Chapter 2. Corporate Venturing: Best of Both Worlds or Venturing Too Far?

"If you put a circle around Silicon Valley, it would look a lot like Enron. But it's easier to innovate at Enron, because we have a lot less friction."
—Jeffrey Skilling

Silicon Valley's success during the 1990s helped further stimulate an already surging interest in corporate venturing. The basic goal of the corporate venturing movement was to emulate and simulate a venture capital–driven startup model within much larger, more mature and established companies. Silicon Valley was the prototype. The challenge was to bring this sort of entrepreneurial energy inside the corporation—even to better it. Pursuing a "simulated startup" approach required significant changes in the old ways of doing business, so much so that it necessitated the establishment of separate, quasi-autonomous venturing structures and divisions within the parent company.

These new venturing units, including independent R&D "skunkworks" and new business incubators, distinguished themselves from the old-line bureaucracy and hierarchy in several key respects.^[1] Beyond being separate organizations within the parent company, they inherently required

• New and different methods of leadership, management, and organization.

• New and different techniques to attract and retain talent, to foster creativity, and fuel ideas.

• New and different approaches to budgeting and funding, including risk management.

These factors were key not only to realizing corporate venturing's promise. They would also prove to be primary sources of its many difficulties in practice.

For companies struggling with everything from disruptive new technologies to stagnant sales and declining industries, corporate venturing seemed an attractive prescription. By the end of the 1990s, companies rushed to set up new venture units almost literally overnight. Brash, up-and-coming managers and quirky technical and creative talent were quickly assembled, along with a copious mix of cash and cubicles and computers. The startup units were often physically located off-site in their own gleaming new facilities, in digs more fit for their bold New Economy mission. Some companies went a step beyond and decided to locate their corporate venturing efforts in far-off places, such as Palo Alto or San Francisco or wherever else was hot and "techno" at the moment. In industries ranging from construction to telecom to consumer goods, in companies as diverse as Bechtel, British Telecom, and Procter and Gamble, corporate venturing took on an urgency.

Corporate venturing was presented as an imperative, not a choice—as key to corporate salvation, not a minor or peripheral R&D initiative.^[2] The startup model seemed to work so well at powering innovation, after all, especially for technology-fueled, knowledge-intensive, industry-transforming new ventures. It was the genesis of so many business legends and represented the essence of the entrepreneurial success of Silicon Valley and all its imitators. Why not bring these ingredients inside a larger, more mature company to instill a similar sort of creative, fertile, incubating, "intrapreneurial" environment? Why should only young upstart firms generate all the excitement and energy, attract all the world-class top talent, and hatch all the hot new ideas?

The startups' gains were especially galling because established firms had such tremendous leverage in the form of ongoing R&D, cash, brands, customers, and other significant resources. Established companies needed to be able to unleash this tremendous leverage to beat the aggressive, but still fragile, startups who sought to challenge them. The message of corporate venturing was that being a "dinosaur" or an "elephant" wasn't necessarily bad at all, as long as you could be a nimble and adaptive beast, a lean and hungry behemoth. The goal was simply to have the best of both worlds: startup and corporate, entrepreneurial and established, young and old. This was something that even the best of startups-from-scratch could not match.

Breaking the Old Molds

Internal corporate venturing initiatives typically had several key goals. To achieve these ends, corporate venturing units distanced themselves from the established organizational structure. They were separate and distinct from the parent company's hierarchy and bureaucracy, its history and culture, its processes and standard operating procedures. The theory was that creation of such fresh intrapreneurial environments would enable the birth and growth of innovations that never would have been born or that would have simply died on the vine in the old establishment. Establishment of these new organizational subunits would remove hierarchical and political impediments to the advancement of frame-breaking new ideas; they would eliminate the anti-innovation biases of bureaucracy: "You can't do that!" or "We don't do things that way around here." They would attract, nurture, and retain imaginative talent from both within and outside of the company. The new freedom would empower the best employees to accelerate the generation of new inventions and commercialization of new businesses.

