When Amazon launched its corporate venture capital (CVC) fund Alexa in June 2015, it did so in the enthusiastic tone typical of the company that’s gone from cheeky disruptor to envied behemoth in just two decades.
“Experiences designed around the human voice will fundamentally improve the way people use technology,” CEO Jeff Bezos announced. “Since introducing Amazon Echo, we’ve heard from developers, manufacturers and start-ups of all sizes who want to innovate with this new technology. We want to empower people to explore the boundaries of voice technology. We’re eager to see what they come up with.”
Sounds almost charitable – but of course Amazon has an agenda. The question is, what is that agenda? The answer, according to Gary Dushnitsky, Associate Professor of Strategy and Entrepreneurship at London Business School (LBS) is not as straightforward as you might think. Because not all corporate venturing programmes are the same.
“Corporate venture capital is an umbrella term for the practice of setting up a dedicated unit in order to engage and harness start-ups that are out there – separate from your internal R&D team,” says Dr Dushnitsky. “We’re not talking about joint ventures with established competitors, but specifically engaging with entrepreneurs and start-ups because there’s something different about them. They might envision or find different products, services and business models to you. It’s not necessarily about novel technology – though that can come into it. There is a commercial logic around it.”
CVC doesn’t always live up to the expectations of the parent organisation. Dushnitsky points to the experience of BlackBerry Partners Fund, which was set up by RIM and others to invest in startups that would enhance the value of the BlackBerry. On the rationale that the best athletes shouldn’t be locked into one platform, BlackBerry Partners Fund did not exclude its portfolio companies form running on other platforms. “Not tying themselves down was critical to getting the best ideas.” It was a way for BlackBerry to get sight of all the best ideas early on. What happened, however, was that some startups took BlackBerry money and developed Phone-facing solutions.
Corporate venturing has grown up
So why would you want to do it? That’s what any company needs to think through clearly before embarking on CVC, says Dr Dushnitsky. There’s more than one rationale and you need to know what you want to achieve before throwing your innovation budget at a startup. “It’s akin to, every company has a CMO but that doesn’t mean they all have the same marketing strategy. It’s critical to understand why you’re engaging with start-ups and how to structure the four Ss – strategy, structure, staffing and salary. Those four dimensions must be aligned for the CVC to deliver the value you intended it to deliver. A misalignment adds substantial challenges to what is already a challenging process.”
Challenging but potentially rewarding – and at least nobody launching a CVC unit will be met by raised eyebrows these days. There have been several waves of corporate venturing since the mid-1960s and it’s now regarded as an established, acceptable activity. “There’s been learning both in terms of the people running corporate venturing and in terms of understanding what it does,” says Dr Dushnitsky. “Corporate venturing has matured and grown and is becoming a viable business strategy. In the past you’d hear people referring to it as ‘the CEO’s pet project’ – now it has a meaningful business value. This doesn’t mean companies aren’t making mistakes or that corporate venturing will always succeed but it’s becoming more commonplace.”
Identifying your CVC strategy and purpose
Dr Dushnitsky has identified three approaches to corporate venturing and states that he sees a lot of confusion where a company thinks they are doing it for one purpose but mimics the structures and performance measures of another. Let’s take each of these three in turn:
1. Monetising the parent firm’s current offering
In 2011, BBC Worldwide participated in a US$20 million Series B round of investment into Viki. The Singapore-based venture gains the rights to popular TV shows, movies and music videos and then invites its online community translate them into local languages using its subtitling software. That content is available online and on mobile. To date one billion videos have been viewed on Viki and 200 million words translated.
At about the same time it invested in Viki, BBC Worldwide licensed over 200 hours of its own programmes to Viki. In the space of a few weeks, these were translated by thousands of enthusiasts into several Asian languages. “The BBC had a very high penetration rate in the English-speaking world but should they invest in making content for that part of the world, not knowing if there’s a market for it?” Dr Dushnitsky highlights the benefit to the parent corporation. “It made that content accessible and by the number of downloads and page views [the BBC] were able to gain insight into the size of the market.”
