Session 6

The Future of corporate venturing

Corporate venturing is a practice where a large firm takes an equity stake in a small but innovative or
specialist firm to which they provide management and expertise.

During the height of the dot-com boom (around 1999), many large firms turned to corporate
venturing as a way of promoting innovation, creating a window on new technologies, retaining
entrepreneurially minded employees and spurring growth.

Four years later, corporate venture investment levels have fallen by 75%! What went wrong?
 Venturing units with mixed objectives and mixed-up business models.

4 types of venturing:

 Ecosystem venturing
 Innovation venturing
 Harvest venturing
 Private equity venturing

1. Ecosystem Venturing
Ecosystem venturing supports and encourages a company’s network of customers, suppliers and
complementary businesses.

Some companies depend on the vibrancy of a community of connected businesses for their success.
 With ecosystem venturing a company sometimes can improve the vibrancy of its ecosystem by
providing venture-capital support to its entrepreneurs.

Example Intel Capital

Intel Capital invested mainly in suppliers, often to guarantee availability of components.

Example Johnson & Johnson Development Corporation

JJDC makes minority investments in a broad range of startup companies. The value is in helping to
establish new technology areas and providing the existing business with a window on new
technologies.

When appropriate?
Ecosystem venturing is appropriate when an existing business depends on the vibrancy of a
community of complementary businesses and the entrepreneurs in the community do not have
sufficient support from existing suppliers of venture capital.

The loss of focus pitfall

the major pitfall in ecosystem venturing is to lose focus and begin invest in a wider deal stream and
seek greater autonomy than that which justified the creation of the unit.

There can be a great company to invest in but their must be an alignment to investor’s business
units.

 Solution: venture has to have clear objectives in which sector to invest in and balance and
relative balance between financial and strategic returns.
 2. Innovation Venturing
Innovation venturing improves the effectiveness of some of a company’s existing activity.

Innovation venturing employs methods of the venture capital industry to undertake traditional
functional activities such as R&D.

Example Royal Dutch/Shell Group’s GameChanger program

used to increase innovation in the technical function of Shell’s exploration business.

When appropriate?
Innovation venturing is appropriate when an existing function is underperforming because there is
insufficient energy directed toward commercially oriented innovation and creativity.

The culture change pitfall

View the innovation venture as a way of addressing a general concern about lack of entrepreneurial
spirit in the company rather than to improve effectiveness of a specific function.

 Solution: the innovation-venture unit should report to, and be governed by, the function of
which it is part.

3. Harvest Venturing
Harvest venturing increases a company’s cash resources by harvesting its spare intellectual property
or other assets.

Harvesting venturing is a process of converting existing corporate resources into commercial

ventures and then into cash.
Generate cash from selling or licensing corporate resources (technology, brands, managerial skills
and fixed assets…)

Example Lucent New Venture Group

it was set up to commercialize intellectual property and technology coming out of Lucent’s R&D unit
that was not immediately support by a business unit.

When appropriate?
Under three conditions:

1. There must be resources that are not fully exploited

2. Exploiting the full value of these resources must require the establishment of a new business
3. The resources are not needed either by the existing business or as new growth platforms

The new legs pitfall

the unit is set up for harvesting reasons but it is given or develops the additional objective of
delivering new growth opportunities – “new legs” – for the company.

 Solution: the unit should be funded only for its operating budget and should be measured on
cash returns against total funds spend.
 4. Private equity venturing
Private equity venturing diversifies a company’s business into the venture capital industry.

A private equity unit invests in startups businesses as if it were an independent venture capitalist.
The goal is financial: there is no need that the unit will assist existing businesses or find a new growth
platform to add to the portfolio.

Example GE Equity
Set up by the General Electric Co., GE Equity grew from a zero base to a fund of $4 billion invested in
300 companies.

The anyone-can-do-this pitfall

Attracted to a sector where others are having success, managers enter the business misjudging both
the timing and skills that are needed to make it work.