Beyond just management and organization, corporate venturing pioneered new approaches toward funding, budgeting, and risk management for corporate development. The nature and needs of startups differed from those of traditional business development functions. The message was: Reconsider, revamp, or even eliminate established budgets and procedures. Provide internal risk capital, VC-like funding. Just as importantly, establish the same type of equity and high-powered motivational rewards and incentives that employees could expect in a real startup; for example, give them "phantom" stock and options to simulate a startup's equity-fueled culture. Traditional, measly year-end bonuses simply would not do the trick.

With the new organization in place, set your top-notch executives, scientists, engineers, and creative talent loose. Let them plant a bunch of real innovation options and watch as they grow. Then, much like the Darwinian processes of the traditional VC/startup model, use periodic reviews, milestones, and funding decisions to prune the underperformers and nourish the promising ventures further as the future unfolds.

Unfortunately, the Darwinian process applied to corporate venturing programs themselves. The featured advantages of corporate venturing—autonomy, risk taking, outside-the-box thinking—turned into liabilities. Once again, Enron was the corporate venturing leader, only this time on the downside. After a string of disappointing outcomes, and in some cases outright financial and strategic disasters, a whole host of companies in a wide range of industries curbed their commitment to corporate venturing or shut down their venturing units entirely. Where did the theory go wrong?

Don't Just Act Like One: Be a Venture Capitalist

A complementary vision of corporate venturing went considerably beyond the notion of establishing new venture units, R&D skunkworks, or internal business incubators. The more encompassing notion of corporate venturing was the idea that established corporations also could—and should—literally become venture capitalists. They should establish venture-capital funds to invest chunks of corporate cash into promising new ventures, whether inside or (more usually) outside the firm.

During the 1990s, with companies increasingly envying the rich financial and strategic success of VCs, the idea of corporate venture capital (CVC) exploded.^[3] According to the National Venture Capital Association, the number of CVC deals jumped from just 126 in 1995 to more than 2,150 in 2000, while the total dollar amounts surged from $400 million to $17 billion. For its part, of course, Enron had four of its own venture-capital funds.

Targeted corporate venture capital investments promised not only great direct financial returns, as with traditional VC investments. They also offered the potential of even greater-leveraged synergies with the parent, both strategic and financial. Through CVC, corporations could more quickly discover new technologies and new businesses. As they developed and grew, CVC investments would allow corporate investors to have an inside track on partnering with or acquiring these startups' innovations. Companies as diverse as AT&T, Eastman Chemical, GE, Intel, and Time Warner became widely touted corporate venture capitalists.

As CVC funds grew in popularity and resources, they made bigger and bigger investments and ventured further into more diverse types of businesses. Their growth in size and breadth was an attempt to tap into even more novel ideas, further diversify their strategically targeted portfolios, and reap greater financial gains. "Complementary" became the criterion or catchword to sum up these more broadly targeted CVC-funding activities. The definition of complementary grew broad in practice, with computer firms investing in health care startups and consumer goods firms investing in e-commerce companies. These types of investments were made with the logic of spurring new applications and new markets that might in turn enhance the funding firm's own products and services. The objective was to create a more fertile industry macroenvironment or ecosystem in which the parent company could flourish.

The Ups and Downs of Corporate Venturing

The efforts of Andersen Consulting (now Accenture) provide a quick glimpse into the peak of CVC enthusiasm. In December 1999, the global information technology and consulting powerhouse launched Andersen Consulting Ventures (ACV), a new CVC unit focused on investing in business-to-business electronic commerce companies. Andersen committed more than $500 million from its own funds and sought to raise the total to more than $1 billion by soliciting investment from other outside VC funds and financial institutions. The founding of ACV even merited a brand-new Palo Alto office—quite a stretch from Andersen's Midwestern, buttoned-down global headquarters in Chicago.

Andersen planned to be more than a passive investor in ACV. Instead, the company would be a strategic investor and active partner, using its IT, consulting, and management expertise to help power ACV's portfolio companies to success. In an interesting twist also being adopted by other corporate venturers, Andersen even allowed payment for services rendered in the form of equity. ACV soon joined forces with other new CVC funds that were also focused on electronic commerce, including Commerce One Inc.'s Commerce One Ventures, founded in August 2000.

