The dotcom bubble may have burst, but this big bang seems to have done nothing to deflate companies’ enthusiasm for investigating new ways of obtaining revenues. In fact, at a time of low inflation around the globe, there is intensifying pressure to find new markets, and create new products and services.
The way management consultancies and others are attempting to meet this demand is by promoting a concept known as “corporate venturing”. The activities in this area of well-known companies such as chipmaker Intel, internet business solutions supplier Cisco Systems, information group Reuters, and others, demonstrate that it is an idea with much to recommend it.
But there is no denying that its appeal is partly tied up in the general excitement that surrounds entrepreneurs. Francois Austin, one of the founders of Corven, a consultancy that helps companies establish new businesses, sums this up by saying that corporate venturing “fits into the growth and innovation agenda of senior executives”.
An academic with a keen interest in the area is more blunt. Corporate venturing is, he says, an MTI (a major trendy issue). It could be suggested that nothing better illustrates this than the fact that the government has latched on to the idea. Since April 2000, there has been a government-sponsored corporate venturing scheme, under which large companies can gain tax benefits from participating in certain forms of corporate venturing.
And, in last month’s Budget, Gordon Brown announced measures to improve the scheme.
Nevertheless, for all the excitement that it generates, corporate venturing remains a mystery to many. As a result, the Confederation of British Industry, which produced a report on the subject a few months before the Chancellor announced his scheme, believes the government would be better off raising awareness than organising a tax relief scheme.
One of the problems facing promoters of the concept is confusion as to just what corporate venturing is. Essentially, it refers to an arrangement by which a large company becomes involved with one or more smaller ones with the aim of both benefiting. Typically, the large company will provide cash through taking a stake in a business that is of strategic importance to it. The practice is particularly widespread in the computer and pharmaceutical sectors because innovation in these highly competitive and fast-moving industries often occurs in early-stage start-ups. Corporate venturing gives the established player access to the technology and it gives the start-up the finance or marketing and distribution it needs to expand, often overseas. The recent McDonald’s purchase of a stake in Pret a Manger, the upmarket chain of sandwich shops, can be seen as an example of this.
The CBI defines venturing as “a formal, direct relationship, usually between a larger and an independent smaller company, in which both contribute financial, management or technical resources, sharing risks and rewards equally for mutual growth”.
This is a broad interpretation that covers distribution and marketing arrangements, where no investment is involved, as well as what is termed corporate venture capital, where corporates provide risk capital either as an indirect investment through venture capital funds or through a specially established fund. Some organisations also use corporate venturing to include their initiatives that encourage employees to become more entrepreneurial.
Connected to this is the increasingly popular approach whereby companies identify within themselves assets – such as brands, intellectual property or people – that they can use to develop new business lines. This is what Virgin Group has been doing by using its brand to expand into a wide portfolio of activities that now includes travel and financial services.
However it is defined, corporate venturing is on the rise. According to Professor Gordon Murray of London Business School, activities in this area have increased 50-fold in the past three years, so that last year $17bn was invested in this way around the world.
However, even proponents accept that such investment is cyclical. There was a lot of activity in the 1980s, before the recession of the early 1990s stifled it, and the recent boom encouraged even more action as companies of all sorts sought to establish their “new economy” credentials. Major corporates and the consultancies that advise them have rushed to set up venture funds and incubators. Management consultancy Booz-Allen & Hamilton believes that every European chief executive should be exploring corporate venturing initiatives.
But not everybody agrees. Diana Noble, managing director of Reed Elsevier Ventures, the Anglo-Dutch publisher’s recently-established corporate venturing arm, suggests the activity is most suitable for sectors that are undergoing great change and where – as in pharmaceuticals and computer technology – innovation is typically in entrepreneurial, venture capital-funded small companies.
Noble says she left “pure” venture capital for a similar role with the publisher because she could see that the field was core to the company’s strategy. She feels the company’s objective of providing customers with the best content and technology available will require “a network of partnerships to supplement the traditional methods of build or buy”, and she adds that many of these partnerships will involve fast-growing, emerging companies.
In making this move, the publisher is following a trend that – like so many in management circles – began in the US. Besides Cisco and Intel, the healthcare products group Johnson & Johnson has for many years operated venture funds on both sides of the Atlantic. Indeed, it is reckoned that about two-thirds of the top-100 US companies are either using or thinking of using corporate venturing as a means of increasing revenues, with 28 corporations having gone public on investing more than $100m in this way.
In Europe, the figures are more modest. The true picture is difficult to obtain because companies are concerned about giving away commercial secrets. But about 100 of the continent’s largest 2,000 companies are said to be running corporate venturing programmes. Corven says it is estimated that between 1994 and 1998, #3.7bn has been invested by EU corporate venturers, creating 55,000 jobs.
These figures are likely to grow. As well as pharmaceuticals and high technology, the utilities sector has been identified as an area ripe for activity of this sort, as companies seek to use their knowledge of customers to expand beyond regulated operations. However, as Scottish Power’s recent decision to concentrate on its core energy business suggests, corporate venturing can be tricky. The CBI has warned that conflicts of interest, changes in priorities on the part of investing companies, disputes over exit strategies and the need for further capital are just some of the problem areas that can beset arrangements between large companies and their smaller counterparts.
But even businesses seeking to establish new ventures within themselves can run into problems. In an article in a recent issue of its magazine Strategy & Business, Booz-Allen points out that there are often tensions between the core business and the new venture, often involving financial resources or people. One way of tackling this is to take the approach of Lucent Technologies and its new ventures investment arm, Lucent New Venture Group, and share in the value captured from the ideas emerging from Bell Labs (the heart of the company that became Lucent) through joint marketing agreements, acquisitions and product development collaboration.
Austin says that conflicts also arise from the two parties’ approaches to decision-making. While a corporate might want to take a long time to analyse opportunities, new ventures typically operate in areas that require quick decisions. Tied in to this is what he calls “the ability to fail fast”. Corporates, he says, have a tendency to keep ventures going for too long, when they should be more like venture capitalists in their readiness to make hard choices about how much time to give an idea.
All of this is also linked to the people aspect. Corporates often do not have the sort of people required to run new ventures within their ranks and so need to recruit them, creating tensions over such matters as pay and management style. Nor is it a simple matter of having certain people for the established business and others for new ventures. Corven helps businesses deal with the fact that they need “strategic architects”, who can have a vision, plus people who can lead the growth of the business and others who can manage the next phase, which may involve spinning off the new business.
There are other pitfalls, too. According to one executive active in this area, companies have to abide by the usual business disciplines – and the over-riding need is for focus. “Don’t invest in black holes, don’t send good money after bad, understand the business objectives, allow space to develop the proposition, but still define it – otherwise you have a good idea but no money coming from it,” he says.
That said, the potential gains of corporate venturing can make the risk worthwhile. Just look at how the mobile phone company Vodafone has transformed itself from being a modest part of Racal Electronics.
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