THCB

Building a Corporate Venture Group That Matters

Screen Shot 2015-07-07 at 3.40.15 PM“Um…Who are you, and why are you in my office?”

This was the verbatim greeting we received from respected Sand Hill Road investors when we first introduced Merck’s Global Health Innovation Fund (GHI) in 2010.  However, since that time we’ve come a long way.  By investing in digital health, we’ve grown from a $125M venture fund to a $500M venture fund and have added a growth equity fund with M&A capabilities.

Today, these same investors remember our name and co-invest with us.

So how did we get here?  Certainly timing, luck and sponsorship are critical to anything done in a corporate environment.  Acting as a strategic and financial investor has also helped to earn the trust of entrepreneurs and fellow investors.  And, building a great team has been critical; but these are fairly obvious steps.

There are three other strategic maxims we found to be mandatory in building a corporate unit that’s successful.

#1 ESTABLISH FREEDOM TO OPERATE

Own your investment theses. The investment theses of GHI inform Merck leadership of the opportunities we see in the market and how they tie back to corporate strategy.  Ultimately, the company needs to recognize the option value the fund provides them.

Simplify governance. GHI has a single board with thumbs-up / thumbs-down approval.  While we leverage expertise inside of the company, GHI doesn’t need departmental or business unit approvals to get deals done.  This streamlines decision-making and allows GHI to move at market speed.

Have your own balance sheet.  The capital sits in the fund.  We don’t have to ask business units for capital.

Get quick results.  Invest in deals with a three- to five-year time horizon, as most organizations don’t have the patience to wait longer.

#2 AN ECOSYSTEM MINDSET IS MANDATORY

Point solutions struggle with adoption. Particularly in health care, technology point solutions typically fail to gain widespread adoption unless they are integrated seamlessly into IT infrastructure, reimbursement and, perhaps most importantly, workflow.

Invest in interdependencies and complementary capabilities.  Value creation is accelerated when companies with complementary capabilities start to create integrated solution offerings that truly solve customer needs.  For instance, a remote monitoring platform becomes more powerful when it is linked to a strong health data platform, predictive analytics and care coordination capabilities.  In real terms those combined capabilities can reduce readmissions from greater than 50 to single digit percentages.  That’s ecosystem investing.

#3 EXPAND YOUR INVESTOR TOOLKIT. 

Rethink your syndicates.  There is great value brought by financial venture firms. In cases where market makers are needed, it is corporate venture units that can provide the most value through access to technical expertise, corporate resources or distribution channels. 

Establish a firewalled emerging businesses unit.  Create a landing spot within the organization to nurture and grow acquired businesses while protecting them from the pressures of quarterly earnings.

Establish growth equity capabilities. There will be cases when portfolio companies reach an inflection point prior to your company’s ability to act.  To preserve the option value for your company, you may need to put greater amounts of capital to work. To achieve the organization’s goals, you need to stand ready to make markets.   You may also need to look at roll-ups to accelerate the pace of change.

The bottom line is corporate venture units need to produce results that actually matter to the corporation.  In most cases, being an external-facing unit provides option value for the corporation.  But increasingly, it also means setting up mechanisms to effectively address areas where the corporation is ill equipped to act on that option value.  That’s where these three maxims can help any corporate venture group to have accelerated impact.  But there’s room to do even more.

CALL TO ACTION: MAKING IT MATTER

While venture’s survival of the fittest approach is great for spurring individual innovations quickly, it isn’t always optimal for accelerating systemic change.  In some cases, such as health care, we may need to think about forms of pre-competitive collaborative efforts that can make a difference at scale.  While it’s wonderful that our respective portfolio companies are improving thousands of lives, for it to truly matter, we need to be impacting millions of lives.

In some cases standard setting is required, but more often than not what is required is actors who are willing to find new forms of investing to accelerate change.  As an example, let’s look at diabetes care.  There are hundreds of novel apps, devices and solutions all solving for pieces of the puzzle.  However, there’s no market function that is trying to integrate those solutions into a comprehensive offering.  A consortium could work together to figure out which combinations work best in specific populations.  While it might not initially select the absolute best components, such an effort could have the benefit of accelerating improved patient outcomes for millions.

While GHI has come a long way in four years, we are looking for others who will join us in our quest to make it truly matter in health care.

William Taranto is the President of Merck GHI Fund.

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