Andersen's timing could have been better, but it was hardly unusual. Its late start, near the top of the venture capital boom, is typical of CVC in general. Just 2 years after its founding, along with a slew of other now-withering CVC efforts, Accenture announced it would sell Andersen Consulting Ventures. The announced reasons for the sale: to reduce volatility in earnings, and to allow the company to refocus on its core businesses of IT and management consulting. Accenture took a $212 million charge for losses on ACV investments, causing its second quarter 2002 profits to drop 87 percent.

In September 2002, Accenture reached final agreement for CIBC World Markets to buy its venture portfolio. Accenture would retain just 5 percent. At the same time, Accenture reaffirmed "it would discontinue direct venture capital investing and no longer accept illiquid securities from clients or alliance partners." Accenture would leave VC investing to VCs.

Accenture's story was a microcosm of larger, longer-term CVC habits and trends. According to the National Venture Capital Association, CVC investments peaked at nearly $17 billion in 2000 and plummeted to less than $1 billion in 2003. The number of deals peaked at nearly 2,200 and dropped to just over 300 during the same time period. In 2001, Microsoft recorded more than $5 billion in losses from its venture investments. Intel lost more than $600 million. AT&T, Compaq, News Corporation, and many others abruptly decided to simply shut down their CVC efforts.

What goes up can come down. With the high potential upsides of CVC come the real possibility (if not likelihood) of low downward swings. It was easy to forget this as financial markets and startup valuations kept soaring ever-higher. Ironically, the much touted logic that corporate VCs were supposed to be more "strategic" and, therefore, more patient about their investing—that is, compared to those flighty, quick-buck financiers—proved false. Corporate VCs were first to the exit door. Again, venturing theory seemed to go awry in real-world practice.

The Disappointing Record of Corporate Ventures

Corporate venturing has a spotty long-term record, one only punctuated by the excesses of recent years. Each of the individual elements of corporate venturing and CVC by itself seems to make sense. They appeared to work beautifully in the Silicon Valley model. Combined in a corporate context, however, these elements most often did not produce, or caused unintended and unfortunate results. Many companies sharply curtailed or shut down their ventures, skunkworks, and incubators and shut down, froze, or sold off most or all of their CVC portfolios.

History would suggest that these results were likely, if not foregone conclusions. Corporate venturing more often than not had produced weak results even prior to the recent technology boom and bust. Few people recalled Exxon Enterprises's unfortunate corporate-venturing experiences in the 1970s and 1980s, for example. Just as it would seem years later to many other companies, the logic seemed sound at the time: to help Exxon better exploit the voluminous output of its massive corporate R&D efforts and to help it generate and invest in new products and new markets, from both inside and outside. The losses piled up into the billions before Exxon jumped ship. After experimenting with everything from solar and nuclear power to information systems and office equipment, Exxon's venturing ambitions ran out of gas and were completely junked.

Some of the more hopeful recent examples fared little better. Throughout the 1990s, from the major airlines' repeatedly failed ventures into discount "airline-within-an-airline" concepts (e.g., Continental Lite and United Shuttle) to General Motors's Saturn experiment, corporate venturing had a lackluster record. Each initiative was launched with great fanfare and considerable investment. Soon, each was sputtering, quietly swept away, or simply abandoned.

In general, the record for corporate venturing and corporate venture capital actually was relatively much better before the corporate-venturing concept really took off as a fad in the later 1990s. The collapse of the bubble only accentuated the hurdles that venturing efforts faced, especially when hurriedly and uncritically implemented. As the authors of The Venture Imperative admitted, "Most companies have tried some form of corporate venturing, and most companies have failed at it."

The implication of most critiques and analyses of corporate-venturing missteps was to the effect of "if only companies could do it better . . . ." But the difficulties of corporate venturing go much deeper than implementation. They are inherent in the concept itself. They are part of a larger "core" problem.

Reconsidering Corporate Venturing Success

Despite their featured successes, even some of the most widely touted recent exemplars of corporate venturing had their notable troubles. During the height of innovation excitement, the three most frequently and prominently featured examples of corporate venturing were Enron, Xerox, and Lucent Technologies. By 2000, literally hundreds of books, articles, and case studies cited their corporate-venturing prowess as models from which to learn.