 Solution:
1. Units should be fully separated from the company and have its own close-end fund with
short investment period chosen in light of the current private equity cycle.
2. Units should be staffed with seasoned managers from the private equity industry.
3. The managers should be evaluated and rewarded as they would be in the private equity
world.

Summary of the key elements of the four corporate venturing business models p35 session 6

5. Why new Leg Venturing Fails

Companies have core businesses that are growing only slowly or declining so search for new growth
opportunities.
Managers realize that the pickings adjacent to their existing businesses are limited.
They therefor start searching more widely and latch onto corporate venturing as a low-cost way of
experimenting and trying out new businesses.

1. Managers only feel the need to use corporate venturing if the obvious growth paths in
adjacent business are blocked. Hence the unit is focused on low probability projects.
2. New ventures that are developed within a separated unit attracted little attention and
commitment from the core company.
3. The length of time it takes to develop a successful division is longer than most business
cycles.
4. Early-stage venturing is a tough environment even for professional, independent,
venture capital companies.

6. The danger of mixed messages

The greatest cause of corporate venturing failure is companies’ inability to define which model their
venture unit is supposed to be following.
this results in:

 the strategic and/or financial objectives are ambiguous

 the structure and staffing decisions are out of alignment
 The managers find themselves being pushed in several directions at once.
Corporate Venturing: Strategies and Success Factors
1. Introduction
Firms explore new technological and business opportunities to build up a long-term competitive
advantage in rapidly changing and unpredictable environments.

However, it appears to be difficult for incumbent firms to renew existing capabilities in the advent of
new technologies and business models.
Reasons:

 Incumbent firms have existing products and processes which may be

threatened/cannibalized by new tech and market changes.
 Incumbent firms have developed a routines, innovation processes and customer centered
value networks that exploit existing competences but are not good for explorative activities.

 Engaging in corporate venture to improve their capabilities to explore new opportunities

Industry- and firm-level factors have an impact on decision of firms to set up a corporate venture unit

more corporate venturing in industries

 with rich (exploitable) technological opportunities
 where complementary assets are important and concentrated amongst incumbent firms
 that rely more on secrecy and trade secrets

more in firms
 that are likely to invest in entrepreneurial ventures when their business is underperforming
 that have uncommitted financial resources

Distinctions between two types of corporate venturing

1. Based on the locus of investments

a. Internal venturing: investments in technologies and ideas that originate from within
firm boundaries
b. External venturing: investments in external startups
2. Based on the nature of investments
a. Direct venturing: direct capital investments in technology-ventures
b. Indirect venturing: a firm invest capital in a financial intermediary (for example, a
venture capital fund) that invest in ventures.

2. Corporate Venturing Motives

A corporate venturing unit identifies and develops a new businesses for its parent company having a
financial or strategic motives as purpose.

1. Financial motives
a. diversify into the private equity business  corporate venture capital firm
b. monetizing brands, intellectual property, product or process technology or
underused fixed assets not representing a commercial value anymore to the firm’s
main business  harvesting venturing

2. strategic motives
a. stimulating and enabling corporate entrepreneurship by surfacing ideas within the
firm  innovation venturing
 b. navigating new environments which are relevant to the parent firm to support its
main business or to say ahead of the game  technology scouting
c. develop a demand for the mains business’ new products or to support its main
business operations –> ecosystem harvesting

3. Success factors of corporate venturing

Five broad categories of success factors that apply to all venturing strategies above.

1. Goal clarity: in order to be successful a corporate venture unit needs to have clarity of goals
and the distinctive organization capabilities to deliver upon these goals
2. Long term commitment: corporate venturing should be seen as an instrument serving the
parent firm’s long-term commitment.
3. Adjacency
a. Economic adjacency: fit between the needs of the venture and the resources of the
parent
b. Relational adjacency: similarities in the organizational culture and structure of the
parent firm and the venture

Investing in distant ventures is called new leg venturing and has a small chance of success

4. Autonomy
a. In budget to cover operating expenses an d-the investments of the CVU
b. In the rights to make decisions on investments and other management issues
5. Critical mass: low success rates require critical mass in the number of new ventures pursued
by the CVU.