Co investing has become an increasingly popular strategy for companies looking to gain access to new opportunities and capabilities. By co investing alongside other firms, companies can tap into new markets, technologies or talent pools in a capital efficient manner. However, co investments also come with unique risks and challenges. In this article, we will examine key examples of successful co investing arrangements and highlight important considerations for companies exploring this model.
Strategic alignment is critical for co investing success
One of the most important factors for a successful co investment is strategic alignment between the participating companies. The investment should advance shared objectives that could not be easily achieved independently. For example, in 2015 Johnson & Johnson co invested with Pfizer to form a new immunology drug company called Janssen Biotech. Both companies contributed assets around inflammatory disease drugs, allowing them to consolidate R&D efforts and maximize commercial opportunities neither could realize alone. However, if co investors’ interests diverge over the course of a deal, substantial value can be lost through disputes or inefficient decision making. Companies should carefully evaluate the motivations and incentives of potential co investment partners upfront.
Governance structure enables flexibility balanced with oversight
The governance model is another critical consideration for co investments. Co investors must strike the right balance between flexibility to adapt to changing conditions and appropriate oversight mechanisms. In the Janssen Biotech example, both Johnson & Johnson and Pfizer received representation on the new company’s board while day-to-day operations were delegated to an independent management team. This allowed the parent companies to maintain involvement at a strategic level while enabling autonomous leadership focused on the subsidiary’s priorities. Companies should take care to negotiate governance terms that provide the room to maneuver required for the co invested entity to thrive.
Co investing through a joint venture can mitigate risk
For co investments targeting highly uncertain markets or technologies, utilizing a joint venture structure can help mitigate risk. In 2016, Apple co invested $1 billion alongside automaker Didi Chuxing to form Didi Chuxing Technology. Rather than acquire the ridesharing startup outright, Apple made a strategic investment to gain exposure to emerging mobility markets and autonomous driving technology. The joint venture allowed Apple to participate without taking on full ownership. For complex or capital intensive co investments, a joint venture model can similarly help companies test the waters before fully committing.
Co investing through corporate venture arms offers flexibility
An increasingly popular approach to co investing is through dedicated corporate venture capital arms. Google, Intel, Microsoft and Salesforce are among the many companies that have launched venture funds to make strategic co investments in startups. These corporate VC funds provide several advantages, including flexibility to participate in multiple deals across different industries and the ability to make smaller investments that would not justify involvement from the parent company. However, governance can become complex when corporate funds co invest alongside external VCs. Setting clear rules upfront regarding information sharing, exit rights and board involvement is key.
When approached thoughtfully, co investing can provide companies with an efficient means to access innovation and new markets. However, realizing the potential benefits requires careful partner selection, governance planning and alignment on strategic objectives. Companies considering co investments should analyze prospective deals closely under these criteria to set the partnership up for success.