There definitely were lessons to be learned from these examples, though not always the ones intended. The disastrous results of the Enron experiment speak for themselves: collapse, bankruptcy, lawsuits, and all the rest. The corporate venturing performance of Lucent and Xerox are different stories, but are still sobering in their own ways. In their Five Year Shareholder Scorecard, for example, The Wall Street Journal cited Lucent and Xerox among its "Worst Performers" from the end of 1998 through 2003. Lucent, in fact, was number one on the "Worst Performers" list with an annualized compound average total return of –41.6 percent. Xerox did slightly better at only –24.3 percent per annum. Of course, much of this record was because of the massive technology and market downturn, but the other 998 companies on the Journal's scoreboard also went through the same wrenching period. What had happened to all Xerox's and Lucent's fabled corporate venturing successes? Why weren't they reflected in their stock prices?

These post-hoc results highlight a critical point that must be kept in mind for other would-be corporate venturers, and for assessing the overall record of corporate venturing. It is not enough to look at the short-term success or failure of individual ventures alone, although the record is also weak in this regard. Corporate venturing ultimately must be assessed by measuring its impact on the corporate founder and funder (i.e., the corporate parent). More accurately assessing corporate-venturing performance, much like assessing the performance of venture capitalists themselves, requires gazing over a broader and longer-term horizon, not just pointing to a single small venture. In this regard, it's useful to review the record of Xerox and Lucent to see what lessons a more holistic retrospective might offer.

Complex Lessons from Venturing Exemplars

The justifiably acclaimed Xerox Palo Alto Research Center (PARC) has long been one of the most well-known and precocious pioneers of innovation as an R&D "skunkworks" or innovation "hothouse." As Xerox badly sputtered in the later 1990s, however, not many would-be corporate venturers gave much attention to the mixed lessons that Xerox's PARC experience offered. Instead, even more ambitious R&D skunkworks and new venture incubators were launched and pushed full speed ahead. The now widely known tale is that, despite Xerox's lavishing resources on PARC over the course of three decades beginning in the early 1970s, many of PARC's most famous inventions never turned into successful and profitable innovations for the parent company. Xerox's PARC was a tale of massive missed opportunities (Fumbling the Future, one book was titled).

Without question, PARC was very successful as an R&D skunkworks; it was a prolific font of all sorts of hardware and software inventions and path-breaking new ideas in the areas of computing, communications, graphics, and the like. PARC developed various early versions of the personal computer (PC), user-friendly graphical computer operating systems, the Ethernet, and numerous laser-printing technologies, among a long list of other credits. Its contributions to laser printing were the most notable single success story for parent company Xerox. Although Xerox did not directly gain from many other novel inventions and technologies, some of these other PARC innovations were brought to market through a succession of spinout companies. Xerox Technology Ventures (XTV), one of the pioneering and most active dedicated corporate venture capital funds, facilitated the process of bringing PARC technologies further toward commercialization.

In the final analysis, however, the fantastic genius and prolific technology output of PARC could not and did not revive, revamp, or rescue Xerox's deteriorating core businesses. Xerox was not able to take PARC's ideas and inventions and use them to reinvigorate itself, even though it was at least theoretically possible that they might have done so. Now, it's probably not fair to fault PARC or Xerox Technology Ventures for not reviving the entire company. But some of the more vigorous promoters of corporate venturing would have us believe precisely that—that such novel "innoventuring" is a key, if not the key, solution to the core problems of corporate innovation. If such outstanding efforts and incredible wellsprings of innovation like Xerox PARC and XTV cannot do the trick, what possibly could?

By the end of the decade and in the wake of serious competitive and financial difficulties, Xerox began to seek outside investors and customers for PARC to try to make it a self-sustaining, independent company. Subsequently, Xerox laid off much of the staff and considered whether to entirely spin off PARC. If Xerox and PARC were such exemplars of corporate venturing, why was the parent company severely downsizing the research center and even questioning its future as part of Xerox? Despite its myriad inventions and patents, PARC offered Xerox little hope.

