The Three Internal Barriers to Deep-Tech Corporate Venturing

The flow of capital to deep-tech startups is rapidly becoming a torrent. From 2016 to 2020, annual investments in startups focused on commercializing emerging technologies such as biotechnology, robotics, and quantum computing grew in value from $15 billion to $60 billion worldwide, with the average private investment more than tripling in size. Deep-tech corporate venturing (CV) — the second-largest source of this funding — grew from $5.1 billion in 2016 to $18.3 billion in 2020.

The intent behind these deep-tech corporate investments is clear. In theory, deep-tech CV enables companies to quickly gain expertise in leading-edge technologies and pursue potentially disruptive innovations without building internal capabilities from scratch. In reality, however, such funding can come with high hurdles, such as time-to-market durations that often exceed five years, and the greater risk inherent to novel and complex technologies. The difficulties are underscored by an analysis we conducted using CV data from 46 international companies that was collected under the auspices of IESE Business School in 2018. It revealed that 68.9% of the initiatives failed to deliver their expected results.

To better understand the most significant barriers to success in deep-tech CV and the tactics that chief innovation officers (CINOs) can use to achieve more positive results, we turned to East and Southeast Asia for our new study. (In 2019, Asian companies accounted for 40% of corporate venture investments in startups, the largest percentage globally.) The study included an analysis of CV in 180 companies and interviews with 77 of their innovation executives, most of whom work in companies with CV portfolios that include a 25% or greater concentration of deep-tech startups. It revealed three internal barriers that CINOs commonly encounter with deep-tech startups and the ways in which they can be overcome.

Barrier 1: Not-Invented-Here Syndrome

The first barrier is a familiar one. Too often, corporate R&D teams prefer to develop technology internally rather than collaborate with external partners. Thus, when CV teams propose an external innovation to bridge an internal technology gap or open a new growth avenue, R&D resists. This resistance is often rooted in the fear of losing control of the technology or in doubts about the capabilities of the startup. In any case, collaboration proposals can be rejected without further analysis, and growth opportunities are lost.

To counter this syndrome and lay the groundwork for successful collaborations with deep-tech startups, CINOs should secure the right technical expertise to evaluate CV opportunities and neutralize the internal bias against external innovation sourcing. This expertise can come from the R&D department itself, the CV team, or an outside expert with an independent perspective. Consider LG Technology Ventures, the corporate venture capital arm of LG Group, which has over $400 million in investments in deep-tech startups. There, internal due diligence reviews are complemented with an external expert opinion whenever there is a risk of internal bias against an opportunity.

In other companies, we found that a shared mandate between R&D and CV and/or a shared leader with experience in both disciplines helps them overcome internal biases and siloed decision-making and encourages them to make sourcing choices that are best for the organization as a whole.

Barrier 2: Risk Aversion

Working with deep-tech startups often involves long time horizons, substantial capital investment, product complexity, and founders who lack business experience. Thus, deep tech is often associated with high risk, which can cause corporate leaders to block efforts to adopt and catalyze external innovation.

The antidote to risk aversion is risk management. Executives assign different risk profiles to various CV mechanisms. For example, they see startup acquisitions, corporate venture capital, and venture builders as high risk. (With venture building, the corporation allocates resources to the creation of an external venture through talent recruitment — usually external — and the development of a business model that will benefit the corporation.) Hackathons, scouting missions, and challenge prizes, on the other hand, are viewed as low risk. So when CINOs consider the combination of CV mechanisms to use, it’s important that they evaluate the amount of risk their colleagues in senior management are willing to take on and choose mechanisms that match it.

Another way to manage risk is to tailor CV pitches to other management team members. Rather than starting with a discussion of the technology, for example, CINOs should begin their pitches with the business problem or opportunity that the proposed innovation will address and the value it can deliver to the company. They should keep their audience in mind, too: Executive committees tend to prefer innovations that support the business’s long-term strategy, while business unit leaders are more likely to respond to investments that deliver a short- or midterm impact on profitability and resources.

CINOs can also demonstrate the value of proposed investments by creating a sandbox (or other low-risk/low-cost testing environment) to develop minimum proofs of concept. For example, Thailand’s Siam Commercial Bank created a sandbox that mirrors its live environment to provide third-party developers and entrepreneurs with a way to test and validate their apps against the bank’s APIs.

Finally, savvy CINOs can manage risk by allocating resources to CV innovations in a progressive manner. Staged investments limit the financial downside in worst-case scenarios and can help ease the misgivings of senior executives.

Barrier 3: Top-Down Corporate Cultures

A top-down corporate culture can stifle ideas originating on the front line and erode a startup team’s motivation. Such cultures usually feature centralized decision-making and standardized processes. They are highly hierarchical, with their vision, objectives, and implementation plans cascading down from the top of the company.

This kind of culture is especially challenging for CV when upper management lacks expertise in — and an appetite for — deep tech, which makes it difficult to secure the buy-in of the executive committee. It also requires layers of approvals, which can slow CV decision-making and communication.

CINOs can use several tactics to overcome this barrier. While changing the culture is likely to be a bridge too far for CINOs, they can enlist influential internal advocates, such as executive committee members or business unit heads, or turn to external corporate innovation experts to help make a convincing case for external innovation to the senior management team.

It’s also helpful to establish policies that provide some degree of autonomy to CV teams. Some companies we studied provide the CV team with a sponsor in the executive committee who is empowered to shortcut venturing approvals. Others, such as Samsung Ventures, set a ceiling for deep-tech CV investments, below which the involvement of upper management and a business unit may not be required. This enables the CV team to work faster when making minor investments, such as conducting hackathons or running pilot programs.

The benefits of deep-tech CV, including gaining access to leading-edge technologies and fielding innovative new products and services, are compelling. That’s why Toyota backed autonomous mobility startup Pony.ai, Samsung invested in quantum computing startup IonQ, and Lenovo partnered with lithium-ion battery startup CosMX. Indeed, 71% of the companies we studied are planning to increase their innovation efforts involving deep-tech startups during the next five years. To capture the payoffs of deep-tech CV, however, CINOs will need to recognize and overcome the internal barriers to success.