With the technology industry in the midst of another boom cycle, many large corporations, particularly IT vendors, are investing heavily in their corporate venture efforts to gain access to trends in innovation and investment opportunities. However, previous booms have demonstrated that creating a sustainable corporate venture organization is in fact quite difficult even for companies with the best intentions.
Large corporations are well-positioned to be successful venture investors. Most have large cash balances, tremendous knowledge of emerging technology markets and customer needs, and significant capabilities and commercial networks. These competencies make the large corporation a differentiated and value-added venture investor in a world where capital is a commodity.
Creating such an organization within a large corporation is difficult when executives shift between departments and strategic priorities change on a regular basis. A small number of companies,including SAP, have taken significant steps to align their corporate venture effort with entrepreneurs’ needs while still meeting the corporation’s long-term objectives. While these initiatives sometimes differ they typically include these five, critical steps:
1) Create an affiliated but distinctly separate identity. The venture arm’s brand needs to demonstrate its independence and commitment to entrepreneurs while still showcasing the strengths of the affiliation with the parent company.
2) Commit to long-term financial support. Annual capital budgets don’t work in venture capital. The venture group needs to provide entrepreneurs with unfettered, ongoing access to additional capital over multiple years.
3) Provide the right incentives. The venture organization should retain de facto independence and be composed of professional investors focused on the portfolio companies’ success. A good investment team will also want incentives aligned with the financial return of their investments, not the achievement of larger corporate strategic and financial objectives.
4) Adopt a hands-off approach once an investment strategy is final. This is critical for retaining a quality team. Excessive involvement in investment decisions thwarts the overall objective of the corporate venture effort by disempowering the investment team.
5) Forge connections between the venture group, its portfolio companies and the parent company. A significant ongoing investment of events and marketing within the parent company is necessary to ensure that the venture organization continues to have access to the parent company’s capabilities.
The above strategies can be challenging for many large corporations to accept. Senior executives must advocate to their boards a significant long-term capital commitment to an undertaking over which it will have little day-to-day control. Building consensus inevitably requires a trusted corporate executive team and venture investment team to have been in place for many years beforehand. However, the rewards of building a team and the right organizational construct can provide ongoing exposure to the most exciting emerging technologies and markets. Meanwhile, entrepreneurs will recognize this new breed of corporate venture investor for their ability to provide the best of both worlds: a strong, sustainable organization focused on their success with access to unique capabilities that can’t be found anywhere else.
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