Corporate venture capital invests externally through taking minority stakes in third parties whereas corporate incubation operates internally. If you are accountable for the realisation 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.
Strategic value: you already own it
Congratulations – you just closed a perfect strategic investment. You are backing a big data start-up that aims to revolutionise a core business process in your industry. Your strategic edge is accessing the technology first, influencing its development and incorporating it into your product before any of your competitors. If your company succeeds, you not only get a first-mover advantage, you also become the case study that drives more customers to the start-up, thereby increasing your investment’s financial value.
It all sounds good. But with the deal done, who at your company owns the strategic follow-through of getting the start-up’s technology adopted internally? Who figures out the right business model for offering the start-up’s solution within your product? If it is you – by design or default -then you should consider how external investing and internal incubation could align under a single corporate venturing and innovation group.
While corporate venture capital invests externally in start-up companies, incubation internally develops strategic opportunities from initial concept through significant iteration to the point of launch, kill or spin-out. These two groups can help each other succeed.
An incubation team has protected resources and processes designed to overcome an established company’s natural inertia against the new and unproven. These are the people who can facilitate, and if necessary execute, your company’s side of a pilot project. They can also do much of the business planning in conjunction with, but not greatly burdening, key stakeholders. In return, the corporate venturing team’s network and marketplace visibility can help access potential incubation partners, including those not related to the investment portfolio.
Why investing and incubation go together
Internal and external innovation fit well together because they have much in common.
Shared goal of strategic options for growth: A single group can be accountable to the chief executive (CEO) and leadership team, acting as an internal advocate for innovation and overseeing a portfolio of innovation activities addressing the same strategic themes at different stages of development across multiple time horizons.
Shared internal innovation obstacles to overcome: A single group can create a common context, governance and process to tackle three of the main reasons big corporation cannot innovate – difficulty with uncertainty, focus on today instead of tomorrow in the pursuit of quarterly earnings and fear of action that could risk the brand.
Shared external ecosystem: To be effective, corporate venturing and internal incubation both tap the same network of start-up and mature companies, investors, institutions and service providers. Coordinating efforts provides clarity and a single consistent touch point for the ecosystem.
Bringing these two activities together into a corporate venturing and innovation group under one leader can be very powerful when the rest of the company has agreed that this decision-maker has the freedom
to get things done in an uncon-ventional matter. Not only do the investing and incubation teams work better together but they go faster.
Key elements of the group
The corporate venturing and innovation group combines elements of a corporate venture team and an internal incubation team into a single organisational entity.
It is led by a head of corporate venturing and innovation or a chief innovation officer.
It reports to the CEO, chief operating officer or perhaps a head of strategy, but not one of the other shared services such as finance, information technology or marketing.
It has an enterprise-wide mandate.
It takes a portfolio approach to both investment and incubation.
It has its own protected people and project funds and is not a shared service.
It partners point people in the businesses and functions, offloading much of what otherwise would be the point people’s extra work in a new initiative. This partnering without burdening goes a long way to achieving buy-in.
It oversees all minority equity holdings, whether investing off the balance sheet, through a separate dedicated fund or as an investor – limited partner (LP) – in independent venture capital funds.
Depending on the company’s industry and growth strategy, the corporate venturing and innovation group can stick with investing and incubation or expand to include other familiar external and internal innovation activities, such as strategic alliances, spin-outs, new product development, research and development, emerging business units or innovation-oriented mergers and acquisitions.
In addition, if a corporate venturing and innovation group is successful at developing new opportunities under uncertainty, the core business will want more. For example, the group may be asked to provide culture-oriented services such as coaching project teams in the incubation process or acting as an internal venture capitalist to select and fund
innovation projects within the core business. While these activities may please the company leadership, they can end up having a greater impact on employee engagement than execution towards strategic options.
Single entity, separate teams
If they are in the same group, the incubation and investing teams should remain distinct. This reflects the significantly different skillsets required. For example, the incubation team may be a mix of people brought in from the outside who have experience creating something out of nothing, and people from inside with deep internal networks and knowledge of how to get things done.
In contrast, the corporate venturing team will be people with broad external networks and deal experience. The two teams will collaborate on common strategic goals and share their internal and external networks, albeit with appropriate firewalls around confidential information possessed by the corporate venture capital team.
Common innovation portfolio management
The corporate venturing and innovation group takes a portfolio approach to both investing and incubation, maintaining an external investment portfolio and an internal incubation portfolio. In both cases, there is not a single bet or a best bet, but a number of ideas in development, many of which will fail along the way before becoming strategic options. Thus, innovation portfolio management is critical to the success of the corporate venturing and innovation group. This is the umbrella framework used to set strategic themes, evaluate the health and status of innovation activities and assess strategic value. Managing the portfolio
ensures the activities of the group are diversified across strategic themes, time horizons, types of innovation and stages of development. The framework is used in conversations with the company’s senior leadership to discuss performance of the group and make key decisions.
Conclusion
Let us reconsider the big-data investment cited at the beginning of this article, first without a corporate venturingand innovation group.
The good news is, there is an enthusiastic business unit champion – you would be nowhere without her. However, the number of moving parts that influence the realisation of strategic value is still huge, such as if the champion takes on a new leadership role. Her designated point person for working with the start-up is assigned to a major six-month corporate initiative and the latter’s direct report has just been tasked with identifying how to cut another $50m from this year’s budget. As the business unit shifts priorities to deal with the declining budget, the budget slack used to fund the unplanned pilot with the start-up disappears. “We really want this, but maybe next year…”
In contrast, a dedicated innovation team with its own resources – people and money – and under the same portfolio management and decision-making umbrella as the corporate venturing team can still proceed.
Congratulations, indeed.
In 2011, Jacqueline LeSage Krause’s team at The Hartford won Global Corporate Venturing’s award for best practices in financial services for combining incubation and investment.
She currently divides her time between Hartford and San Francisco, focusing on new entrepreneurial ventures in healthcare, insurance and consumer services. Next month, she considers the key decisions for a corporate venturing and innovation group. In a third article in August, she focuses on tips and tricks for owning commercial pilots. instead of handing them off to the businesses.