Inherent Venturing Problems

Most diagnoses of PARC's problems fault Xerox executives for their lack of vision and bumbled management. But it's possible there's something more fundamental at the root of its problems. Much of the problem was in the nature of PARC itself. PARC's autonomy and freedom were critical factors in fostering the creative and dynamic environment that generated so many new ideas. Yet this libertine independence was also a key factor that made it so difficult for PARC to be a catalyst to revive or transform Xerox's core businesses. Many of PARC's concepts were fabulous advances in their own rights, but were a bit off-the-mark—in reality, perception, or both—for Xerox's core needs. Some of the common problems of "Not Invented Here" repeatedly surfaced. PARC researchers in Palo Alto clashed with Xerox R&D personnel and product development executives in New York and elsewhere around the world. PARC and Xerox's other core global R&D and product development efforts were, both literally and figuratively, quite far apart. PARC was very creative in the abstract, but not nearly as effective in practical business terms.

One lesson from even this relatively prolific experiment in corporate venturing is the limitations of pouring massive amounts of talent and resources into quasi-autonomous R&D skunkworks or new venture incubators. Such investments, even if thriving in their own right, might nonetheless do little to resolve a company's larger, more important innovation challenges. Brainstorming, creative genius, and being on the cutting edge often mean being "out there," literally and figuratively, on the periphery. Internal venturing R&D skunkworks or venture incubators might generate myriad new ideas and inventions. Regardless, their net contributions to a company might be marginal. They might be largely irrelevant or relatively insignificant in terms of the core strategy and direction of the parent company. Even good and useful venture-generated ideas might be difficult to integrate with the parent: strategically, organizationally, technologically, culturally, or otherwise.

Lucent's New Ventures

The venturing experiences of Lucent Technologies also offer some valuable insight in this regard. During its relatively brief existence, Lucent's New Ventures Group (NVG) garnered much attention as a model for corporate venturing. It had some notable successes in terms of individual ventures. From a broader perspective, the record is more interesting and nuanced.

Lucent's famed Bell Labs R&D operations had always generated more inventions and ideas than the parent company knew what to do with by itself. As Lucent split from AT&T in 1996, some of Lucent's new management saw this excess innovation as an opportunity, not a problem. They imagined that, even if they were not always a clear fit with Lucent's main lines of business, Bell Labs's many patents and inventions could realize tremendous value if they could somehow be pushed further toward commercialization. Bell Labs had long since run a significant licensing operation to externalize its technology. Bringing more ventures to fruition more fully and quickly required a different approach, however, if Lucent were to be able to create and capture greater value.

After some initial experimentation with a few ventures during 1996 and 1997, the Lucent New Ventures Group was officially formed in late 1997 and early 1998. In addition to Lucent's own initial contributions, by 2000, the NVG attracted $160 million in outside venture capital funding for its various technology ventures. By 2001, the NVG portfolio included more than two dozen companies, the vast majority of which were direct offspring of Bell Labs research.

Despite NVG's successes, Lucent itself sputtered and tumbled as the telecommunications industry crashed. By the end of 2001, Lucent's NVG was being prepared for sale. New outside investments from Lucent's own corporate venture capital arm (Lucent Venture Partners) also dried up. Even as the company's approach to corporate venturing continued to be featured as a model, was the telecom crash prematurely forcing Lucent to give up on a good part of its future (its notable venturing experiments with NVG)?

Lucent's own assessment had become more mixed. In the midst of an ongoing strategic and financial crisis, exacerbated by the continued weakness of the entire telecom sector, Lucent felt it could no longer afford such wide-ranging and distracting experiments. The company embarked on a massive retrenching, restructuring, and refocusing.

Lucent's Ex-Venturing

In January 2002, Coller Capital bought the NVG, with Lucent retaining just 20 percent. Likewise, investments by Lucent's CVC arm ended abruptly: "In early 2002, Lucent Technologies made the strategic decision to limit the activities of Lucent Venture Partners, in an effort to focus its resources on the internal developments that best serve its large service provider customers. As such, Lucent Venture Partners will no longer pursue new investments." Lucent's top management decided that it lacked the logic and resources to keep supporting the NVG as well as active venture capital investing.