It was a clever move also because local people were translating it in a way that was true to their pop culture. It wasn’t a London view of what Filipinos think, it was being translated by hundreds of Filipinos and that gave you a much more alive, punchy result. Crucially, “The investment allowed BBC Worldwide to get a broader reach for its existing products and services”.
2. Discovering trends and offerings outside the parent firm
This second approach is about an established player wanting to scan the entrepreneurial landscape. Here, it is common to see CVC programmes with a clear mandate to identify and invest in novel technologies. Dr Dushnitsky observes that the logic extends beyond the narrow technological remit. Consider Coca-Cola’s Venturing and Emerging Brands (VEB) unit, which has been investing in nascent brands in North America since 2009, reviewing 150-200 brands every year. “They know that carbonated drinks aren’t the future, the market has probably peaked. This enables Coca-Cola to explore possible future trends and product categories that might not be on their immediate horizon.”
Products such as tea-based drinks and wellbeing drinks might not appeal to Coca-Cola’s existing customers but they are potentially major growth areas. “Yes, you can wait until one of these things hits big but by that point you might have missed the true opportunity and have to pay a hefty price to get it instead of your competitor getting it. So this is a way to find out from the outside what new products and services exist out there. Is there a grass-roots growing of ideas? By building relationships with companies earlier on you can see where the market is headed.”
3. Building an ecosystem for offerings both inside and outside the parent firm
The third approach to CVC entails a corporation that has developed a product or service that it believes could be valuable but it’s early days and requires others’ developments in order to take off.
“There’s a recognition that for the product or service they have developed to be valuable more stuff needs to happen elsewhere. It shares similarities with the first approach in that your goal is to monetise your own offerings but it overlaps with the second approach in that you don’t know what’s going to make this most valuable – you’re reaching out for the market to do that.”
Dr Dushnitsky points to Intel Capital, which launched a US$100 million Perceptual Computing Fund in 2013, with the aim of accelerating the development of software and applications to enable human-to-computer interactions.
So what is Amazon up to?
In August 2016, Amazon joined a US$35 million round through the Alexa Fund into the Canadian smart thermostat maker Ecobee, which had 24% share of the market, second only to Nest.
Most Alexa Fund investments to date have been relatively small. One such is Nucleus, which produces an Alexa-powered video intercom system. Amazon put US$5.6 million into it in August 2016 and worked with Nucleus’ developers on how best to implement the Alexa technology. Nucleus’ product – purchased via Amazon.com – sold out within a day of its launch. A few months later Amazon unveiled the Echo Show, an almost identical product. While Nucleus’ CEO Johnathan Frankel expressed “sadness”, Amazon claimed the two companies had shared the same vision. He insisted, “We want our partners to be successful”.
Today’s CVC space contains a range of players beyond the more obvious tech candidates. The most active CVC investors in 2016 were Intel Capital and Google Ventures in joint first place, followed by Salesforce Ventures and Comcast Ventures, according to venture capital database CB Insights. But everybody is at it. Samsung recently announced a US$1.1 billion fund called Next47 to invest in futuristic technologies such as AI, autonomous machines and blockchain-based data transfer. The car manufacturer BMW is working on raising a US$530 million fund for its BMW iVentures subsidiary. Even Campbell Soups has a CVC unit now.
The early signs appear positive for Amazon’s Alexa CVC experiment. The platform passed 15,000 skills in June, according to Voicebot. During that month, new skill introductions increased by 23%, up from the less than 10% growth in each of the prior three months. Compare this to Google Assistant, which has less than 400 voice apps and you might think it’s a no-brainer.
The recently announced collaboration with Microsoft voice service Cortona may further shape the role and success of the Alexa Fund. But will Amazon succeed in this space in the longer term? “We know Amazon is an organisation that has been able to deliver a new business model time and again,” says Dr Dushnitsky.” They already have a strong offering in this space. Now the question becomes, is the 100-million Alexa Fund the way to push voice forward – or not?”