The latest crop of corporate venturing units has transformed parent companies at 77% of units, according to research into 48 of the largest companies in venturing. This is an interview with the study’s author, Swiss university ETH Zurich’s Boris Battistini, based on the article The State of Corporate Venturing, co-authored by Fredrik Hacklin and Pius Baschera, colleagues of Battistini at ETH Zurich, and published in Research-Technology Management.
What did you do in the study?
In partnership with consultancy Bain & Co, we studied 48 high-profile venture units at leading global corporations. There have not been many recent large-scale attempts to document the state of corporate venturing activities in a systematic manner using primary data. Rather, most work has been based either on quantitative analysis of deals or illustrative case studies. The most comprehensive study is now over a decade old and focused primarily on dot.com companies. This research initiative aimed to address this gap. We present the key insights of a global study and offer a benchmark against which to compare current and future corporate venturing initiatives.
What did your research find?
Our data demonstrate that corporate venturing has significantly evolved over the past decade. 77% of survey respondents reported that important changes that redefined the scope and nature of their activities had occurred in their units. Managers of venturing units pointed to the learning effects of increased experience in deal origination and the increased availability of high-quality human resources with relevant background in venture capital or new business development. More importantly, perhaps, a key change driver was the increased awareness among senior executives that a sustainable innovation strategy requires both internal initiatives and systematic access to external sources of innovation. As a result of these transformations,
the majority of respondents saw an extension in the scope and longevity of their venturing unit operations.
What were your main findings about units’ strategies?
The prime market focus of venturing activity for the majority of units we studied is in adjacent business areas, while the reinforcement and strengthening of the core business represent the primary market focus for over a quarter of the units examined. Just under a fifth of venturing units focus on “white space” opportunities beyond usual business activities. We also found more than half of corporations use venturing to search for expansion opportunities in markets near a strong core business area.
What objectives did groups have?
The most important objectives reported are financial return – rated important or very important by 75% – and a window on technology and market intelligence – 63% – followed by access to breakthrough technologies, development of strategic relationships, and new product development. In terms of performance, the majority of respondents appear to be satisfied.
How independent are units from their parents? While a third of units in our study exhibited relatively limited decision-making autonomy, reporting that all investments are subject to internal review, more than two-thirds of the units examined have a dedicated source of capital, with a sizeable portion (37%) operating with a closed fund structure. Autonomous governance structures not only allow faster, more independent operations, they are also more efficient in managing potential misalignment of interests between the long-term strategic objectives of the venturing unit and the short-term performance requirements of the parent company. The reporting line to the corporate parent depends on strategic focus and objectives.
For example, where technology intelligence is the prime motive of the venturing initiative, the unit reports directly to the chief technology officer and research and development organisation. Importantly, 30% of respondents also indicated they report directly to the chief executive and the board of directors, emphasising the strong mandate of the venturing unit and the increased strategic importance of corporate venturing.
What compensation trends did you find?
We found that high-powered incentives are an increasingly important component of the overall compensation package for managers of corporate venturing programmes. Notably, nearly half the units we studied adopted performance-based incentive structures, offering long-term incentives based on financial and strategic performance, reflecting both the investment time horizon and maximisation of shareholder value. Interestingly 15% adopted a compensation package that combines a fixed salary with carried interest [a share of fund performance profit], and several more directors reported internal discussion on [the adoption of] carried interest compensation systems. The increased use of value-based incentives is expected to enable better alignment between the interests of the corporate parent and those of the venture unit. It should be observed that a more attractive value-based compensation approach should also be instrumental in attracting and retaining high-quality employees.