Juggling dozens of new ventures requires significant time, attention, due diligence, and patience. It requires careful funding and ongoing nurturing. As was the case with both Lucent's NVG and its Lucent Venture Partners, and also the case with Xerox PARC and Xerox Technology Ventures, the mission of such organizations typically is to support innovations that are not central concerns of the parent company. Investments focused on innovations that fall outside the parent company's own core technologies and markets. Despite the successes of Lucent's NVG in launching new startups, it did little to alleviate the core strategic, competitive, and financial challenges of the parent company. This is not that surprising, given that it was not really designed to do this in the first place.

However, this very fact raises some fundamental questions: What is the purpose of such corporate-venturing efforts if they are not "core" to the company's success in the first place? If this type of venturing is not something that the parent feels compelled to continue pursuing to ensure its future, what is the underlying logic for it to begin with? A simple financial justification seems inadequate. There are many other potential ways to realize value other than through such non-core, full-scale internal venturing experiments.

A good example of the complex issues involved comes from Coller Capital's purchase of Lucent's NVG itself. The acquisition highlights questions about the purpose and competence of operating companies being involved in non-core venturing and venture capital activities. Coller Capital, a London-based private equity firm and venture funder, formed New Venture Partners (NVP) to manage the former Lucent NVG portfolio it had purchased. Almost all NVP's management team consisted of former Lucent-affiliated managers. Just a month after NVG was sold, a new transaction sparked some surprise and controversy. In February 2002, Coller Capital earned back more than the price it paid for the entire Lucent NVG by selling just one of its portfolio companies, Celiant, for $470 million.

Did Coller get the best of Lucent? Was Lucent unaware of or unable or unwilling to pursue the true value of its own portfolio of ventures? Whatever the case, Coller's clear and aggressive focus on running a financially successful venture fund quickly seemed a more lucrative approach than Lucent's.

Other Ex-Venturers

A year later, in a similar replay of Lucent's experience, Coller Capital purchased four companies of BT Group's (formerly British Telecom) three-year old Brightstar technology incubator. Coller established a new fund, NVP Brightstar, in which BT retained a minority 23 percent interest. NVP Brightstar also gained exclusive rights to create new startup businesses using BT's intellectual property portfolio.

British Telecom's Brightstar initiative was originally designed for much the same purpose as Lucent's NVG—to help commercialize the copious output of BT's R&D labs. Nine companies were founded or spun out, and more than $50 million in external VC funds were raised. By the time of their sale, however, none of the ventures had earned any payback for BT through a liquidity event such as an IPO or acquisition. Continuing this venture "outsourcing" trend, in October 2003, Coller's New Venture Partners (NVP) announced a similar deal with Philips Electronics. NVP was tasked with identifying and facilitating possible venture spinouts from Philips's R&D labs and intellectual property portfolio.

None of these results suggest that corporate venturing efforts, such as Xerox PARC and Lucent's NVG, and their corresponding corporate venture capital funds (Xerox Technology Ventures and Lucent New Ventures) did not have clearly identifiable successes in their own right, on their own terms. They birthed some important technology and several successful spinouts and, in that sense, generated positive economic value. In reviewing Xerox's and Lucent's widely acclaimed corporate venturing efforts in terms of their broader and longer-term performance, however, one must also consider the larger context. From this perspective, corporate venturing failed to deliver, even for some of its most celebrated practitioners.

Corporate venturing was, the theory went, the primary or sole hope for large and mature companies to stay strategically, competitively, and financially fit. Corporate venturing experience seems to offer a more mixed and cautionary message. Don't go looking for company salvation—or even substantial rejuvenation—in corporate venturing. You're likely to be disappointed. The odds were stacked against corporate venturing because of the very strategies, structures, and processes by which it typically was pursued.

The Consummate Corporate Venture Capitalist

A final example helps illustrate both the possibilities and uncertainties of the corporate venturing model in general, and corporate venture capital more specifically. Intel Capital, the venture fund division of Intel, has prospered as one of the largest, best-known, and most successful corporate venture capitalists. No company's CVC efforts garnered as much attention as Intel's.

Intel Capital started small in the early 1990s, making investments primarily in other semiconductor companies or semiconductor design software or equipment makers. The company typically invested as part of a syndicate that included other, more traditional VC firms. The professed goal was to invest in companies and technologies that would help accelerate and expand the performance and possibilities of Intel's own core products.

