Corporate venture capital invests externally through taking minority stakes in third parties whereas corporate incubation operates internally. If you are accountable for the reali-sation of strategic value from your investments, but are not in control, this three-part series is for you.
I discuss combining investment and incubation in a single corporate venturing and innovation group, drawing on my experience leading innovation and corporate venture capital at the Hartford, and going beyond. While this model may not be suited to all corporates, it is increasingly part of the opportunity set discussed as a corporate venturing group is formed or reformed in subsequent years.
In the first article, we made the case for combining corporate venturing and incubation into a single group, which we called the corporate venturing and innovation group. In this second article we highlight five key structural decisions when bringing the group together in order to address the main barriers to innovation. Next month, we look at developing commercial opportunities under uncertainty in the incubator.
Innovation barriers
As companies become successful and grow, they often unintentionally develop a culture that reinforces the existing core business and protects it – and its people – from change. The results are barriers to innovation that appear consistently across industries.
l Difficulty with uncertainty – management systems and valued leadership skills are all about forcing certainty as soon as possible. They do not enable execution under uncertainty.
l Focus on today instead of tomorrow – corporate strategy often ends at a three-year horizon. In the competition for resources, today almost always wins out over tomorrow, especially in the face of quarterly earnings-per-share goals. Opportunity cost is not considered because it cannot be measured.
l Fear of action – with established businesses and brands, the risk of doing something is perceived as greater than the risk of doing nothing. In a start-up that analysis is flipped on its head. The first two points, difficulty with uncertainty and focus on today, are intertwined by the corporate desire for decision-making based on facts, numbers, what can be measured.
The uncertain cannot be measured. At best, we can derive a range. In a recent New York Times interview, Carl Bass, chief executive of software provider Autodesk expressed his concerns about this issue.
He said: “This is my current fascination – it is this whole idea about keeping companies entrepreneurial and innovative and cutting-edge.
“The thing I worry about a lot is how companies measure themselves … We measure ourselves around revenue and profits and financial metrics that perform long after a spark is gone … I have been spending a lot more time trying to quantify or figure out if what we are doing is right, or whether what we are really doing is just celebrating the result of things that happened a while ago. I think it is real easy as a leader to confuse what the results are today with the actions that happened a while ago … because then you just start coasting.”
These innovation barriers can be present whether the company is small or large, as long as there is an existing successful business. At the 2010 Wired Disruptive conference, Mark Pincus, the founder and chief executive of US-listed online games company Zynga, told a surprising story about a programme called Bold Beats that he set up to give the Zynga product teams permission to take risks within an existing successful game franchise.
He said: “The more successful a game gets, the more conservative the team gets.” However, the situation is exacerbated in companies that are large, mature and have significant internal competition for scarce resources among multiple established businesses – companies like many of ours as Global Corporate Venturing readers.
Setting up the group to counter barriers
When structuring a corporate venturing and innovation group, the primary goal is to tackle these barriers. As these barriers are in play in a different way at each company, there is no one-size-fits-allapproach. However, there are five critical decisions areas.
l Goal
l Governance
l Strategic engagement
l Resources and processes
l Role of the businesses
These decisions are a way to acknowledge and institutionalise that innovation requires a different structure than business as usual.
Goal: what are we trying to achieve? The first and most fundamental decision for the combined group is its goal – and “innovation” is not an acceptable answer. It needs to be specific enough to inform the group’s structure. For example, if the goal is to create entirely new businesses, then the group is likely to require freedom to set up new corporate entities, go off-brand, and in some cases do spin-outs.
In contrast, if the goal is to help drive the existing businesses, then fewer degrees of freedom are required.
Governance: how do we make decisions and determine how we are doing?
Once the goal is determined, the next critical step is establishing a governance structure for making decisions. A well set-up governing body – whether a single person or a group – can choose to take risks and set an example for action for the rest of the company.
Broadly, two levels of decision-making happen for a combined corporate venturing and innovation group.
