June 17, 2016

Corporate venturing: the challenge of bringing something new to the table – on incubation as a tool for digital transformation, part 2

Gunnar Tolf

Lead Consultant, Business and IT Transformation, Tieto

More and more established companies start various forms of venture portfolios to develop and test new products, services or whole new business models at a very high speed in order to meet the accelerating pace of innovation and competition driven by digital technology. 

A challenge for established corporations when using these approaches is that they come close to the business model of venture capital firms. In order to create value for both their shareholders and the new businesses, they need to add something that a financial investor could not.

Exploring new business models calls for trial and error

A basic challenge when introducing new technologies to a market is that traditional market research is not that helpful. Conventional marketing wisdom says that you should always listen to the customer and what they need – which is true when it comes to new variants of existing product categories. When it comes to technology driven innovation this is not necessarily the case. When being introduced to new technologies, customers and producers alike need to learn how the technology can be applied before being able to answer if there is a need for a new product or not.

The ongoing digital revolution provides plenty of examples of unexpected successes as well as expected killer applications that never gained momentum. Just to mention one classic example, SMS text message services were introduced mainly because it was technologically possible, not based on an extremely well researched business case, and then turned into a major commercial success when consumers experimented their way into finding a use for it.

The speed of development drives a venture-capital approach

If you accept the assumption that you cannot survey or plan your way to the next technology-driven commercial success, the logical way for launching new products and businesses is a venture approach: launch at an early stage, control costs, test with customers, evaluate, adapt, evaluate again and, hopefully in the end, find the approach that works and is accepted by your customers. This approach requires a culture of both agility and cost control that in most cases is quite different from that of the parent organisation. A proven tool to handle this is incubation – separating the organisation responsible for a new offering from the parent organisation so that it can grow its own culture. A corporation with some financial muscle may expand the venture approach to a portfolio of initiatives that are continuously evaluated and closed down or given additional funding based on success. The result will be, virtually or figuratively, a venture-capital company as a subsidiary.*

However, here you encounter the challenge: Sooner or later some investor will ask the CEOs or boards of the these companies: “Why should you as a bank / telco / media company / manufacturer run a venture capital fund, instead of returning the invested capital to shareholders and let us invest the money into a independent (and more professional) venture capital fund if that is what we want.” Ask the executives now their corporate finance theory, they will answer: “Because we have parenting advantages, synergies between the parent company and the ventures, that allows us to generate a better return on investment than an independent fund.”

Current leaders need to build on existing strengths to be relevant

The obvious question will then be: “Are there really (parenting advantages)?”. If we say that the ventures should be isolated from the parent companies in order to protect their entrepreneurial culture – how can we simultaneously realise synergies between the two? Many of the most apparent synergies, e.g. sharing resources such as infrastructure, support functions, etc. are hard to combine with separate cultures. Increasingly they are also available as scalable services, which reduces the need for a parent company to provide them.

In most cases, the synergies that will give an established company a parenting advantage compared to a financial investor and still and still being able to keep the ventures at arm’s length will be immaterial assets, such as access to:

  • Patented technology as well as non-patented know-how
  • Networks of expertise for advice and talent for recruitment
  • Ecosystems of potential partners - which is also becoming increasingly important to small and large businesses alike
  • Data, which is becoming increasingly important in a world of data-driven businesses
  • Industry knowledge and an ear to the ground allowing for early spotting of the best ideas and teams.

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* This is also what several international companies have chosen to do. Some examples of such initiatives are American Express Ventures (financial services), Citi Ventures (financial services), Santander InnoVentures (financial services), AXA Strategic Ventures (insurance), Verizon Ventures (telecoms) and Qualcomm Ventures (wireless technology) Comcast Ventures (media and entertainment) and Time Warner Investments (media and entertainment).  

Read also the first blog of the blog serie here >>>

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