As the technology boom picked up steam throughout the 1990s, Intel Capital expanded its horizons to invest in a much wider variety of computing and communications ventures, both hardware and software, broadband and wireless, Internet and telecom. The stated goals remained similar if somewhat broader: to enhance the speed and growth of key markets for the parent company and its products. In 1999 alone, Intel invested $1.2 billion in nearly 250 new outside ventures. By the end of the year, its portfolio consisted of about 350 companies. In 2000, the investments paid off handsomely as Intel recorded a one-time gain of $2.1 billion. Even as the technology bust spiraled downward, unlike many of its fair-weather imitators, Intel Capital continued active, if somewhat diminished, venture capital investing.

Intel's position as a CVC role model is ambiguous, however. Its most prominent successes seem more of an exceptional historical case, not necessarily a template that other firms might readily follow. Intel Capital's own boom period, for example, occurred during a unique period characterized by the explosion of the PC, Internet, and related computing technologies. Intel was at the center of each revolution. Its quasi-monopoly microprocessor profits allowed it the luxury of being able to afford to invest excess cash into myriad peripheral, or "complementary," activities in a way the vast majority of other companies could never hope to do. In this sense, it was relatively easy for Intel to establish and support a sustained CVC program, even with the inevitable ups and downs, including a billion in losses in 2001 and 2002. Few other firms, other than extraordinarily rare and valuable specimens such as Microsoft, could really fit such a rich model. Intel's privileged position gave it unique power in its product markets and in financial markets. It had better information and better access, unparalleled clout and influence in order to take advantage of venture investing opportunities like almost no one else could. Its most fantastic gains were in the bubble years of 1999 and 2000, when all technology investors looked pretty smart—at least for a moment.

One key assumption about Intel Capital's purpose and performance, apart from its financial contribution, remains questionable. On the strategic side, Intel Capital's investments primarily have not been in Intel's own core technology domains. Instead, Intel Capital intentionally invested in what it termed "complementary" new technologies and businesses in order to foster a richer "ecosystem" for its products. Which key markets for Intel's core products would not have blossomed without Intel Capital's investments? This is largely a hypothetical question, of course. But from an economic and technological standpoint, one can build a reasonably strong argument that Intel Capital's boost to these markets was uncertain at best.

On one hand, for example, Intel Capital professed to help build a "Wi-Fi ecosystem" through its venture funding. But, on the other hand, Intel CEO Craig Barrett noted around the same time, ". . . WiFi didn't happen because Microsoft or Intel or Cisco said it was going to happen; it happened because a bunch of grassroots folks just said, 'Hey, this is a cool thing.' The PC emerged the same way."^[4] Likewise, the explosion of the PC industry in the 1980s and early 1990s—the single event that fueled Intel's success more than anything else—far predated the existence and investments of Intel Capital.

In contrast to this ambiguity, what is beyond dispute is that Intel's continuing success as an industry-dominating technology company was due to its massive, ongoing core R&D and manufacturing investments and its core new business development initiatives. For example, Intel's Celeron provides a good counterpoint to the arguments for the necessity of corporate venturing as being key to corporate innovation. Of Intel's recent innovations, few were as radical and as important as Intel's decision in the mid 1990s to make and sell lower powered, lower priced Celeron microprocessors. Intel's business model had been built primarily around the reverse approach—ever-higher powered chips and big boosts in prices to match. Yet, Intel's Celeron was not born in some clandestine skunkworks and commercialized in a venture incubator. It was not something discovered, funded, and acquired through Intel Capital, Intel's massive CVC operations. Instead, Celeron was a core innovation initiative seized operations. Instead, Celeron was a core innovation initiative seized upon, and frantically pushed forward, by Intel's top management and entire organization—including especially CEO Andy Grove. It was a central R&D and management focus that helped significantly enhance Intel's continued dominance in microprocessors. Other important initiatives, such as the later family of Centrino mobile/wireless chips, also followed this non-venturing model.

