In 2013 corporate VC yielded 3 times the number of patents per dollar invested than in-house R&D. This is not a single and exceptional observation, but rather the one that caught my attention and prompted me to look into what is being said about the performance of corporate venture funds.
Traditionally corporate venture funds are set up to engage with startups active in the industry that the company operates in. An early and successful example is Eli Lilly’s corporate fund set up in 2001 to engage in the proliferating biotech startup scene. By 2013 it had already engaged in 30 deals and brought home a considerable amount of knowledge on development of biologics.
It is increasingly argued that corporate funds show agility and flexibility that usually the internal R&D structure lacks, and bring new ideas and tools to the company that may even impact its future direction. All this does not mean that running successful corporate venture funds is easy. Far from that, it is more of an art to combine the slow and process driven culture of a large company with the agility required for a venture fund to bring in home runs.
One of the values of setting up and running a corporate venture fund is that companies are finding such funds useful for learning about the external world, and where innovation is heading outside their walls. Corporate venture funds are also seen as an intelligence device identifying technological threats to the company’s competitive edge. This is in contrast with the inward focus of R&D, which to some extent is natural, as their work is actual product development, and the skills and expertise amassed in the R&D division are focused on problem solving in order to develop a concept to a final product.
There is a tension here between what the R&D is mainly organized to do, namely focusing on producing a scalable end product as opposed to the skills and requirements for scanning the outside technology and innovation horizon for ideas, disruptions and trends. Corporate venture is expected to fill this gap, which it is increasingly doing successfully in areas it focuses its investments. However, despite their undeniable advantages corporate venture funds require considerable time, effort, money and skill to run successfully. Although initially it seems logical to use corporate venture funds as frontline scouts for sensing the outside world, it would not be able to address all of the intelligence needs for the company’s innovation foresight requirements. One example is the requirement for highly skilled individuals familiar with the world of venture capital in setting up and running the fund. This follows the need to overcome incompatibilities between the mindsets of a risk happy venture capitalists and the risk shy and process driven corporate executive. This tension can often lead to loss of access to knowledge, which for corporate ventures functioning as source of intelligence on outside trends may be far more important than potential financial returns. There are a number of obstacles to the flow of knowledge from the corporate venture arm to the executives of the parent corporation:
- Geographic distance
- Focus on day to day reduces attention and immediacy of knowledge dissemination
- Culture gap between the venture arm and the rest of the organization
- Lack of an immediate and obvious connection between the nascent technologies developed by startups with what the company is doing now
- Lack of awareness that a corporate fund can be a source of knowledge about the world outside
Often the reach of a corporate fund would be limited to its area/s of focus.
The need for flow of information on how the world outside is changing and the impact of external changes on the ability of the company to stay competitive goes beyond the immediate focus of the corporate venture arm. Furthermore, setting up and running a venture arm is a major strategic investment which requires planning and longer term commitment to which many companies may not be willing or able to commit to. Nevertheless, the need for detecting technological disruptions and understanding their impact on the industry and competitiveness of the firm remains a priority.
One way to approach this need is to create an external knowledge capital fund. This fund can be a connecting hub for various divisions of the company that may traditionally not exchange much information with each other either. The hub invests in acquiring knowledge, both externally in form of various scanning and foresight exercises as well as internally through internal innovation portals. The real power of this system emerges when external information, trends and patterns identified are matched against the internal knowledge and capabilities to identify:
When the external trends and body of internal capabilities overlap strongly, new products and services can be developed rapidly with minimal or no external help
Where external trends and internal capabilities show only limited compatibility, there is value in finding relevant partners and external parties to acquire skills and technologies to develop products and services within a 3 to 5 years horizon
When the external trends and knowledge acquisition opens up new opportunities, this is when the highest value generating innovation can happen. Radical shifts towards new competitive fields can be achieved.
The value of a systematic approach to acquisition and dissemination of external knowledge through the organisation will go beyond the immediate sourceing of information and trend identification, it will be a hub for exchanging information, connecting knowledge, expertise and skills internally, and creating a gateway for connection to the outside world. Such a hub serves multiple divisions from the same source preventing multiplication of time, effort and resources spent on acquiring the same knowledge independently by different divisions.
A corporate knowledge fund generates value by creating a flow of information/knowledge from the outside into the company and ensuring the further flow of the information/knowledge within the company, linking idea generation, innovation and translation.
References on Corporate VC info discussed in the article:
If you can’t beat them, buy them; the Economist, November 22nd 2014
Corporate Venturing, Josh Lerner, HBR, October 2013
Will corporate venture capital disrupt the traditional investment ecosystem? Rami Rahal, entrepreneur.com, December 16th 2014
How corporate venture capital helps firms explore new territory, Jos Lerner, HBR, 10th September 2013
New game for corporate R&D and venture capital, Igor Sill, Geneva Venture Management LLC