What should large corporations do to accelerate innovation and remain relevant? Or, stated slightly differently, what should such corporations do to avoid being disrupted by younger, more agile and innovative startups? A conventional answer to these questions has been to engage in corporate venturing.
In recent years, a great deal has been written on corporate venturing or corporate venture capital, which is usually understood as a corporation making an investment in external startups either “directly” – off the balance sheet through a corporate venturing unit – or “indirectly” – through a venture capital fund – for strategic or financial gain or both. Understanding whether and how this type of financing represents an effective use of capital or an effective means of funding young, high-growth startup companies is a central issue in debates on the innovation sector of the economy.
On the one hand, Global Corporate Venturing and other information providers offer multiple examples that point to corporate venturing’s potential to complement a corporation’s internal and open innovation strategies. Such examples also show how corporate venture capital can be a valuable source of funds and other services, for example know-how or network access, to founders and startups.
On the other hand, however, there is significant evidence that corporate support may compare unfavourably with more traditional forms of venture capital, both from the perspective of the startup receiving the support and the large corporation that provides it. It is no secret that corporate venture capital is not always well regarded in the startup world. Differences in expectations, aims and practices can reduce the possibility of both parties benefiting from the corporate-startup relationship.
During a recent fireside chat at CB Insight’s The Future of Fintech Conference, venture capitalist Fred Wilson restated his dissatisfaction with corporate venture capital activities: “I hate corporate investing … it’s stupid. Corporations should buy companies.”
In earlier comments, in June 2013 at Pando’s conference, Wilson had already made it very clear that he would “never, ever, ever, ever” invest alongside corporations again, although he later clarified he was primarily concerned with “strategic” rather than passive, meaning financial, corporate investors.
What is interesting is that corporations also find it difficult to establish a clear connection between corporate venturing activities and their own efforts to stay relevant, innovative and competitive. Earlier research found that nearly half of the researched corporate venture capital units had a very short lifecycle or were largely inactive. But even those companies that are active in the area of corporate venture capital also appear to find it difficult to innovate, anticipate disruptive trends and adequately deal with the numerous challenges of today’s business environment.
How do the most innovative firms utilise corporate venturing?
As a response to this more sceptical view, we wanted to revisit the question of the effectiveness of corporate venturing by looking at the current venturing strategies of the most innovative publicly-listed companies in the US, according to the Boston Consulting 2015 list, the Forbes 2015 list and the Fast Company 2016 list.
Interestingly, we found that – in the best cases – corporate venturing has become a key strategy in ensuring that larger and more well-established firms do not become consumed by the negative effects of a “corporate attitude”.
By this term, we refer to an internal corporate culture dominated by overly conservative and bureaucratic decision-making, static-closed-hierarchical organisational forms, and a myopic focus on formalistic regulatory compliance and maximising shareholder value. Over the medium to long term, those firms under the influence of a corporate attitude will tend to fail in developing strategies that deliver the innovation necessary to survive.
Although there are some important advantages to investing directly or indirectly in startups, particularly in terms of the relationship and interaction between the corporation and networks of startups, the real question is whether the corporation’s role as direct or indirect investor can have an impact on the corporate attitude that all too often prevails in more mature enterprises.
We acknowledge this is a difficult question to answer. Nevertheless, our research suggests the most innovative corporations employ other venturing strategies that go much further than simply operating as a source of capital. Crucially, these strategies provide an important mechanism for large corporations to leverage the benefits of corporate venturing to resist the spread of a corporate attitude. In this way, corporate venturing can play a key role in preserving the capacity and culture of innovation necessary for all firms to survive in today’s hyper-competitive global markets.
What then are the strategies employed by the more innovative corporations?
Creating an environment for serendipity
In their corporate venturing practices, the most innovative corporations acknowledge the benefits of fluid boundaries as an important strategy for maximising opportunities for mutual learning between corporates and startups. Building relationships with incubators and accelerators is one way of achieving this goal, but it can also be supplemented by other, perhaps simpler, measures that create multiple opportunities for serendipity – happenstance encounters that can add value to either the corporation, the startup or, ideally, both.
