Since venture capital funds started to become a serious player in the financial world and began to have an impact on the world of corporate R&D, big corporations started to play there as well. They set up corporate venture funds shelling out several hundred million dollars in many cases. For example BASF, the globally leading chemical company, has invested about € 150 millions in 23 ventures via their corporate venturing arm (BASF Venture Capital GmbH) since its creation in 2001. Evonik, another innovation focused chemical company recently announced to further strengthen its innovation capacity by establishing a corporate venturing unit within its Innovation Management organization. Evonik plans to invest a total of up to €100 million over the medium term in highly promising start-ups and leading specialist venture capital funds.
However, in many cases results were mixed so that some companies decided to even stop venturing. In a survey amongst executives from companies active in corporate venturing, only 37% rated their corporate venturing units as successful (D.F. Kuratko et al., 2009). At the same time venture capital funds continue to harvest nice returns on their investments and grew into a significant provider of new technologies and business models.
How come? Is it intrinsically impossible to do corporate venturing in a big corporation? Are they too risk averse and too slow in their decision processes, two comments often made by capital venture funds? Or are corporations missing a “magic ingredient” to make venturing work in their realm?
A lot has been said and written about corporate venturing concerning strategy and how to run venturing processes in a way that makes corporate venturing successful in a big corporation. But very little thought has been given to and publicly shared about the impact of governance of corporate ventures and its interaction with company culture. In a capital venture fund, everything including governance and culture is focused on and driven by the objective to make capital venturing a (financial) success. However, a big corporation has already a strong culture and has implemented important governance processes before they started to get into corporate venturing. And those pre-existing governance processes and culture elements did not come to life with the overarching objective of making corporate venturing successful.
When a corporation starts a corporate venture function a lot of money is at stake in addition to the reputation of the company itself. Corporate venturing is a very public activity – so failures and shortcomings are widely visible. In addition the venturing community is relatively small and tightly knit. Any blunder will be quickly talked about in many circles and institutions. So it is critical to decide on good governance standards and compliance procedures and have put them in place when corporate ventures go live.
The following governance vectors have proven to be most impactful on success or failure of corporate ventures:
Taking them in turn:
Who ‘owns’ the money financing the corporate venture fund? Typically funds are provided by the CEO, CFO, and CTO agreeing on a budget. But one of them will feel a particular ownership for it, play the leading role in governing the funds, and thereby color how the company looks at corporate venture money and how it measures success of its corporate venturing activities. If the money comes from the CFO, it typically is seen as capital money. So success is measured predominantly on return on investment. That’s OK if the objective of the corporate venture is to provide (better) return on the company’s funds than investing them into building its core and or new businesses. However, more often than not corporate venturing also has a strategic objective, namely to increase the company’s access to new technologies and business models. This can easily get in conflict with the goal of maximizing return on capital.
If the money comes from the CTO’s budget, it is often seen as a corporate expense in the same way as the R&D budget. This typically maximizes its strategic utilization for creating new options for the company but may prove costly if the ‘burn factor’ is too high.
If the money comes from the CEO, he typically leans one or the other way. However, there is also the danger that corporate ventures become the ‘sand box’ of the CEO where he can play entrepreneur.
Who calls the shots? When working with corporate venture arms of big corporations, capital venture funds complain most often about the screening process being too slow and investment decisions taking too long. Often critical go/no-go calls have to be made in a couple of days even if they involve several tens of millions of dollars. So corporate venturing requires setting up a clear and short chain of command in order to ensure a speedy decision process. One problem arises from the fact that there may be too many cooks in the corporate venture kitchen. It helps to be very clear from the get-go on differentiating between who takes investment decisions and who merely concurs, mostly on executional and compliance aspects. Lastly there should a clearly defined process on how and when the Business Units come into play as the ultimate customers of the venturing activity.
How to ensure appropriate controls? Corporate venturing involves spending big dollars and accepting high uncertainties which can be quite controversial in a smoothly operating big corporation which typically focuses on risk reduction. Therefore it is important to define the rules of engagement upfront which are endorsed by the key company leaders (CEO/CFO/CTO). Also some employees involved in corporate venturing may need special training – corporate venturing is a game very different from the core business of most companies!
How to manage expectations? Because corporate venturing involves big dollars it creates high expectations. They have to be managed in the view that many investments will turn out to be utter failures. Only a few will be real but then roaring successes, but typically not the first ones. So corporate venture leaders have to manage the heads AND the hearts of top management. They need to assess the ventures’ status objectively against the agreed success criteria and manage the emotions triggered by the high risk/high return character of corporate venturing. Managing expectations requires mastering the communication challenge of speaking to the hearts and minds of management simultaneously. Using narrative approaches is a tool proven successful in this context.
How to deal with those challenges? What can and should be done? As a first step, Top Management needs to assess whether the venturing process is working as intended and the expectations of the organization, most importantly of the business groups and of Top Management are aligned, and realistic for the venturing group to meet. It is important to also consider the implicit or ‘unspoken’ expectations – those are sometimes even more influential on how corporate venturing is seen and executed than the official management messages carefully crafted by the PR department. Answering the following questions honestly and profoundly will yield a good take on the real situation and the chances of the venturing group to be successful in the eyes of the corporation:
In closing, I believe in and advocate corporate venturing as an effective tool for companies to ensure a sustainable stream of innovations long term. It can complement their internal innovation efforts by giving them access to new and potential break-through technologies and business models outside their usual fields of operation and discovery. Real and impactful innovations often happen at the fringes of the business not at its core. However, corporate venturing comes with a substantial cost and requires top management to deal with the cultural and governance challenges of the venturing world – which in most cases is very different from the company’s core businesses. The price of ignoring these challenges will be disappointing results of corporate venturing activities or even a costly failure.
Joachim von Heimburg is one of the most experienced innovation practitioners in Europe and the Middle East. He designs and implements innovation strategies, processes and structures and makes them operational creating value for the business. This he supports by creating a culture fostering an innovative spirit and entrepreneurial activities.
From 2006 to 2009 he led the culture change of Procter & Gamble from traditional R&D to Open Innovation in EMEA. From 2010 to 2012 he was General Manager Innovation and Corporate Program at SABIC, one of the leading global chemical companies. At present, he works as Innovation Architect and Executive Advisor on state-of-the art innovation capabilities and structures helping companies and other organizations to innovate how they innovate.
He has extensive multi-cultural working experience in 7 countries (Belgium, Canada, Germany, Saudi Arabia, Switzerland, Turkey and the USA). He holds a Ph.D. in theoretical physics of the University of Marburg, Germany and studied economics at the University of Frankfurt, Germany. More on his website www.jvhinnovation.de