The Value of Corporate Venturing

Tristan Bierenbroodspot and David van Loo explain and discuss the value of corporate venturing. They also give insight in what kind of advantages are possible with implementing corporate venturing. Finally they conclude that a corporate venturing strategy can be necessary to maximize value.

Commercial companies aim for maximizing value creation; they seek to achieve the highest possible financial return. The traditional or ‘classical’ way of achieving this is by creating a competitive advantage based on competencies that lie within the company itself and raising substantial entry barriers for (potential) competitors. In this case a product is developed by the company’s own R&D department and protected by patents. This ‘classical’ approach has, however, come under scrutiny due to the increasing dynamics in the global marketplace. The effects of globalization have an increasing impact: there are less geographical restrictions, larger potential markets, faster technological developments and rapidly changing needs. This leads to an increasing degree of competitiveness and threat of substitutes for the company’s own products and services.

When taking into account that the global marketplace is becoming more and more dynamic, the question arises whether companies can afford to hold on to the classical approach. An increasing number of companies are opening themselves up to the outside world by incorporating open innovation and corporate venturing into their corporate strategy. Companies like Samsung, Google and Intel have implemented such a strategy and in the Netherlands Randstad, KLM and DSM are among those actively pursuing this. What are the advantages of this approach and why does it lead to more value creation in the long term as compared to the classical approach?

Relevance is the key to value creation

Relevance is the key to maximizing value creation in the long term. Traditional companies focusing on incremental improvement of existing products and markets and the creation of barriers for entrants are perfectly capable of achieving good returns in the short term. However, they should also take into account the opportunities and threats that lie outside the current framework of their own organisation. In an ever changing environment, these companies become increasingly vulnerable in the long term. Due to their decreasing relevance they will be surpassed eventually, which will inevitably lead to a loss of value or even complete demise.

Young companies like Uber and Airbnb, respectively founded in 2009 and 2008, have recently showed how quickly a start-up company can enter a traditional market and cause disruption without any warning. In addition, Apple showed with the introduction of the first generation iPhone in 2007 that companies from other industries can pose a serious threat to existing and market leading companies like Nokia and Blackberry at the time.

Corporate venturing is a key to relevance

An increasing number of companies uses corporate venturing as a way to retain and expand their relevance. Large corporations with a tight organisational structure both stimulate and participate in initiatives that lie inside and outside the borders of the company. This may include setting up an incubator to grow and exploit initiatives of employees, founding of joint ventures, engaging in strategic partnerships and participating in external startups or existing companies. At first, mainly technological and pharmaceutical companies, like Intel and Johnson & Johnson, used corporate venturing. Recently, companies in the energy, consumer, financial, services, chemical, cleantech and transport industry have become increasingly active in corporate venturing.

Corporate venturing has been around before…

In the 60’s, 80’s and 90’s corporate venturing witnessed, as is the case now, a strong uprising. The historical corporate venturing heights were however disrupted by events also affecting the traditional venture capital industry: the collapse of the IPO market in 1973, the crash of the American stock market in 1987 and the economic crisis following the burst of the dot.com bubble in 1999 – 2000. The uprise of corporate venturing in the past was driven in particular by financial return expectations in the short term while keeping in mind the increase in the American stock market (60’s and 90’s), tax benefits and/or relaxations regarding investments (in the late 1970s) and high yield expectations of investors of dot.com initiatives (90’s). These turned out to be temporary effects.

…but the reason of application has changed.

The recent uprising of corporate venturing does not seem to be driven by temporary factors. The combination of faster technological development, rapidly changing needs, fewer geographic restrictions, increased globalization and larger potential markets has led to a structural increase in competitiveness and threat of substitutes for a company’s own products and services. The challenge for companies, multinationals in particular, is to retain their relevance and create value in the long term, given this structurally new and challenging environment. This calls for continuous innovation and a good sense for the market. The resources for this can be found inside, but most definitely also outside of the organisation’s own borders.

Where the venture capital market has been going through a consolidation the last few years, the number of corporate venture capital funds increased. In 2011, 2012 and 2013 alone there were over 350 of such funds launched, according to sources of Global Corporate Venturing[1]. The fact that this trend now deviates from the past may be an indication of the fundamental difference between the motives behind the recent uprising of corporate venturing and the motives behind the previous growth periods in the 60’s, 80’s and 90’s.

 The advantages of corporate venturing

The main idea behind corporate venturing is that, in a world where knowledge and expertise is becoming more and more accessible, companies can no longer afford to focus solely on their own research and development. Companies should not hold on to strict boundaries  between them and the outside world but rather open them up. Only by making optimal use of the competencies and developments from both inside and outside the organisation will the company be able to provide relevant products and services. This also implies the instalment of internal projects and knowledge outside of the company, if this means that they would come to better fruition. The company that is best capable of doing so is able to create the largest competitive advantage in the long term and will therefore be able to create the most value.

The implementation of corporate venturing helps companies to get a quicker and better insight into the revolutionary innovations and developments in the marketplace. They are able to capture relevant and successful initiatives, without the entrepreneurship and the innovative power of these initiatives being disturbed by the rules of the large corporate. This is complementary to the traditional research and development within the company itself which focuses on incremental innovation; the improvement of existing products and/or services.

The exact advantages of corporate venturing are dependent on the sub-objectives that companies wish to pursue. A report of the Strategic Decisions Group[2] describes the intended advantages of corporate venturing for companies like Intel and Samsung: expansion of the ecosystem (may increase the demand for own products), access to new technologies, new product innovation, access to new markets, access to new talent (employees) and financial return (in the short term and long term). Intel, for example, founded Intel Capital in 1990 with the main goal of increasing the demand for their Pentium chips. Intel Capital participates in both start-up companies and existing companies which complement the core activities of Intel. Panasonic founded the Panasonic Venture Group in 1998 with the aim of acquiring new, revolutionary technologies which are easy to integrate into their own R&D department. By doing so Panasonic intends to achieve a strategic return.

Conclusion

Incremental improvements of existing products and markets and increasing barriers for potential entrants is in many cases not sufficient anymore. The setting has been permanently changed and is being characterised by rapid technological developments, changing needs and fewer geographical limitations. For many companies relevance has become the key to value creation on the long term. Corporate venturing contributes to preservation or enlargement of this relevance. It enables companies to make optimal use of the competencies and developments from both inside and outside of the organisation, allowing them to create relevant products and services. The company that is best able to structure their organisation in this way is most likely to achieve the largest competitive advantage. In order to maximize value creation the implementation of a corporate venturing strategy can in many cases prove to be a necessity.

[1]  James Mawson, Turning the cycles to an ADVANTAGE, June 2014

[2] Strategic Decisions Group International LLC, Corporate venturing in Technology Companies, February 2012