Recognising that “fluid or porous boundaries” have an important role to play in forming and transforming corporate culture, more innovative corporations offer an opportunity for corporate employees to routinely mix with startup founders and employees by embracing the “open architecture” associated with co-working spaces. Such co-working spaces are, by definition, more conducive to the kind of happenstance interaction and collaboration that can foster innovation.
Acquiring and retaining founder-entrepreneurs
Many large corporations routinely acquire control over startups that they may or may not have funded through corporate venture capital. What is interesting, however, is that the more innovative companies seek to preserve that startup’s unique identity and do not seek to assimilate it into their own established corporate culture. This approach is in marked contrast to conventional merger and acquisition practices in which absorbing the acquired company into the structures, practices and culture of the acquiring company is usually regarded as the most effective strategy.
Take the example of Amazon and Zappos. Amazon acquired Zappos, an online shoe retailer in 2009. The interesting thing about the Zappos example is that after the acquisition Amazon did not seek to change key aspects of Zappos’s internal organisational culture. Quite the contrary, aspects of Zappos became part of the larger Amazon ecosystem. For instance, Zappos instituted a “pay-to-quit” policy in which they offered all employees a dollar-amount to quit. The logic of the offer seems clear. If an employee is not 100% committed to the firm and its flat organisational culture, then the company would rather pay now than pay later. Zappos’s pay-to-quit principle was later adopted elsewhere within the Amazon group.
Amazon is not alone in this regard. In our sample (see table), a number of large corporations have been able to retain the founders of the startups they acquired. These startups were not absorbed into the acquiring corporate, but were integrated into an open “ecosystem” that allowed the startup to preserve its own identity while enjoying the benefits of being associated with a larger firm – growing faster and exploiting synergies with other departments or businesses within the ecosystem. In addition, this also opened the possibility of the startup influencing the culture and practices of the acquiring parent firm.
Introducing an entrepreneurial and corporate venturing culture
Some companies in our sample have transformed “corporate venturing” into a main driver of their firm’s culture, specifically promoting an internal culture of entrepreneurism. This is without doubt the most important corporate venturing strategy that we identified.
Consider the example of Google and its Area 120 project. This project offers employees within Google the opportunity to become entrepreneurs. Under the scheme, 20% of an employee’s time can then be set aside to pursue a business idea, for which they can receive money and other types of support associated with incubators. With such a project, Google shows that it understands it does not simply have employees, but potential entrepreneurs that can and should be stimulated into action.
Netflix offers an even better example. In 2009, its founder Reed Hastings introduced in a 124-page slide deck outlining a forward-thinking approach to corporate culture that helps to attract and retain talented people by offering them a much greater degree of freedom and responsibility. The effect of this approach is that every Netflix employee is treated as if he or she were an entrepreneur.
Building the right kind of internal corporate venturing culture is a crucial step. However, another important part of this strategy involves the corporation giving back to society – particularly the local community – in order to improve that community. In the context of corporate venturing, this may mean the corporation supporting local startups that operate in diverse sectors of the economy, possibly unrelated to the corporation’s main business.
This kind of interest in community-building is often found amongst the more innovative corporations. For instance, Salesforce has integrated a giving-back policy into its business model. This involved offering grants to support the communities “where our employees live and work”. The result of such efforts is an ecosystem with a balanced internal and external entrepreneurial culture.
Building a flat, open and inclusive corporate venturing ecosystem
Too often, the focus of the contemporary corporate venturing debate has been on corporate venture capital – investments made by corporates in order to acquire, either directly or indirectly, minority stakes in smaller third-party startup companies. If we look at the most innovative companies, however, we can see that this strategy alone is not enough for large corporations looking to survive in a world where the pace of innovation is constantly accelerating.
The world’s most innovative companies recognise the need for a more imaginative approach. They understand that their future prospects will not be solely determined by developments in technology, but also by the organisation of the firm. This means putting in place the organisational structures and capacities to meet the business and design challenges associated with assembling the products or services of the future. By offering a powerful means of resisting the potentially destructive effects of a corporate attitude, corporate venturing can become a critical mechanism for maintaining the culture of innovation that is necessary for all firms to maximise their chances of sustained success.
This is an updated guest comment based on an address by Erik Vermeulen to the GCV Symposium in London in May