the acquisition terms allow, as they often feel stifled in larger organizational settings.

• "Building Startups"

  • Enterprises can establish their own startups, which is called greenfield venture creation, using internal resources or recruiting new talent. This method affords complete control over the new venture, encompassing its vision, product, go-to-market strategy, and talent. Companies like Mach49 have succeeded in aiding enterprises to create internal Venture Factories, assisting new companies through ideation, incubation, acceleration, and scaling phases. During my time at Roivant, greenfield venture creation was one of our key strategies. We created dedicated incubation teams for each venture, providing a limited budget and timeline to demonstrate viability. It's important to note, however, that this approach is inherently risk-laden. Enterprises typically focus on maximizing efficiency through established management strategies, so greenfield venture creation is often uncharted territory, requiring external support to navigate successfully.

Indirect Options

• Startup Partnerships: Collaborating with startups offers mutual benefits. Startups gain revenue, validation, and networking opportunities, while enterprises get a taste of innovative technologies and insights into the startup ecosystem. Partnerships can also function as scouting mechanisms to spot emerging trends and potential collaboration areas, and sometimes result in acquisitions of startups with impactful technologies. The beauty of this option lies in its scale - enterprises can partner with more startups than they could ever build, invest in, or acquire, thus widening their market perspective and options. One notable player in startup partnerships is 27pilots, recently acquired by Deloitte, which pioneered the Venture Client model and authored a book on the topic.

• Limited Partnership: Becoming limited partners in venture funds provides enterprises with exposure to a broad portfolio of startups, enabling diversification.

• Accelerators and Incubators: By financially or otherwise supporting accelerators and incubators, enterprises can gain exposure to promising startups and stay abreast of industry trends.

Common Problems and Challenges

Venturing into the startup landscape is a rewarding but challenging endeavor. Enterprises, particularly those opting to invest in startups or create them from scratch, are likely to encounter several roadblocks. These include:

• Limited Entrepreneurial Experience: Many executives within large organizations lack firsthand startup-building experience. Building and running a startup demands a unique skill set, encompassing agility, adaptability, and a high risk tolerance. Enterprises need to bridge this skill gap by offering support, training, and mentorship to their leaders or by recruiting individuals with startup experience.

• Inadequate Reward Structures: In numerous large companies, rewards such as promotions or bonuses are tied to the success of existing business lines, leaving little incentive for venturing.

• Conflicting Priorities: Juggling short-term shareholder demands with long-term startup investments can be challenging. While startups need time and resources to flourish, shareholders often seek immediate returns and profitability. Striking the right balance requires careful planning and effective communication.

• Complacency: Without immediate pressure to invest in venturing, complacency can set in, especially when businesses are performing well. Recognize that the ideal time to venture is when your current products are peaking, anticipating that your innovation efforts will bear fruit when legacy products begin to lose market traction.

• Organizational Immune Systems: Enterprises, with their established hierarchies and bureaucracies, often resist the introduction of corporate venturing initiatives. To counter this resistance, top leadership must drive change, communicate effectively, and manage the cultural shift within the organization.

• Risk Aversion: Companies often prioritize safeguarding their existing markets and might hesitate to invest in new, untested ideas that could disrupt their current business models.

• Fear of Cannibalization: Firms might resist innovation that threatens to cannibalize their existing products or services.

• Lack of Access: Building credibility and meaningful relationships with startups can be challenging without the right connections or understanding of the startup culture. Hot startups, typically courted by top-tier investors like a16z, Sequoia Capital, Tiger Global, Softbank Vision Fund, Founders Fund, often prefer these investors over strategic corporate investors. Enterprises must actively engage with the startup ecosystem, build networks, and foster an environment of trust. They can leverage their unique data or offer to pilot startup technology within their business units to gain a foot in the door.

Despite these hurdles, it's crucial to remember that the potential benefits of entering the startup game, and the potential risks of staying on the sidelines, are too significant to ignore. The challenges aren't reasons to avoid innovation but to approach it strategically and with a willingness to learn and adapt.

Case Study: Lessons Learned from Roivant Sciences

Roivant Sciences, founded in New York in 2014 by Vivek Ramaswamy, Bill Symonds, Lawrence Friedhoff, and Alan Roemer, is a principal investment firm that successfully implemented enterprise venturing by adopting a family of companies approach. This strategy led to the creation of over 35 ventures, or "Vants," in the biopharmaceutical and healthcare technology space, many of which went on to attract external capital, go public, or merge with other companies.

In my five years with Roivant, initially as part of the Business Development & Licensing team of Roivant Pharma and later as a Principal on the Roivant Health team, I was deeply involved with a number of ventures, particularly Lokavant, Primavant, Alyvant, and Emavant.

These "Vants" served varied roles in the healthcare and biopharmaceutical ecosystem. Lokavant was dedicated to refining clinical operations technology, while Primavant facilitated crucial payer-pharma negotiations. On the other hand, Alyvant was engaged in the emerging telemedicine and online pharmacy sector, and Emavant addressed the challenge of providing effective disease management platforms for conditions like diabetes.

