Institute For The Future

Does Corporate Venture Investing Work?

One of my clients is a large global company trying to beef up its ability to source core innovations that go beyond new combinations and packaging - basic science and technology that will help it deliver new value over a sustained period.

 

Opening up their innovation process is clearly an important step, and as we have explored many of the potential vehicles for building a more networked R&D model, the idea of a venture investing fund has moved to the forefront of my thinking. If, as open innovation holds, many of the best ideas are outside the company, I can't think of a more aggressive way to scan, secure and inject them into an existing company.

 

But as the Wall Street Journal reports on Google's efforts in the area, corporate venture funds have a lot of inherent problems and a mixed record.

 

 

 

The move would make Google the latest technology giant to take on a more-formal role in seeding start-ups. Intel Corp. has had a large venture-capital arm for years, as have Motorola Inc., Comcast Corp. and many others. In the consumer-Internet area, Walt Disney Co.'s Steamboat Ventures has invested in a number of Web start-ups. So has Amazon.com Inc., which has funded a number of young companies without structuring a formal fund.

 

Their track records have been mixed. Corporate venture-capital arms have been hampered by challenges that traditional venture-capital businesses don't face. Venture capitalists invest in private start-ups at an early stage, usually in hopes of a big payout if the company is sold or if its stock goes public.

 

Many start-ups fear that taking corporate money limits their options and comes with strings that could turn away other potential investors -- such as a right to buy the company at a later date. Some funds with less competitive compensation have struggled to retain managers, and corporate venture funds often don't allow senior employees to invest personal money in their funds, while other venture funds typically do.

 

 

Silicon Valley Reporter picks up on New York City-based venture investor Fred Wilson's scathing critique:

 

And if the payoffs and tradeoffs are iffy for the chosen start-ups, so too are they for Google, as venture capitalist Fred Wilson points out. "Corporate investors don't really share the profit motive with the entrepreneurs," he says, because a big-multiple exit isn't as significant for the giant company. "That's the big problem with corporate structures for venture investing. One time gains in corporations don't make anyone rich. Wall Street ignores the gain. The company can't put the gain into the pocket of its management. So it just doesn't matter very much." While there are many strategic and tactical ways for Google to target its fertilizing wealth, Wilson says, "I do think that venture investing is not the best use of a corporation's capital and that it is inevitable that it will produce sub-par returns at best and significant losses at worst. And as a Google shareholder, I'd prefer to see them do something else with all that money they are making."

 

 

It seems that corporate venture funds need to be really focused and serve as a piece in a well-integrated and well-conceived network innovation portfolio. My personal favorite is the fund created by Novartis to invest in the startups of those who were let go after the merger of Sandoz and CibaGeigy. It was both the right thing and the smart thing to do, and has been highly successful. Honestly, who's a more important part of your network than your corporate alumni?