CVC creates little shareholder value, says Stryber’s Alex Mahr

Having spent years in and around corporate innovation – consulting on corporate innovation at Roland Berger, serving as strategy and innovation manager at Swisscom, and co-managing a CVC fund at PubliGroupe – Alex Mahr, co-founder of German venture builder Stryber, isn’t convinced corporate venture capital as an effective instrument for innovation.

One of the first things Mahr leaned about corporate innovation, during his time in the telecommunications sector, is how hard it is to make any changes. Despite telecoms companies having massive resources at hand to innovate – plenty of user experience and user interface engineers, as well as an R&D army – Mahr was surprised at how difficult it was to actually create a new way of doing things inside a big corporate.

“My realisation there was that if your whole organisation is geared towards incremental revenue increase of 2% over the year and just keep it stable, then there’s no point of arguing anything disruptive. I mean, there’s absolutely no point. New features, new products, yes, but no new business models,” he says on a recent episode of the CVC Unplugged podcast.

Later, as a CVC leader in a media company, he developed what would become a scepticism with the core mission of corporate venture capital. “The sole innovation strategy was basically: let’s invest globally in startups and then try to bring back the innovation to the mothership. And there’s a lot of problems with that statement, operationally,” he says.

No contol, no value

The core issue, according to Mahr comes down to the minority ownership that defines venture activity. Without a controlling stake, the value of that innovation, the argument goes, won’t show up directly on the financials.

While Mahr was managing the CVC, an investment bank carried out a “sum-of-its-parts” the parent media company. They concluded the market cap was discounted by 45% compared to the company’s fair asset value. What surprised Mahr was that the market was discounting the €230m CVC fund entirely, to zero. The shareholders, it seemed, did not value the fund.

“It’s basically the shareholders saying: Okay, you are reinvesting my money in other companies. I don’t want you to do that unless you obtain control. And if you have control, you can spin up a strategy that makes sense. Otherwise, I’m discounting this to zero. I’m not even interested in these kinds of investments,” explains Mahr.

“This was the moment for me that I realised your shareholders expect you to have that innovation on the operating part of the P&L.”

Without majority stakes, you cannot, by general accounting principles, consolidate a portfolio company’s innovation directly such that it shows up on the P&L. Without that, says Mahr, you’re not fulfilling the desires of your shareholders, which is counterproductive in a context where shareholder value is the name of the game.

“Corporate venture capital may or may not have a role in other aspects, but if this is your sole instrument for innovation, I think this is not the right way.”

No IP, no value

Many corporate investors say they can create value by fostering partnerships between their portfolio companies and the corporate parent company. But even this creates little value to the corporate shareholders, says Mahr, because it comes from minority holdings.

“Whatever you do in this partnership, it’s not your shareholder value, it’s the shareholder value of that company,” says Mahr.

Even if there is a revenue-share model of some kind that would bring in new revenue to the corporate, the value of the IP would not translate over to the parent’s financials without majority control.

Core vs business model innovation

But is the shareholder-centric view the right way to think about it? Innovation is, after all, a long-term project, and shareholders tend to concern themselves chiefly with the quarterly dividend-per-share.

Mahr agrees that there are several different types of innovation. Core innovation optimises the current business, for example a telecommunications company integrating artificial intelligence into its call centres to bring down costs. Business model innovation, meanwhile, might create a new branch for the company, for example that same telco partnering with a fintech startup to add lending services to its repertoire.

CVC is even less ideal for that longer-term business model innovation, says Mahr, because there is no clear path to majority ownership that would consolidate that innovation. If that fintech startup becomes successful, that success is never reflected on the corporate P&L.

Better ways to learn

One of CVC’s greatest strategic functions, in theory, is that of a periscope, looking around the corner to glean where the market is headed, and what technologies will become important in the future. Mahr questions if CVC is the most efficient way of achieving this.

“How big a fund do you need to put up to be really informed about the whole market? I I think you’re just looking at the fraction of the market at best,” he says. A data-driven, in-house analytic approach, he says, may be better.

It’s been over a decade now since Mahr has been active in the CVC space, and he recognises the progress that has been made in terms of best practices across the industry. It’s not the fact of CVC itself that he objects to, it does have a place, he says, but only in tandem with other innovation tools.

“I think most of the companies running a CVC fund, are much more advanced nowadays in how they use [CVC] as a tool in the whole context of innovation – but also, I still have a lot of conversations with companies that still perceive CVC as the solution, the sole solution, to innovation. I think that is completely wrong.”

Venture building

Ultimately, getting majority ownership of an innovative company happens one of two ways: you can buy it, or you can build it. M&A tends to be a pretty well-oiled machine at most corporations, but venture building is a different animal.

“Any business unit out there has been a corporate venture at some point,” says Mahr, pointing to examples of major strategic shifts like telecoms company Nokia, which started as a pulp mill business

Those massive leaps of faith, he argues, took place in a different corporate context, where there was wide leeway and long timelines to spend months and months formulating strategic business plans.

“In our fast paced environment today, I argue this is not applicable anymore,” he says, adding that providing a risk-managed environment to build out new internal ventures and strategic initiatives is a better way of introducing new ways of doing things.

Stryber, a portmanteau of “strategy” and “cyber” which also had the advantage of being a free domain name at the time of founding, today focuses on helping large corporates with an average of $5bn in revenue to build out those internal ventures. The name of the game is customer centricity, risk elimination – avoiding the need for strong outliers to maintain the wider portfolio – and shortening the innovation cycle.

Crucially, internal ventures tend to be wholly-owned, or at the very least majority controlled. For corporate executives who may seek innovation to grow the parent company by a certain amount over a set time window, being able to directly point to added revenue from internal ventures is an advantage.

Global Corporate Venturing is planning to run a webinar on venture building on February 14 as part of our The Next Wave series. If you would like to take part in the webinar please contact Maija Palmer, GCV editor, to discuss further.