Why is it that we are NOT in awe of the corporate venture arms of multi-billion companies? Yet we remember large venture firms and what they have done! In my work with large enterprises and ProVoke, I am stunned as to how underutilized, over-protected and cautious the Corporate Venture arms of my clients are.
Why not use your capital to achieve a ton more, innovate and inspire your staff? My role is to disrupt the current ecosystem. I am a huge advocate of Corporate venture for the following 4 reasons:
1. To test the waters, experiment rapidly and proliferate in different areas of innovation at a hugely positive rate. Allowing companies to diversify at a very significant rate and helping nurture the external ecosystem.
2. To grow a hugely positive arm of the company by growing the corporate venture arm into a multi-billion enterprise within an enterprise.
3. To help seed and grow new areas of technologies , where their company can be leading force. While at the same time invigorating their internal staff. Instead of remaining as a ‘relic’ old enterprise, why not become a huge force of innovation!?
4. Instead of acquisitions as a segregated innovation-silo, why don’t we look at acquisitions as the path from disruption to innovation.
Hence I liked this month’s HBR article by Josh Lerner on Corporate Venturing. He and I share common thoughts around this topic and I have summarized Josh’s key points. Enjoy!
In his article, “Corporate Venturing,” published in the latest issue of Harvard Business Review, Josh Lerner makes a compelling case in favor of corporate venturing. In the tech field, a company’s success depends on its ability to move flexibly in response to rapid changes in technologies. This involves both knowledge of current innovations and trends, as well as effective adaptation to these transformations (by developing new technologies, etc.). Traditionally, this role has been left to R&D; yet corporate R&D is often limited by pressure to narrow its project focus and cut costs. As a result, companies often lack the wide perspective (beyond their area of expertise) required to deal with competitive threats effectively.
According to Lerner, investing in start-ups offers companies an alternative way to learn and innovate.
(1) Corporate venturing enables faster response to market transformations by giving parent companies an inside glimpse into groundbreaking areas as well as possible ownership of new ideas. This takes some of the pressure off of corporations to develop capabilities on their own (very costly in time and money).
(2) Corporate venturing offers a better view of competitive threats by allowing companies to stay abreast of potentially disruptive changes outside the company. By investing in competing technologies, companies can better keep up with them and avoid being blindsided (a role which R&D often fails in).
(3) Corporate venturing offers easier disengagement from fruitless investments, because it’s easier to let go of outside investments than internal projects that have bogged down. This is critical because it frees up resources for more promising projects.
(4) Venture investments can lead to increased demand for the corporation’s own products when the corporation invests in the development of technologies that rely on their own platform. Thus, corporate venturing can be used to shape and create market ecosystems in their interest.
(5) Corporate venturing often leads to higher returns because corporate-backed start-ups tend to outperform those backed solely by independent VCs.
Despite these benefits, corporate venture funds often run into problems. Companies have wasted billions of dollars trying to invest their venture funds successfully, partly due to the very different mind-sets of the parent company and the venture fund. Lerner offers several recommendations for how corporations can make their venture capital funds work.
A) Alignment of the goals of the venture fund and start-up with corporate objectives promotes better investment decisions and more successful start-ups. According to a study by Lerner and colleague Paul Gompers, corporate venture funds are more successful when the focus of the corporate parent and their portfolio firm business overlap, and start-ups that are aligned with company goals outperform those that are not.
B) A streamlined approval process helps facilitate fast-paced and flexible investment into potential opportunities. Companies with convoluted approval processes force their venture funds to try to satisfy many different interests, so that they wind up with too many divergent goals.
C) Strong incentives improve recruitment, retention and performance of corporate venturers. This includes making compensation in a corporate VC fund comparable to that of independent VC groups, as well as linking pay to proven investment success.
D) An experimental mind-set that tolerates failure can help circumvent the pitfalls of a risk-averse fund. Punishing failure and playing it too safe can lead the parent company to miss vital opportunities.
E) A high level of corporate commitment to promising projects can help prevent the damaging consequences of being seen as an unreliable investment fund, and also keeps high-caliber outside investors interested in joining.
F) Finally, gathering knowledge from the start-up is as important in the venture fund’s role as acquisition deals. Knowledge transfer from start-up to parent company is a difficult but hugely important task, critical for the success of both the venture fund and the corporation.
In sum, corporate venture funds can be as successful as the top private VC funds and can even outperform them. When internal research no longer satisfies the critical need for insights into new disruptive technologies or market movements, a well-managed venture fund can help a corporation discover the next game-changing idea.
Would love to hear your thoughts!
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Linda Bernardi is a Technology Strategist, Investor, and Founder & CEO at StraTerra Partners, The Bernardi Leadership Institute and a Strategic Advisor at Cloudant Inc. She is also the Author of Provoke, Why the Global Culture of Disruption is the Only Hope for Innovation. Learn more here about Linda’s work on disrupting large enterprise analytics.