Each venture had its unique complexities and offered different insights into the landscape of healthcare technology and biopharma. Here are some of the key lessons about enterprise venturing we learned along the way:

• Build a Portfolio: Like a venture capital fund, you should aim to build a portfolio of 10-20 ventures. Given the low success rate of startups, it's risky to invest all your resources into a single project.

• Avoid Analysis Paralysis: Roivant Sciences adopted a more agile and decisive decision-making process, recognizing that overanalyzing potential deals can lead to missed opportunities.

• Creative Deal-Making: Roivant Sciences excelled in creating win-win scenarios, leveraging its resources to provide value to startups while protecting its own interests.

• Talent Selection: Hiring executives with corporate backgrounds did not always translate into success in the startup world. Instead, Roivant found that recruiting individuals with substantial startup experience and a generalist mindset proved more effective.

• Incentivization Matters: To foster entrepreneurial drive, Roivant explored alternative compensation models, including stock options, for leaders within portfolio companies.

• Continuous Iteration: Roivant constantly refined its organizational and governance models, adapting them to better support startups' autonomy and success. They shifted from providing shared services to promoting decentralization and ownership, which facilitated smoother business transitions.

• Failure is Inevitable: Roivant recognized the high failure rate of startups and cultivated a culture that views failure as a learning opportunity.

• Constrained Resources: Roivant provided startups with a fixed timeline and budget to prove their viability, mirroring the discipline of traditional venture capital.

• External Validation: Roivant encouraged startups to seek external investment to validate their own investment theses and ensure they were in line with broader market interests.

• Meritocracy: Roivant upheld a performance-based culture, rewarding high performers and weeding out underperformers. Underperformance was viewed as detrimental to the overall success of the organization.

In summary, Roivant Sciences' approach to enterprise venturing showcases the importance of a diversified investment approach, agile decision-making, creative negotiation, strategic talent selection, and an iterative learning process. It also highlights the importance of acknowledging and learning from failure, maintaining disciplined resource allocation, seeking external validation, and upholding a performance-based culture.

Additional Factors for Success in Enterprise Venturing

Beyond the lessons learned from Roivant Sciences, there are other important factors to consider to ensure the success of enterprise venturing initiatives. Here are some key elements:

• Define Your Goals: For successful venturing, it's crucial to have a clear understanding of your objectives. These could range from driving revenue growth to meeting ESG criteria or solving niche problems. Aligning your ventures with these goals will guide your strategic decisions and help you measure success.

• Executive Buy-In: Top executives' support is pivotal for the survival and success of venturing initiatives. Since executives often make decisions based on quarterly outcomes, it's essential they embrace a long-term perspective when backing venturing efforts.

• Long-Term Thinking: Successful venturing requires a long-term perspective that resists pressure for immediate results. Startups need time to grow and reach their full potential, and immediate quarterly results shouldn't derail this long-term vision.

• Capital Allocation: Adequate capital and resources should be allocated to support the ventures through their growth stages. Venturing involves risk and potential failure; hence a willingness to invest even when ventures might fail is part of the journey.

• Leverage Unfair Advantage: Capitalize on your unique strengths—be it domain expertise, talent pool, customer relationships, distribution channels, data, or technology. These elements give you an edge in the competitive startup landscape and increase the chances of success.

• Ideation Process: Establish a robust ideation process that gathers insights from across the organization. Consider looking globally at what startups and employees outside of your core geography are doing for inspiration.

• Talent and Entrepreneurial Experience: Hire individuals with significant startup experience or consider training your existing staff to develop entrepreneurial capabilities. The gap between a functional expert and an effective entrepreneur can be vast, and bridging this gap is critical to venture success.

• Respect for Founders: Demonstrate respect for the hard work of founders and their teams. Understand their perspectives and motivations and recognize that startups' scale today doesn't determine their future potential.

• Building Connections: Actively engage with the startup ecosystem, foster partnerships, and establish your reputation as a credible and valuable partner for startups.

• External Support: Leverage external resources, such as our full-stack Venture-as-a-Service, the Venture Factory approach from Mach49, or the Venture Client model by 27 pilots, to gain expertise and guidance your internal team may lack.

• Customer Orientation: Prioritize customer feedback and incorporate it into your product development. Enterprises often struggle with this due to their scale, but startups must be customer-centric.

• MVP Mentality: Validate your venture's viability through a Minimum Viable Product (MVP) before investing heavily in full-fledged product development. This ensures you're building something customers want before allocating significant resources.

• Double Timelines: Always expect ventures to take longer and cost more than initially planned. Startups are full of unforeseen risks and challenges, and being prepared for this reality helps maintain realistic expectations.

• Don't Fall in Love: Be comfortable ending ventures that aren't performing as expected. The sunk cost fallacy can be a trap, but it's important to recognize when to cut losses and move on to more promising opportunities.

Conclusion

Enterprise venturing presents a valuable opportunity for organizations to engage with the startup ecosystem and leverage it for growth and innovation. However, successful venturing requires a thoughtful approach, considering factors such as the backing of top executives, long-term thinking, sufficient capital allocation, and more. Leveraging insights from successful ventures like Roivant Sciences and being aware of common pitfalls can help organizations navigate their own enterprise venturing journey, leading to a thriving ecosystem of innovation and growth.