Climbing the corporate ladder: How effective are CVCs?

Big food is quick to commit to open innovation but with tight revenue and profit expectations, how much are they really able to invest in CVC? NutritionInvestor considers the challenges faced by CVCs and alternative ways to partner with start-ups

There is a general perception among food and beverage industry folk that corporate venture funds (CVCs) are largely over-promising and under-delivering. A quick glance at community start-up platform FoodHack’s CVC database confirms that investment across large-scale CVCs has slowed over time.

Danone’s venture arm has made 18 investments and one exit since its inception in 2016, while the Coca-Cola Company’s Venturing & Emerging brands CVC has made only 11 investments and no exits in the 14 years it’s been operating.

Starved for innovation

The corporate model is inherently void of disruptive and open innovation, as major FMCGs focus their efforts on meeting revenue and profit targets to please shareholders. “The position of large companies is to always innovate upwards and incrementally, meaning innovation is a continuous improvement of a product they’ve already launched, or they launch incremental innovation in product extensions,” Change Foods’ chief marketing officer and former senior brand manager at Danone Irina Gerry tells NutritionInvestor.

“Big corporations tend to do large-scale incremental innovation incredibly well. What they don’t do well is disruptive smaller innovation as they are not rewarded highly for launching products that are less profitable than their current business,” she adds.

Laurent Marcel, CEO for Danone’s venture capital arm Danone Manifesto Ventures (DMV) acknowledges global FMCGs are not as quick to innovate as start-ups. “Start-ups tend to go faster and try more in wider territories, while large companies take more time to assess chances of success and scalability. In a way, it corresponds to different phases of business: young companies experiment to emerge, large companies innovate to scale,” he says.

Add to that the widespread belief that CVCs are something of a front for corporates to appear as though they are investing in disruptive start-ups and providing them with a platform for growth. “There are certainly situations where it’s more of a branding move that says ‘this is what we’re going to do and it looks like we’re doing open innovation,’” one venture capital executive says speaking off the record.

Similarly, small-business owner Rushina Shah admits that she had also believed CVCs to be a PR stunt rather than a genuine effort by big corporations to support start-ups. “When you see big corporates like Nestlé  and Unilever with venture funds you wonder if it’s just a way to look like they are supporting smaller businesses, especially when they are losing a lot of market share and business to smaller brands,” Shah notes.

She recalls during her time as a senior brand manager at Procter and Gamble (P&G), the company positioned haircare product line Aussie as a small, independent brand to appeal to a younger and more savvy audience. “Gen Z and Millennial audiences tend to want to purchase new and savvy products and they don’t often purchase products from those bigger companies,” Shah adds.

Yet, when she established her healthy snack business Insane Grain almost four years ago, Shah sought out investment from larger corporations, as well as the “the experiences that come with that funding”. In her case, an independent accelerator proved the best way to access corporations with experience in her market segment.

An alternative route

In 2002, Harvard Business School professor Henry Chesbrough said CVCs sought to advance one of two fundamental goals – either increasing sales and profits or exploiting synergies with new ventures. But today, M&A has become the preferred avenue for big companies looking to make strategic and financial gains by diversifying their offering.

“In our world, for R&D it’s often safer to do M&A,” entrepreneur and advisor to corporate funds Paddy Willis says. “Why would you spend a million or two developing or launching a brand or product that maybe falls flat on its face when you could bring on a cool new brand, scale it and hopefully not kill it in the process,” Willis adds.

A recent report published by Financial Times-backed media platform Dealroom revealed that although overall corporate investment in VCs is primed to reach an all-time high of €34 billion across all sectors in the first half of this year, the corporate share of all global VC investment was at its lowest point in 10 years in June (17%).

“More than 80% of CVC investments are doomed to fail because it takes so much time to even react to an application by a start-up,” says Hadar Sutovsky, vice-president of external innovation for Israeli agricultural chemicals company ICL Group. Having spent almost three years as part of Unilever’s innovation team back in 2016, Sutovsky has witnessed first-hand the strain FMCGs face in dedicating resources to their CVCs.

“These guys are in a tough position. It would be easier for them to just take the money and invest it in a fund and then they don’t take responsibility for the failure [of a start-up], they just become an LP,” Sutovsky notes.

Sutovsky is seeking out food and agtech start-ups to join ICL Group’s corporate accelerator ICL Planet. “An entity like ICL Planet is better at bridging the gap to open innovation,” she says. “It’s infusing our organisation with innovation and agility and everything else related to working with start-ups. In the long run, I think this collaboration can lead to follow-on investments and then [for us] to be more invested in the start-up. Later on, there is always the potential for an acquisition.”

Elsewhere, independent accelerators in the foodtech space are finding new and novel ways to conjoin corporations and start-ups outside of the traditional CVC relationship. Mission Ventures is one such example of an accelerator acting as an intermediary between one of the UK’s market-leading bread makers Warburtons and a handful of start-ups producing baked goods.

“It’s really about [gaining] management time and access to deal flow,” Mission Ventures founder Paddy Willis says of the model and how he believes it benefits corporates. “[Previously] Warburtons lost out on a couple of really good deals because they didn’t really have anything to offer beyond paying money for their shares,” he adds.

Willis founded organic baby food start-up Plum Baby in 2004 and went on to sell the business to a private equity company four years later when the company had reached annual retail sales of £15 million. He understands both the positives and negatives for both parties in the corporate/start-up partnership.

One such example is the difficult position a small business might find itself in when trying to source a buyer once it exits a CVC tie-up. If the corporate doesn’t snap up the firm itself after investing in and nurturing the business, others might also be dissuaded from acquiring it.

“There’s always a slight risk of that, but [the corporate] can make a reasonable argument that it’s not down to a fault in the business or the product line as much as the company is never going to fit the corporate strategy,” Willis attests. “Bearing in mind they could be investing in this business five or so years before it gets to an exit point, and therefore their corporate priorities have changed.”

Ultimately, there is much to gain on both sides of the start-up/corporate relationship. And while many view the CVC model as restrictive and detrimental for small businesses looking for corporate capital and guidance, big companies are clearly opening up to alternative partnership opportunities.