Hidden value in corporate venturing

Citation

Dickman, K., Kambil, A. and Wilson, J. (2002), "Hidden value in corporate venturing", Strategy & Leadership, Vol. 30 No. 2. https://doi.org/10.1108/sl.2002.26130bab.001

Hidden value in corporate venturing

Hidden value in corporate venturing

Kenneth Dickman, Ajit Kambil and James Wilson

The dramatic decline in corporate venture funding in recent years has been widely reported in the business press. But a new study finds that corporations have not stopped strategic venturing. It seems that the publicity over the drop in corporate financial deal making obscured the on-going opportunities for strategic venture management.

Perhaps to counterbalance its one-time indiscriminate hospitality during the dot.com boom, the business press has now thrown out and slammed the door on all things venturing, from venture capitalists to corporate venture funds. But real opportunity will not go away that easily. According to a recent Accenture study of 150 leading executives from the Fortune 1000[1], venturing continues in its more traditional form. That is, companies in a broad range of industries are actively engaging in venturing through the commercialization of new products, technologies, or other corporate assets that generate more strategic and financial value as a new and sometimes independent business. The full benefits of such venturing projects have not been appropriately recognized.

While less than 30 percent of the executives in the Fall 2000 study were venturing primarily for financial gain, nearly twice that number were venturing largely for strategic reasons. And nearly 80 percent said such ventures are critically important for realizing the value of their company's intellectual property, technologies, brand, and physical assets – aims that distinguish them from VCs and some misguided corporate venture funds, which seek financial returns only. These executives spoke from experience – over 60 percent were engaged in three or more corporate ventures while 16 percent were engaged in ten or more.

It is not surprising that executives, people who have risen to the top of their organizations by discernment and experience, have recently weighed in favor of overturning the journalistic trend Du jour. For one thing, current conditions favor corporate venturing. Interest rates are low and capital is cheap. Smart people with real entrepreneurial experience are plentiful and less expensive. And appropriately managed corporate venturing is a time-tested strategy – an important fact that evades the radar screen on the bandwagon's dashboard. Harvard business historian Nancy F. Koehn, for example, points out that many of today's Fortune 500 companies began as spin-offs of larger corporations over 75 years ago. More recently, GE has purchased over 200 companies that have started out as either venture investments or joint ventures; over half of Corning's new product lines over the past five years are the result of venturing activities; and Thermoelectron has freed over $1 billion in the sale of non-core, commercialized assets.

Two lessons

So the opportunity, executive confidence, and track-record is solid, but what does it take for a corporate venture to happen? New ventures need to align a number of resources and capabilities: they need a terrific new concept, technology, or process to take to market; channels to access customers; and execution capabilities to build and scale the infrastructure. There must also be capital to finance the venture and an entrepreneurial culture and staff to implement it – both of which were pricier just a year ago. Virgin, best known for its airline and record shops, is innovating the way wine is bought and sold online with the venture Virgin Wines. And Coca-Cola just took a stake in eight new ventures, all of which promise to hasten the development of technologies to improve operations such as bottling and distribution. Coke also just expanded its ten-year joint venture with Nestle to meet the increased demand for caffeine worldwide, which has far outstripped the demand for soda. One surprising lesson here is that some of the most interesting corporate venturing initiatives are being realized in traditional business domains like operations, not in disruptive technologies.

Partnering helps build the foundation for new ventures • Equity partners provide capital and external market discipline. • Operational partners provide execution capabilities. • Channel partners provide customer access. • Equity and operational partners provide new ideas and related innovations. Venturing know-how • Skills for venturing take substantial time to build and pay-off. • Successful venturing requires substantial relationship capital in the firm between the creators and managers of new uncertain ventures and traditional managers. • Killing venturing efforts during slow economic times undermines the capability for a substantial period of time.

The second lesson, one that is often overlooked, is that successful ventures require social capital between the leaders of the new venture and the parent firm, or a powerful executive in the parent firm who is the venture champion. There are also critical relations outside of the firm – between experienced entrepreneurs who staff the start-up, and loyal customers who may buy the product. Relations between channel partners who co-develop or market a product can also make a venture happen. Exostar, a global trading exchange for the aerospace and defense industry, was founded on a partnership of four industry leaders: BAE Systems, Boeing, Lockheed Martin, and Raytheon. This is also the case with Omnexus, an independent global marketplace for the $50 billion plastics industry. The venture's founders include BASF AG, Dow, and DuPont.

So companies should not go it alone, nor do they plan to. Nearly 60 percent of executives in the recent study expect to structure their venturing activities as joint ventures. Consulting firms can also provide all the ancillary services required for launching the start-up – from critical infrastructure to product design and development. Venturing through this kind of partnership also has an added benefit, that the risk of the venture is shared with partners.

Companies are already outsourcing a number of venturing activities to firms that specialize in developing venturing capabilities. Both British Telecom and Delphi Automotives are working with Vennworks to venture one of their respective non-core technologies to market every year. As consulting firms build more specialized capabilities for venturing, everything from business plan development to product development, launch, and marketing can be temporarily outsourced – with the exception of the key assets or capabilities required for the initiative.

Now companies can buy low while building the strategic and social assets that enable innovation and profitability for the long haul – positives that go recognized in history books, if not the daily business page.

Note

1. 1.

   Accenture surveyed a representative sample of 150 of the leading executives in the Fortune 1000 in Fall 2001. A broad range of industries, services, locales, and sizes of companies are equally represented.