In order to achieve financial and strategic objectives, survival of a corporate venturing fund is a prerequisite. Part of the challenge can come from the compromises required and promises made when a unit set up in the firstplace.
A group might be established with strategic goals highlighted to gain support from the chief executive, charts to show how business units can benefit in the short term and tables showing expected return on investment to satisfy the financial director.
Meeting them all is tricky but often the deciding factor is overall sentiment from the social herd and feelings of confidence within a company from strong free cashflow.
These latter psychological issues, as well as the length of time it can take for an idea to work its way up and be accepted by a board, have often meant that corporate venturing units start at the worst possible time – right at the end of the economic cycle – before a crash that results in confidence quickly turning to cost-cutting survivalism.
Utilities, this month’s featured sector, should be ideal parents to invest in venturing consistency over the long term but have often been predestined to fail.
As well as the above issues facing all corporations, the organisational culture at the corporate venturing unit’s parent company has been regarded as a primary factor behind the launch of energy utilities’ venturing funds between 1999 and 2001, and the subsequent closure of three-quarters of them within about five years, according to an academic paper* by Tarja Teppo, co-founder of Cleantech Invest in Finland, and Rolf Wüstenhagen, Good Energies professor for management of renewable energies at the University of St Gallen in Switzerland.
The main factors related to parent firm organisational culture are the parent’s view on innovation and industry development, and its organisational mindset. Two issues were identified regarding innovation and industry development in the energy sector.
First, many electric utilities did not perceive innovation as an important competitive advantage, which in turn made the life of a corporate venturing fund difficultas it tried to identify innovative business models or technologies promoted by start-ups.
Second, even in cases where the parent firm realised scouting for innovative business approaches was important, the company saw no urgency to act because it was used to reacting to external regulatory pressures, not to business threats imposed by new external ventures.
The parent firms organisational mindset or worldview may differ strongly from the one present in the corporate venturing fund, which therefore needs “adequate auton-omy to establish its own management processes”, according to the academics.
The differences were often shown in utilities’ preference to work with relatively larger, mature third parties.
The effect of the organisational culture is also affected by risk-taking practices in the parent firms decision-making process, such as conducting effective due diligence on pro-spective technology and involving non-venture experts in decision-making, and its skills in managing and measuring the corporate venturing fund’s success.
As one corporate venturer told the researchers: “The problem [with venturing] is that if you are really innovative you get in trouble with the traditional organisation … And if [the ventures] are gaining market share, the headquarters or the operating unit is losing market share. And losing market share in the traditional sector or an operating unit is valued more than chances in the new growth area.”
But these factors are changing surprising quickly as the tipping point of disruption sweeps across the sector – whether in telecoms, power or water.
The rapid growth of venturing units and new funds – 30 in three years according to Global Corporate Venturing research – and their sophistication and ambition means the odds of survival are better than at any point in history.
This is to be welcomed but the managers now just need to live up to the promises they have made.
*Teppo, T and Wüstenhagen, R (2009): Why corporate venture capital funds fail – evidence from the European energy industry, World Review of Entrepreneurship, Man-agement and Sustainable Development, Vol 5, No 4, pp353-375.
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