TM Corporate Venturing

7/30/2019 TM Corporate Venturing

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Corporate Venturing

Technology Management

PGPM-III Trimester



R & D: Corporate Venturing & Spin-offs

• In today’s rapidly changing business

environment, companies look for different

ways to innovate.

• Corporate venturing is one organized

approach

• It is a vehicle used by company’s to capture

innovation, provide a window for acquisitions

and an opportunity for strategic partnership



• It was only in the 1990’s that many business

units were established riding on the wave of

internet technology boom.

• Many units faced challenges common to start-

up business units like: inexperienced

management, problems in securing access to

funding, and difficulty in attractingcustomers.



• Some business units were shut down.

• The survivors secured autonomy to make their

own investment decisions, made good use of

external partnerships, especially venture

capitalists.

• They ensured top-level support and critically,

looked for ways of adding value back to their

corporate parents mainstream business



Strategic Benefits

• Benefits of Corporate Venture investing

include:

• Passion Driven:

• Discovery of unmet customer needs and

unserved emerging markets

•

Potentially high return on investment• Supplements to internal research and

product/service development investments



• Improved efficiency of the value chain

management, in particular supply chain and

customer relationships

• Development of New business relationships

• Preparing potential candidates for strategic

alliance or acquisition

• Fear Driven: Reducing the risk of missing a

new turn in technological developments



• Preventing competitors from acquiring a

break-through technology

• Motivating internal talents to outperform

outside ventures

• Drawbacks: It takes time and effort to build

the right relationship between venture

team/business and parent staff and

organizations



Drawbacks – Contd.

• The objectives of the venture may not be clear

and communicated to everyone involved

• There may be an imbalance in levels of

expertise, investment or assets brought into

the venture by the different partners

• Poor integration and lack of co-operation due

to cultural differences may vitiate the working

atmosphere.



• Misunderstanding between partners resulting

in non-cooperation. The partners may not

provide spirited leadership and support.

• Identifying right ideas and evaluating progress

of research effort are difficult



Models and Outcomes

• There are four generally accepted models of

Corporate Venturing:

• Venture Harvesting: It seeks to convert spare

resources and or intellectual Property(IP) intocash through sale or licensing arrangements

• Eco-System Venturing: Company’s invest in their

suppliers, customers, distributors or companieswho have complementary ideas and technologies

which can help stimulate growth in core business



• Corporate Private Equity: Where the corebusiness essentially sets up an in-houseprivate equity business to exploit its special

access to a deal stream.• Corporate venture models can result in a

number of outcomes:

•

Technology spin-ins when new technologiesare being scanned and acquired to be utilizedin the business.



• Spin-ups when a new business is created to growprofitable revenue within the organization

• Spin-ins when a new complementary start-upbusiness, not necessarily technology based isacquired

• Spin-outs when the corporate exits businessactivities or sells or licenses technology leading tovalue gains for the organization and

• Private equity where corporate financial know-how and commercial expertise are harnessed togenerate a return.



Forms of Corporate Venturing

• External Venturing: Setting up of semi-autonomous orautonomous organizational entities that reside outsidethe existing organizational domain

• Internal Ventures: Establishing organizational entitiesthat reside within an existing organization domain.

• Direct Corporate Venturing: Direct investment of capital by the larger firm in the smaller firm

• Indirect Corporate Venturing: A larger firm invests in aventure capital fund, which in turn supplies funds toinnovation projects



• Corporate Venturing is classified into four

generic forms by the focus of

entrepreneurship and the presence of

investment intermediation

• Direct-Internal venturing: It implies that the

idea was generated within the corporation

and funded, developed and commercializedutilizing internal resources



• Direct-external Venturing: It can be quite varied:

• i)funding in exchange for equity or

• ii) partnering with small firms

•Indirect-internal Venturing: It occurs when thecorporations invests in a venture capital funddesigned to encourage corporate employees todevelop internal ventures.

•

The venture capital fund typically originates andoperates within the corporation and is managedby corporate employees



• Indirect-external Venturing: The company invests in aventure capital fund that targets external ventures inspecific industries or technology sectors.

• Corporations not wanting to go it alone as venturecapitalists can make use of one of the followingmethods:

• Co-venture, becoming part of a syndicate withindependent venture capital firms

• Hire a VC firm to run a dedicated fund where thecorporation is the only investor

• Invest in a targeted pooled fund with other investors.



Exit Strategies for Internal Ventures

• Venture Investments whether by venturecapitalists or by corporations, usually represent along-term payback measured in years rather than

months or quarters• Spin-in: Corporate Venture activities have the

opportunity to produce a spin-in wherebyexisting lines of business decide to adopt the

activity. A spin-in also occurs if corporateexecutives decide to make the new ventures apermanent division



• Spin-out: Alternatively, the external VC

community can help spin out internal ventures to

form external start-ups if they no longer fit the

corporate vision• VC’s can also help find buyers for new ventures

• Spin-offs: Corporate spin-off process is the

division of an existing company into two, usuallya bigger one (the parent company) and a smaller

one(the spin-off)



• The process consists of three phases

• Decision phase

• Separation Phase and the

• Post separation phase

• The decision phase includes all factors leading to thedecision to spin-off.

