Most corporations are concerned about the threat of disruption and some hope their corporate venturing organisation will help them find the next big disruptor. But venturing away from the core, or explorative investing, is about helping the corporation stretch beyond its core assets and resources and see not only potential disruptions, but new opportunities. Smart corporate venturing organisations help their parents see how combining what they do well with new business models, technologies, or taking advantage of new trends developed by startups can create new markets, resulting in a more agile organisation.
Management professor Henk Volberda described this more agile organisation as “the flexible firm”, one that could simultaneously handle the friction of the need for preserving the business while anticipating and embracing its change. Corporate venturing organisations can aid in that mission – to make investments that help preserve their corporate advantages as well as help it prepare for changes that require new skills, assets and technologies. Nowadays, as software, artificial intelligence, robotics, 3D printing, virtual reality, and many more technologies begin to enter other mainstream industries, there has never been a great need.
Exploratory venturing: how hard can it be?
How hard can it be for corporate venturing organisations to invest venture dollars away from the corporate core? Several years ago, I did an extensive research project to find out. I studied more than 100 corporate venturing investments that were made in smaller companies that were doing something outside the corporation’s area of expertise. These companies had received investment for no other reason than for the corporation to watch and learn from them.
As a former managing director at Intel Capital, where we often made exploratory investments, I was well familiar with this type of investing, and I had my ideas on what I would find. Intel Capital generally had an expectation of making a certain number of exploratory, or “eyes and ears” investments, a term coined by Intel Capital founder Les Vadasz for those companies that lacked a defined business relationship. These were generally smaller investments made in companies with no purpose other than for Intel to learn from them.
Studying these 100-plus investments made over more than a decade led me to some interesting insights about the characteristics of the companies themselves, as well as what the corporate investor did to make them more successful strategic outcomes. I ended up with more than a dozen data points, but I will share only a few here.
More capital and more time
First, regarding the investment company characteristics, out of the many characteristics I studied, two things stood out for having an impact on the corporate venturing investment. First, compared with other companies the corporations had invested in, these more exploratory investments received more funding over their lifetime – a lot more funding. In fact, they received on average about $11m more venture capital funding than other investments the corporate venturing units had made. These more exploratory companies required more capital to bring their offerings to market.
The second characteristic that stood out was that the corporate venturing investors had, on average, invested in the companies much earlier in their lifespan than they had in other types of investments. The average age of the companies was just under three and a half years old, while the average company age for other investments was almost two years older. Recognising these two characteristics alone indicated one thing – corporate venturing organisations venturing further from the business are taking greater risks than those that did not.
Successful venturing: keep the business unit away
My research also explored how the corporate venturing unit and the corporation worked with the investment company and whether or not that had any bearing on whether the investment was considered strategically successful. Out of all the attributes considered, two were the most interesting – the more the business unit was involved in sourcing the investment, as opposed to the corporate venturing unit, and the more involved the business unit was in supporting due diligence for the investment, the less strategically successful the investment was.
When you think about it, this is completely intuitive. If the corporate venturing unit relies on the business unit to help source the investment – limited by the business unit’s network, market and so on – or permits the business unit to provide input on how successful the company may be, it will be subject to filtering by the business unit’s own view of the world.
This does not mean that the corporation should always be kept at arm’s length, only that the corporation is not as good at finding and investigating companies as the corporate venturing unit is. Once an investment is made, it is the corporate venturing organisation’s obligation to make sure the corporation can learn from it.
As a case in point, one of the investments I personally made while at Intel was in a company we considered exploratory. I found the company, and when we were investigating the potential of investing, we invited the business unit closest to this area of focus to help us. After a short investigation, the business unit told us in no uncertain terms not to make the investment. In fact, they told us that they had a similar project under way that was superior in many ways to the prospective investment, so there was no need.
Undeterred, I introduced the company to Intel’s corporate research group to have them look at the technology and provide an unbiased opinion. That group’s feedback was that the technology was something far superior to that which Intel was considering and it would be something we eventually needed to understand.
After further validation we invested in the company, despite the business unit’s opposition, and placed a member of the research group as a board observer. Only 18 months later, the business unit acquired the company for the very technology it had earlier dismissed.
With all the challenges and hazards of exploratory investing, it might be tempting for a corporate venturing organisation to keep its head down and focus on less risky ventures. However, venturing away from the core in more exploratory investments can bring even greater strategic gains to the corporation, creating a more flexible, viable organisation if the corporate venturing unit and the business unit invest and manage them properly.