Investing in innovation: how to align CFOs behind deep tech ventures
The potential benefits of leveraging external innovation are clear, but many companies run into an early and highly problematic stumbling block: startup collaborations, venture accelerators, and other innovation programmes can end up looking like a cost on the balance sheet, and it isn't clear when, if, or to what degree they will provide returns for shareholders.This is a real difficulty when it comes to getting key stakeholders on board, especially finance teams and the chief financial officer (CFO). Without their support, it’s impossible to get innovation projects off the ground.
Capital in, strategic returns out
This is because investment in innovation typically produces strategic outputs rather than financial ones, so quantifying those returns in financial terms is very difficult. Some common innovation models which companies deploy include:
Pilot projects
Startup acceleration programmes
Open innovation calls
In all these cases, the end goal of the initial investment is not a financial return, but a strategic development. We shouldn’t underestimate the output of these programmes, which can often be transformational across every business unit of the company. But because these future returns are longer term and are realised in financial terms in other areas of the business, it can be hard to attribute them back to the innovation which brought them about. A robust financial return may be part of the next phase of the story, but the apparent loss of these initial steps can nevertheless be very difficult to work through.
Corporate venture capital (CVC) presents a partial solution. Geared towards financial metrics, it’s easier to keep track of the investment going in and the returns coming out. But this approach also has its pitfalls. It typically requires companies to invest much later in venture development, and that can dramatically reduce strategic returns. That ultimately means leaving money on the table in order to better keep track of the financials - a missed opportunity for investors.
What if there were a way to bring together the huge potential of an early-stage investment with the financial clarity of CVC?
See innovation the way the CFO does
Getting the budget for innovation is tricky, but at CFT we know from experience that companies who succeed can see huge financial returns. The key is to get a CFO on board and to do that, you have to think like one. To get there, let’s look at why it’s so hard to link financial returns with investment in innovation.
The first set of common problems are attribution issues. Seeing profits on the balance sheet is a result of particular business units performing well, rather than a measure of the success of underlying innovations. A new process or method might be essential to delivering those returns, but because the investment it took to create that process is siloed off in the innovation team, it becomes disconnected from the profits it creates.
Developing a more flexible way of thinking about how these investments and returns link up is essential. By analogy, it can be helpful to think of it like the IT team - they’re a cost in the budget, they don’t directly produce revenue, but without them, just about every business function will crumble. As we’ve explored in previous articles, innovation can be every bit as crucial to the long-term success of a business as a solid IT team.
Secondly, it’s helpful to recognise that early-stage startups aligned with business goals have a range of ways they generate returns, including leveraging external investment and providing mechanisms to share initial risk. For external innovation of the types we work with at CFT, there are usually two key sources of external support: public funding which has helped develop initial research, and capital contributions from grants, early investors and VCs which help fund the venture itself. This additional support available for external innovation means that the burden of fostering the early stage venture is shared and reduced. It’s not yours to shoulder alone. Getting a clear view of this support can transform the way a CFO responds to innovation plans.
And finally, don’t lose sight of the ultimate purpose of these venture-backed startups: they’re solving for key challenges. Like the IT team, once they grow to maturity, investor firms will often see returns across a range of business functions through improved processes, greater sustainability, future capabilities, etc. Beyond that, the solution itself can also be profitable through a wide range of models. You solve the problem, and you also profit from the solution. It’s a win-win.
At CFT we’ve got lots of experience pitching these concepts to our clients, and it’s a really enjoyable part of the process for us. By reframing the question of investment, risk and returns when it comes to external innovation, we often find that far from a balance sheet headache, there’s real excitement for the CFO. The potential and returns of these investments are huge, and the time to see the benefits is much shorter than clients often assume. It boils down to getting paid for something you would normally have to pay for, and that’s an idea that any CFO can really get behind.
Seeing it in action: the CFT portfolio
We know from experience that this approach to measuring the internal rate of return (IRR) of new ventures is the key to demonstrating the financial viability of innovation. As well as helping our clients set up and nurture science-backed ventures, we have our own portfolio of 16 companies, and over the life of our business we’ve seen these track an IRR of 61%, taking less than 4 years to make a positive contribution to the balance sheet.
This even beats typical venture capital (VC) portfolio modelling, and despite the fact that VC investment typically happens at a later stage in the venture’s development, we have not needed to adjust our model. You might expect a higher rate of failure in a portfolio of very early-stage investments, but we’ve actually seen that our rigorous de-risking processes mean that the ventures we help develop are more robust - to date, it’s a 100% survival rate.
Businesses operating right now face all kinds of pressure to innovate - from competition to environmental sustainability. But far from a line item in the budget, investing in early-stage, innovation can produce transformative financial returns. It’s not a trade off, it’s a path to revenue growth and business longevity.
Key Takeaways
Scientific venture creation links innovation to tangible ROI.
CFT’s approach is tracking a 61% internal rate of return in just four years across 16 ventures.
Early-stage investment doesn’t have to be high risk.
Rigorous validation and co-funding models reduce exposure and improve success rates.
Securing CFO buy-in starts with reframing innovation.
When presented as a strategic asset, innovation becomes easier to support and budget for.
Strategic ventures generate value beyond direct revenue.
Benefits include process improvements, sustainability outcomes, and long-term business resilience.
Corporate innovation can outperform traditional CVC.
Investing earlier and smarter creates access to value often missed by later-stage capital.