Designing Corporate Ventures

Peter Drucker: Search for innovation needs to be put into seperate organizational components (outside of the ongoing managerial business) in order to stimulate greater innovation and generate additional business growth.

But these attemps have only met temporary succes (pattern of cycle: enthusiasm, implementation, difficulties and termination). Therefore the methods of structuring the corporate venturing have changed and utilizes more VC structures to motivate employees to become more entrepreneurial and take more risks.

Example A: Exxon (1970s) Two-fold corporate venturing programm: 1) external financial investments (VC in external start-up companies) and afterwards 2) Internal ventures (special unit inside Exxon to commerzialize the most promising areas identified through its external investment programms) Result: VC performed very well in financial terms, while those of internal ventures were much lower.

Why CV: use private equitiy investing to identify promising growth areas in markets near those of the corporation and then leverage the parent company’s business. Because of the rise and success of VC, today’s CV must be designed with VC structures.

Previsous Research on Corporate Venturing - Von Hippel: when parent firm had significant prior experience in that market, the new venture was much more likely to succeed. Moreover best performing ventures went off on their own. - Norman Fast: succesful “new venuture divisions” in CV were perceived as threatening to established businesses in the parent firm - Kenneth Rind: Conflicts of interest can arise when venture unit is serving a market already served by the parent firm (venture unit might constrain marketing options) and problems of governance. - Block and Ornati: Most companies do not compensate venture managers any differently from their other managers in order to maintain internal equity - Siegel, Siegel and MacMillan: Conflict between strategic (exploit the potential growth) and financial rationale (create additional revenue).

Through complete autonomy to venture managers financial returns can be maximised. The problem arises that parenting firm and venture can get into conflict. As a consequence parenting firm needs to intervene and lower the authority of the venture manager.

|Incentives |Compensation system: greater rewards than for normal managers combined with higher risk taking but risks/reward far| | |less extreme than in private VC. Founder of venture committed to success. | |Financing |Staged financing increments very much like in VC | |Monitoring |Diligent monitoring and oversight | |Discovering business models |Identify appropriate CEO and promising business models | |Time |No fixed life of the fund and no drive for liquidity | |Scale of capital invested |Evaluate large-scale initiatives | |Complementarities |Exploit complementarity with Lucent’s assets. Identify important industry trends. | |Retention of group learing |Retain group learning: learning from failures, lab staff influenced by CV process. |

Advice: - investing in related venture activities - combine structural disadvantages and potential advantages to design a CV - compete with independent VC for entrepreneurial talent latent in the company - leverage potential advantages of CV (time, scale, management & strategic complements. Learn from failures)