The Secret Diary of Corporate Venturing

Like problem children, if they’re not handled well corporate ventures can cause their parents financial heartache and make them wish ...

Like problem children, if they’re not handled well corporate ventures can cause their parents financial heartache and make them wish they’d never been born. But they can bring rich rewards if gently nurtured to their best ability. Julian Birkinshaw offers advice on practical corporate parenting.
The Secret Diary of Corporate VenturingCorporate venture units exist to nurture and develop start-up businesses for their parent company. But the irony is that most corporate venture units are themselves start-ups. With a few exceptions, like Intel Capital and Johnson and Johnson Development Corporation, the vast majority were established in the late 1990s, during the boom years of the technology bubble. Not only did these operations face all the classic challenges that start-ups are familiar with – inexperienced management, securing access to funding, attracting customers – they also had to weather a meltdown in the technology sector that left most corporate parents wondering why they had got involved in corporate venturing in the first place.

So how has corporate venturing fared in the post- dot-com world? Is it still a viable and exciting approach to new business development in large corporations? Or has it fallen out of favour, a wasteful indulgence suited only to more munificent times?

A close look at the evolution of corporate venture units shows that the story is more complex. Some venture units have indeed been shut down, but most have survived the downturn and a few new ones have been started up. And significantly, the survivors have adapted their strategies and organisation models to cope with the more risk- averse business environment we are now living in.

The CV for CVs

Many large firms use corporate venturing. It is an approach to new business development in which they establish a separate organisational unit (a corporate venture unit) that invests in and nurtures start-up business ventures. There are many different reasons why a large firm might want to create a corporate venturing unit, but four common approaches can be identified – ecosystem venturing, innovation venturing, harvest venturing and private equity venturing.

Ecosystem venturing is a way for certain types of firm (particularly in the high-tech sector) to support the development of their community of suppliers, customers, and makers of complementary products by providing venture capital support for their activities. A well-known example of this approach to corporate venturing is Intel Capital. Intel has invested in hundreds of start-ups over the years for two symbiotic reasons – as a means of supporting the growth of its core microprocessor business, and to provide it with access to the latest emerging technologies in its sector. In addition, it has made good financial returns on its investments over the years.

Innovation venturing employs the methods of the venture capital industry to undertake traditional functional activities such as research and development. Typically, managers set up a separate unit alongside the existing function. The unit rewards people for value created, invests in many projects to spread risk, uses joint ventures and links with the venture capital industry and sets stage gate targets to help assess progress. Royal Dutch/Shell Group’s GameChanger is a good example of this model in action. It provided seed funding to new ideas in the exploration division swiftly, without going through the traditional layers of hierarchy.

Harvest venturing is a process of converting existing corporate resources into commercial ventures and then into cash. It is part of a broader function within large companies whose objective is to generate cash from selling or licensing corporate resources. In some cases the resources in question can simply be sold. In other cases the resources have no immediate commercial value, so the company puts in place a harvest venturing process for evaluating, investing in and developing these resources to the point where they attract interest from outside buyers. Examples of this model include Lucent’s New Ventures Group and BT’s Brightstar, both of which were ultimately sold to a private equity firm.

The fourth approach is private equity venturing. Here, a corporate private equity unit invests in start- up businesses as if it were an independent venture capitalist. The goal is financial: there is no requirement that the unit will assist existing businesses or find a new growth platform to add to the portfolio. In effect, the company is doing little more than diversifying into private equity. Examples of this are GE Equity and Nokia Venture Partners.

All four of these approaches to corporate venturing can be successful, but there are problems associated with each one. Common mistakes include not giving the venture unit enough independence in choosing which ventures to invest in and sell; not providing sufficiently clear objectives; and not giving the venture unit enough time or money to deliver on its objectives.

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