Five aspects to consider before going into corporate venturing
Over the past 20 years, both globalization and technological advancement have dramatically reshaped marketplaces, eroding the traditional power base of many large corporations and nurturing smaller, more agile, and less capitalized firms. At the same time, open innovation has emerged as a leading paradigm for developing new, powerful technologies and successful business models, making it possible for many companies to engage in corporate venturing exercises, such as corporate venture capital programs, entrapreneurships, venturing, corporate incubators and so on without attached stigma.
If you are interested in working for one of these firms, or you are in charge of setting up an incubator or venturing firm, keep in mind the following five concepts:
1. Entrepreneurial Orientation
While entrepreneurial orientation is key to the success of any entrapreneurship project, it will increase the success rate only when top management plays an enabling role: in other words, hiring a bunch of start-up gals and guys to execute the project will only work if you have a diverse, heterogeneous board and management team which can keep the inherent politics of the mother-company as far away as possible from the child-project. This leads to two implications: first, the approval processes need to be as streamlined as possible. Secondly, the entrepreneurial environment must adopt a ‘trial-and-error’ culture, where failures are welcomed as learning opportunities, not as career-ending stops. While an entrepreneur deals with failure on a personal level, larger corporations should develop a system where failure can be successfully managed as a group.
2. Social Capital
Social capital is one of the most important, and underestimated, assets in any entrepreneurship project. There is a direct and positive correlation between the size of the network of the management team and board members, and the performance of the internal start-up. Social capital is an important currency which offers access to opportunities, new clients, suppliers, partners and talent. Social capital is also an often underestimated leveraging tool in negotiations. If you invite a Guy Kawasaki type to sit on your board, do you think you would have any problem in recruiting top entrepreneurial talent? Social capital is also a tool to gain street credibility vs. corporate credibility.
3. Strategic Renewal
Corporate venturing represents the preferred strategy of larger corporations fighting disruption. In 2001, Eli Lilly realized that the genomics revolution was going to disrupt the pharmaceutical industry and therefore decided to start a corporate venture capital fund, Lilly Ventures. Over the course of the past several years, years, the fund invested in more than 30 projects, some of which have later been acquired by Eli Lilly. Moreover, venturing projects are also a tool to drive business model change. Think about newspapers developing their own internet/ media incubators to adapt to the changing nature of news and media consumption. This also means that corporate ventures are an important opportunity for strategic renewal of an entire company. If venturing is anything short of strategic renewal, then the capital should be assigned to professional VC’s to be invested: while they may have lower success rates, they have better returns.
Investment in an incubated company, not necessarily in corporate venture capital scenarios, typically forms a “U” shape: it initially decreases over time and then picks up again if performance is deemed positive. Somehow, the corporate mother wants the child company to have its own initial means and expects financial independence until the business is ready to be scaled quickly at which point investments grow more rapidly. This is critical information for both the employee of a corporation who is thinking of an assignment inside a corporate venture, and for prospective entrepreneurs with previous start-up experience: Start-ups can go through several, rounds of fund-raising, whereas in incubators, this does not happen as often.
There is no automatic mechanism for sharing knowledge between independent projects and the mother company, whether this is an entrepreneurship project or a corporate venturing assignment. For the mother company, the insights generated in these ventures are often critical to their long term survival. For example,in-Q-Tel, the VC fund of the American Central Intelligence Agency, a technology team focuses on testing the technologies developed by portfolio companies in order to assess whether they fit the needs of intelligence officials. This team is separated from the investment branch and is tasked solely with sharing knowledge.
In conclusion, whether you are an individual or a corporation thinking of going into corporate venturing, you should consider these five aspects. In the case of larger corporations, you need to be aware that hiring entrepreneurs is not enough to solve your problem unless the board and the management team can keep the politics and the approval process of the mother-company at a distance. Furthermore, the board and the management team should have high social capital, which is an important currency for these types of ventures. Corporate venturing is a strategic renewal tool, both from a technological and business model standpoint. If the mother company is not ready to renew, it should not pursue those ventures. The pursuit of renewal happens only when a compelling mechanism to gather insights from the invested companies is in place. If you are an individual looking into a stint within an entrepreneurship project, be aware that child companies never use cash in similar fashion to VC funded start-ups, even though they might look like one.