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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 startup business units like: inexperienced management, problems in securing access to funding, and difficulty in attracting customers.

• They ensured top-level support and critically. especially venture capitalists. looked for ways of adding value back to their corporate parents mainstream business . made good use of external partnerships. • The survivors secured autonomy to make their own investment decisions.• Some business units were shut down.

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 .

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 .• Improved efficiency of the value chain management.

• 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 .

• 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. .Drawbacks – Contd.

• Identifying right ideas and evaluating progress of research effort are difficult . The partners may not provide spirited leadership and support.• Misunderstanding between partners resulting in non-cooperation.

distributors or companies who have complementary ideas and technologies which can help stimulate growth in core business . customers.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) into cash through sale or licensing arrangements • Eco-System Venturing: Company’s invest in their suppliers.

. • Corporate venture models can result in a number of outcomes: • Technology spin-ins when new technologies are being scanned and acquired to be utilized in the business.• Corporate Private Equity: Where the core business essentially sets up an in-house private equity business to exploit its special access to a deal stream.

.• Spin-ups when a new business is created to grow profitable revenue within the organization • Spin-ins when a new complementary start-up business. not necessarily technology based is acquired • Spin-outs when the corporate exits business activities or sells or licenses technology leading to value gains for the organization and • Private equity where corporate financial knowhow and commercial expertise are harnessed to generate a return.

which in turn supplies funds to innovation projects . • Direct Corporate Venturing: Direct investment of capital by the larger firm in the smaller firm • Indirect Corporate Venturing: A larger firm invests in a venture capital fund.Forms of Corporate Venturing • External Venturing: Setting up of semi-autonomous or autonomous organizational entities that reside outside the existing organizational domain • Internal Ventures: Establishing organizational entities that reside within an existing organization domain.

• 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 commercialized utilizing internal resources .

• The venture capital fund typically originates and operates within the corporation and is managed by corporate employees .• • • • 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 the corporations invests in a venture capital fund designed to encourage corporate employees to develop internal ventures.

becoming part of a syndicate with independent venture capital firms • Hire a VC firm to run a dedicated fund where the corporation is the only investor • Invest in a targeted pooled fund with other investors. • Corporations not wanting to go it alone as venture capitalists can make use of one of the following methods: • Co-venture.• Indirect-external Venturing: The company invests in a venture capital fund that targets external ventures in specific industries or technology sectors. .

usually represent a long-term payback measured in years rather than months or quarters • Spin-in: Corporate Venture activities have the opportunity to produce a spin-in whereby existing lines of business decide to adopt the activity. A spin-in also occurs if corporate executives decide to make the new ventures a permanent division .Exit Strategies for Internal Ventures • Venture Investments whether by venture capitalists or by corporations.

• Spin-out: Alternatively. usually a bigger one (the parent company) and a smaller one(the spin-off) . 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.

• The separation phase comprises the strategic and organizational separation of the two companies.• • • • • The process consists of three phases Decision phase Separation Phase and the Post separation phase The decision phase includes all factors leading to the decision to spin-off. • The post-separation phase starts with the independent operations of parent and spin-off and ends when no more preferential agreements or relations between parent and spin-off exist .

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.• Motivations: • Depending upon the motivations behind the corporate spin-off process. They are often the consequence of restructuring or refocusing activity of the parent company. .

(Spin-off entrepreneurs) who wants to exploit an unused potential based on their experience acquired within the parent company .• Entrepreneurial: Spin-offs are driven by one or more individuals.

In the first stage. each with specific entry and exit criteria . • These two stages. the corporate venturing program itself is set up. in turn are subdivided into a total of seven phases.Corporate Venture Frame-work • It is divided into two stages. The second stage is an iterative process for identifying ideas and then building. launching and scaling the best ones.

• 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 .

therefore. Many corporations are beginning to turn to venture capitalists to fund their ventures.• Intent: What is the company trying to achieve through corporate Venturing? Is the objective aligned with overall corporate strategy? Do the company’s top executives support the venturing program? • How the new business will be funded is a key consideration. these ideas must include an exit strategy for liquidation . • Venture capitalists are interested in ideas that offer them a significant opportunity to get high return on their investment.

both internal and external. the management should determine the roles. • How will conflicts between the parent and the new ventures be resolved? What level of Control will the parent company have over the new venture? • Inside the company.• Structure: This is concerned with the issues of governance. responsibilities and rewards of the people who will be managing the venture program .

• Filter: Ideas need to be evaluated and filtered. • Objective external help in filtering ideas is often extremely useful . venture capitalists or smaller companies have to be alerted and informed of the criteria. • Experienced. • The goal is to take a large volume of high quality ideas and quickly funnel them down to the few that have real business potential and strategic fit. respected managers from within the existing business should drive the filtering process-with open minds. Sources of new ideas range from internal workshops to outside consultants.

the ventures projected path to profitability and the competitive land-scape in which it will operate . The topics covered: What problems the ventures will solve for customers. Pursuing the best ideas and launching ventures • Companies move rapidly from the realm of planning into the hard realities of the business and the market • The transition consists of four phases: • Concept: Draw up the initial business model. in the form of a five to seven page concept document.Stage-2.

• 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 product or services. prototyping and lining up some committed customers . • Major activities in this phase are piloting.

expenses. revenues. 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 ongoing business meeting standard metrics such as sales. head count and capital budgeting .• During the shape phase.

a robust infrastructure is being developed. a new management team . • In almost every case. The focus now should be on actually building a profit producing enterprise. new customers are being signed up. and the first product or service offering is being built and delivered.• Build: The venture has come a long way. • Alliances are being formed.

AT&T. • Firms such as Lucent.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 the corporations core strengths. CMGI and HP have spun-off specific products or technologies as standalone companies. .

Washington .Examples. a $20 billion global electronics company headquartered in Japan has announced the formation of Sharp Technology Ventures from the Sharp Laboratories headquarters in Camas. 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.

for select Sharp Technologies • Nokia Venturing Organization is focused on corporate venturing activities that include identifying and developing new business or as they put it. the renewal of Nokia. .• Sharp Technology Ventures will pursue business development opportunities including joint development. licensing and spinouts.

• 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 .