• The separation phase comprises the strategic andorganizational separation of the two companies.

• The post-separation phase starts with the independentoperations of parent and spin-off and ends when no morepreferential agreements or relations between parent andspin-off exist



• Motivations:

• Depending upon the motivations behind the

corporate spin-off process, two types can be

distinguished:

• Restructuring driven: Spin-offs are initiated by

the parent company for strategic or operational

motives related to the parent company. They areoften the consequence of restructuring or

refocusing activity of the parent company.



• Entrepreneurial: Spin-offs are driven by one

or more individuals. (Spin-off entrepreneurs)

who wants to exploit an unused potential

based on their experience acquired within theparent company



Corporate Venture Frame-work

• It is divided into two stages. In the first stage,

the corporate venturing program itself is set

up. The second stage is an iterative process for

identifying ideas and then building, launchingand scaling the best ones.

• These two stages, in turn are subdivided into a

total of seven phases, each with specific entryand exit criteria



• Why two stage approach?

• A corporation may or may not want to venture

on a large –scale

• Stage 1: Setting up the corporate venture

program: Intent, Structure and Filter

• Stage 2: Pursuing the best ideas and launching

ventures: Concept, Shape, Build and Scale



• Intent: What is the company trying to achieve throughcorporate Venturing? Is the objective aligned withoverall corporate strategy? Do the company’s topexecutives support the venturing program?

• How the new business will be funded is a keyconsideration. Many corporations are beginning to turnto venture capitalists to fund their ventures.

• Venture capitalists are interested in ideas that offer

them a significant opportunity to get high return ontheir investment, therefore, these ideas must includean exit strategy for liquidation



• Structure: This is concerned with the issues of governance, both internal and external.

• How will conflicts between the parent and the

new ventures be resolved? What level of Controlwill the parent company have over the newventure?

• Inside the company, the management should

determine the roles, responsibilities and rewardsof the people who will be managing the ventureprogram



• Filter: Ideas need to be evaluated and filtered. Sourcesof new ideas range from internal workshops to outsideconsultants, venture capitalists or smaller companieshave to be alerted and informed of the criteria.

•

The goal is to take a large volume of high quality ideasand quickly funnel them down to the few that havereal business potential and strategic fit.

• Experienced, respected managers from within theexisting business should drive the filtering process-with

open minds.• Objective external help in filtering ideas is often

extremely useful



Stage-2, Pursuing the best ideas and

launching ventures

• Companies move rapidly from the realm of planning into the hard realities of the businessand the market

•

The transition consists of four phases:• Concept: Draw up the initial business model, in

the form of a five to seven page conceptdocument. The topics covered: What problems

the ventures will solve for customers, theventures projected path to profitability and thecompetitive land-scape in which it will operate



• Shape: After some preliminary testing and

analysis idea is transformed into a rigorous

plan for execution with clear proof that

customers are willing to purchase the productor services.

• Major activities in this phase are piloting,

prototyping and lining up some committedcustomers



• During the shape phase, the venture moves

from an internal project based entity to a true

operating entity.

• A company isn’t simply a set of on-going

projects with deliverables but rather an on-

going business meeting standard metrics such

as sales, revenues, expenses, head count andcapital budgeting



• Build: The venture has come a long way. Thefocus now should be on actually building aprofit producing enterprise.

• Alliances are being formed, new customersare being signed up, a robust infrastructure isbeing developed, and the first product orservice offering is being built and delivered.

• In almost every case, a new managementteam



Case Study-Spin-off

• During 1999 Xerox formed Xerox New

Enterprises (XNE) as a new management

paradigm within the company to manage and

grow innovative business formed outside thecorporations core strengths.

• Firms such as Lucent, AT&T, CMGI and HP have

spun-off specific products or technologies asstandalone companies.



Examples, Spin-Offs

• AT&T’s creation of Lucent Technologies

• Hewlett Packard’s formation of Agilent

Technologies

• 3Com’s spin-off of palm pilot

• Sharp Corporation, a $20 billion global electronics

company headquartered in Japan has announced

the formation of Sharp Technology Ventures fromthe Sharp Laboratories headquarters in Camas,

Washington



• Sharp Technology Ventures will pursue

business development opportunities including

joint development, licensing and spinouts, for

select Sharp Technologies

• Nokia Venturing Organization is focused on

corporate venturing activities that include

identifying and developing new business or asthey put it, the renewal of Nokia.



• Nokia Venture partners invests exclusively in

mobile and I/P related start-up businesses.

• They have a very interesting third group

called Innovent, that directly supports and

nurtures nascent innovators with the hope of

growing future opportunities for Nokia



Documents

TM Corporate Venturing