l Portfolio decisions: This is not equity investment portfolio management. It is more macro, applying to the entire range of the group’s activities across incubation and equity investment. It covers elements such as strategic themes, types of innovation, time horizon, and stage of incubation process start-up arc. It also ensures the pipeline of opportunities and investments is healthy and capable of generating some wins. Over time, you can measure the portfolio’s composition and health to guide decision-making on specificopportu-nities. The people responsible should be the same indi-viduals that participate in setting strategic themes – a very senior group, potentially including or solely consisting of the chief executive (CEO).l Specificinvestment decisions: The two big structural questions are whether the same entity governs both incu-bation go/no-go and equity investment decisions, and whether the business units (BUs) are part of the decision-making process. If the goal of the group is closer to the core, then the BUs are at least likely to play a role in incu-bation project go/no-go decisions. For equity investments, when the goal is non-core growth or there is concern about keeping a firewallbetween the BUs and the confidentialinformation of the companies in the investment portfolio, the BUs could be excluded from decisions, but potentially providing some level of input. Here are two illustrative examples of how these issues may combine, showing the closer the goal of the group is to the core, the more complex the governance structure is likely to be.Goal is growth adjacent to the core businesses.l Innovation portfolio council consisting of the CEO, chief financialofficer(CFO), senior vice-president (SVP) of strategy and general counsel.l Venture capital investment committee consisting of the CFO, SVP strategy, and head of the corporate ventur-ing and innovation group.l Incubation investment council consisting of the BU heads, key functional heads, and head of the corporate venturing and innovation group.Goal is significan non-core growth.l Same group makes all decisions and consists of the CEO, CFO, SVP strategy, and head of the corporate ven-turing and innovation group.
Strategic themes
Strategic themes focus internal communications and decision-making, provide rigour to the selection of projects and investments, and add context for portfolio management. Because they are for internal use, strategic themes are most powerful when tailored for resonance within the company, and may not map to external technology or “space” definitions.
Themes can come from a long-term vision exercise, from a BU strategy, or from some other corporate strategy. When possible, the corporate venturing and innovation group should adopt themes that align with the existing strategy or vision of the company.
When necessary, such as when there is not a longer-term strategy with which to align, the group should seek consensus among stakeholders around new themes, facilitating the development of strategy and vision as appropriate.
Resources and processes
The corporate venturing and innovation group needs its own budget and a staff capable of executing incubation projects. It may not be obvious at first,but even when the goal is helping the core, the group’s self-sufficiencywill be key to its success in collaborating with the rest of the organisation. Compared with giving the BUs extra budget to be innovative, the BUs may actually be more innovative by seeding and guiding an idea without the burden of doing and paying for everything.
Instead, they can tap a separate budget and a set of people specialised in defining, testing and iterating new ideas. Even in the absence of an incubation group, a venture capital team with pocket money to seed BU pilots with portfolio companies can be highly effective.
As an example of what the corporate venturing and innovation group can offer a BU, the group should have a project framework for rapid prototyping and evaluation of opportunities, including those with partners. In my experience, if you have the right process and people, an on-ramp stage of 100 days and $100,000 can often overcome the uncertainty that would otherwise preclude even starting. In addition, having a group where ideas can safely fail fast will remove some of the hazards BU leaders might perceive in trying new things.
Role of the business units
Some readers may object that, to take an innovation effort seriously, BUs need to contribute budget and people, otherwise, there is no real commitment. For some compa-nies, that means augmenting the corporate venturing and innovation group with BU budget and resources on a per-project basis.
However, BUs may not have flexibility to contribute resources to opportunities that are unplanned during a year or otherwise have an inability to act. As a result, a non-resource-based way of showing commitment is required, such as participating in decision-making and championing opportunities.
Beyond the project-specificarrangements between a BU and a corporate venturing and innovation group, the group needs a consistent way to stay close to each BU, unless the goal is to pursue only the most disruptive of opportuni-ties.
My experience is that instead of being ad-hoc, the mechanism should have a constant planned rhythm. For smaller companies or those with fewer businesses, the head of the corporate venturing and innovation group can meet the BU leadership teams regularly.
In companies with many businesses, the group can identify the equivalent of “account managers” for each BU. These people may become indirect members of the BU leadership team, participating in all their regular meetings.
This allows the corporate venturing and innovation group to have input to strategy and help identify ideas with BUs in an organic, continuous way, rather than waiting for specificoccasions in which everyone is supposed to come together to envision the future and innovate.
Bringing it together
For companies building expertise and capabilities in the process of innovation, structure matters. You need to address it at the beginning, as you are bringing together a group like the corporate venturing and innovation group. Otherwise, no matter how good your ideas or opportunities, they will be subject to the same innovation barriers that motivated your creation of the group in the first place.
To solve the problem – as opposed to moving it – you need to structure the group to be distinct and specialised yet connected in the right ways to the rest of the organisation. It is not easy, but it is far easier than improvising your way to innovation.
In 2011, Jacqueline LeSage Krause’s team at the Hartford won Global Corporate Venturing’s award for best practices in financialservices for combining incubation and invest-ment. She currently divides her time between Hartford and San Francisco, focusing on new entrepreneurial ventures in healthcare, insurance and consumer services. Next month, she focuses on tips and tricks for owning commer-cial pilots instead of handing them off to the businesses.