Once upon a time, we had many corporate venturing units that invested in external projects as well as in internal projects from the corporate groups they belonged to.
The number of units has declined steadily during the past decade and continues to do so in the aftermath of the financial crisis. One company I have always admired is Danfoss Ventures, which is the corporate venturing arm of Danfoss, a group with 26,000 employees working with refrigeration, air conditioning, compressors and more.
Unfortunately, Danfoss Ventures – my role model on corporate venturing – is now dead. According to Nis Storgaard, executive vice-president at Danfoss, this is about prioritising resources where they make most impact.
He said: "The past few years’ development has sharpened our understanding of how important innovation is – but also of how important it is to prioritise investments where they make most difference. And for us this is in our core businesses that have the knowledge of customers and markets as well as the required competences to turn innovative ideas into good business."
I have heard similar explanations over the years and this makes sense. Or does it? It definitely raises some questions.
History has shown us that companies will continue to grow and prosper in the long run only if they are capable of morphing into new business areas. This does not have to be totally new business areas or industries. Core adjacencies could work if the borders are pushed continually.
A key benefit of a corporate venturing unit is that it can create a safe haven for smaller, entrepreneurial projects that otherwise would be killed by the larger group and its bureaucracy. In theory, a corporate venturing unit should be a perfect model to make this happen and thus help companies morph into new business areas. I have been a strong believer in the corporate venture model. Now I have second thoughts. So many companies have tried to make this work and if not even Danfoss can succeed then something is wrong with the model.
The big question is what companies should do now. My take is that we will see hybrid models that incorporate the best of the corporate venturing model while still having a strong focus on the core businesses. This has not really worked that well in the past, but now we can add a new element to this mix – open innovation.
Open innovation not only brings in more diversity and speed by combining internal and external resources. Open innovation also challenges the organisation to change in order to deal with the complexity that comes from working with external partners. This will bring a more holistic approach to innovation. We will deal with many different kinds of innovation and we will involve more business functions.
Open innovation and the diversity this brings can help companies morph into new business areas – as long as they can figure out how to turn odd-looking ideas into revenues and profits.
Reader reaction
Martin Duval: I agree with your "hybrid model". When it comes to corporate venturing (and generic venture capital firms as well) a difference should be made between the ones aiming at early-stage start-ups or disruptive projects, which is closer to corporate incubators versus the laterstage ones, which are closer to mergers and acquisition units.
Therefore a new breed of corporate venturing should have the ability and skills to: identify and scout early stage start-ups, projects and technologies; contact them, without scaring them, with a genuine sense of partnership; analyse opportunities for a pilot project to test the new technology, service or product; assess the scalability issues in case of full deployment; manage the overall funnel: identify, contact, analyse, partner and test; understand the opportunity and if it makes sense to take a minority share in that company, which could be for different objectives, such as making it sustainable for its own operational needs, believing in a strong market potential, try to lock it from being used too early by direct competitors,maybe secure a first option to take a larger share ownership later if not a full acquisition.
A hybrid and new breed corporate venturing model should include: a focus on speed to test and try pilot projects; proximity with the marketing and research and development teams: far from the former model and cliché of four investment managers isolated on a skyscraper floor… l ideally the ability to test projects with a collaborative platform to get feedback from beta test customers; a budget to build and manage a portfolio of "minority shares" early-stage companies to deliver a fair return on investment over a two to three-year period in addition to the operational success stories brought by the launch of new innovative products and services.
SFR Development in the telecoms sector in France used to be close to that model (www.sfrdeveloppement.fr).
Jarl Rosenlykke: I do seem to miss the point about open innovation being better at morphing companies into new areas, as I believe the main problem remains the same.
You write: "As long as they can figure out how to turn odd-looking ideas into revenues and profits." But isn’t that the exact same problem as in corporate venturing? Of course by morphing, you escape the trouble of running multiple business models.
However, the people inside the current organisation may not be fit to execute whatever the new business is morphing into. Especially in a time where people fire everyone who is not part of the core business – and then there is no one left who has the time or ability to take care of new business areas.
To me the quote from Nis Storgaard sounds like the ageold dilemma of exploration or exploitation. And in times of trouble people stop exploring to make revenue now on what they know.
I might be wrong here, but could you explain why open innovation is better suited for doing just that? As an example of an external corporate venturing company (and I do see corporate venturing as a partnership between an external and an internal partner – not just a company creating a dual business model internally) I would suggest looking into Pilot Lite Ventures, a UK-based company that sounds a lot like what you describe above.
Stefan Lindegaard: My point is external collaboration helps expand the mindset of an organisation. The employees are challenged by the views of others and such friction often provides new inspiration. Hopefully, they will be capable of absorbing this inspiration and turn it into business.
Rob Kirschbaum: At DSM, corporate venturing, including the special legal entity called DSM Venturing, is just one of the many tools to make open innovation work. One does not replace the other.
Rein Vosari: As someone who has been actively involved with innovation and creativity since 1978, I find it amusing there is not the general recognition that various processes have a natural lifecycle. 3M has been using elements of open innovation for more than 30 years. Others have as well. There has always been the opportunity to make or buy. Buying someone else’s work in the form of an acquisition, is much easier, a strategy utilised successfully by Oracle, Microsoft or Harold Geneen at ITT.
Kevin McFarthing: Open innovation allows companies to explore whatever time horizon they want to, whether it is short-term product acquisition, medium-term technology development or long-term fundamental research. They can do so without major commitment to fixed resource or technical competencies. With the corporate venturing model, a lot of the intellectual property has been created by internal research groups, whose inventions have deviated from corporate strategy and are then spun out using venture groups because the company is no longer interested.
Leo Borj: I think the open trend will also encourage intrapreneurs – an entrepreneur in a corporate environment. Intrapreneurialism is a good approach to test new markets in the company, to run spin-offs and address new regional areas. All these activities are innovative and integrate ideas and resources from the company but managed by people from the company.