The bottom line is that Intel's enormous innovation success was fundamentally not a function of either corporate venturing or corporate venture capital. Intel's investments in core R&D and manufacturing totaled greater than $8 billion in 2003 alone. This was more than eight times the entire amount of CVC invested by all companies in all industries that year. For those interested in finding a new font of bottom line–boosting corporate innovation, Intel Capital was not necessarily much of a guide. Intel Capital's prosperity was more a byproduct of the parent company's enormous R&D, strategic, and financial momentum, not a fundamental cause or key source of its success. Correlation is not causality.

Core Problems with Corporate Venturing

So why does corporate venturing so often fall flat? By examining more than 100 corporate venturing efforts, we identified several recurring issues. By itself, each issue can cause considerable difficulties. In combination, as they most often operate, these issues can lead to intractable problems and outright failure. Many of these problems revolve around problems related to focus and fit or, relatedly, scale and scope. The end result might be that, paradoxically, even "successful" corporate venturing can be a net value destroyer.

• Irrelevant?—The innovation or venture might be exciting and novel, but not particularly relevant to the overall mission, strategy, and core businesses of the parent firm. Brainstorming is great and is often a primary goal and key output of corporate venturing. But ideas too far removed from the technologies and markets of the parent firm might be largely irrelevant, even if they are potentially valuable to someone else. Firms cannot abruptly jump to operate in businesses in which they have no particular resources, competence, or advantage. The infamous venturing of Exxon Enterprises into office equipment is one of the most glaring examples of this. Many people later cited the same problems with Enron's venturing into broadband. Further-reaching, ever-stretching novelty is often the essence of corporate venturing, but such novelty does not equate to profitable business models or sound strategic directions for the parent.

• Immaterial?—The new venture or corporate venturing effort might be successful in its own right, but not particularly material for the parent company. Even several successful ventures might cumulatively have only small impacts on overall corporate performance. Independently incubated startups take time and nurturing to get to scale; sometimes, it takes over a decade to have a material impact for the parent firm. In other cases, corporate venturing creates only small niche businesses. This is what, by its very nature, corporate venturing tends to generate. Much of Lucent and Xerox's venturing efforts often seemed to fall into this category. (We address these critical issues of relative size and growth later in this chapter.)

• Distraction?—Corporate venturing can give false hope and unduly divert attention and resources. Venturing can be a fun and exciting diversion. After all, who wants to deal with the old, tough, intransigent problems of the core business? But in the end, it can be a dangerous distraction that draws attention and resources away from a firm's more central tasks and critical challenges. No company can juggle innumerable strategies and opportunities. Not even the richest companies can successfully fund and manage an infinite number of ventures. Companies must make strategic choices. They cannot cast about the seeds of myriad innovation options and then simply see which ones flourish or fail. Each venture requires intensive nourishment and care or else all of them will fail. This means that firms must make exclusive, defined, limited strategic choices and then commit to them. Firms that focus too much on newfangled venturing often tend to ignore and neglect their real revenue and profit-generating businesses. The core continues to decay regardless of—or even because of—aggressive venturing. GM's Saturn fits this category. The major airlines' discount startup ventures (Continental Lite, United Shuttle, Ted, Song, and so on) also largely appeared to be distractions as unrelenting cost issues and losses continued to trouble their mainstream airline operations.

• Detraction?—The distraction issue links directly to the ultimate performance question for the parent company. The bottom line is that even a successful venture effort might detract from the corporate parent's overall performance. Even a venture with positive net present value by itself might actually destroy value when it's considered in a larger context. Attention and resources diverted to corporate venturing might leave the firm as a whole in worse shape than before the venture. Failed venture efforts, of course, make the situation even worse by both distraction (such as lost time, talent, market share, and continued troubles in the core businesses) and direct financial losses.

All these factors might combine to result in net value destruction for the parent company. It's not just coincidence that many examples of corporate venturing feature initiatives that are interesting or novel in their own right, but are hardly large and powerful engines of corporate growth to boost core revenues and profits. In contrast, even a minor distraction (e.g., resulting in just a 1% drop in Intel or IBM's share price) might result in billions in lost value. That's a lot of ground to make up with even a big bunch of successful little ventures.

Limitations of Venture Scale and Growth

The limitations of even successful but still relatively small ventures highlight a related core problem with corporate venturing, especially for large companies. Huge differences exist between a Fortune 500 company and a new startup. Much of it is a problem of relative scale or size and relative growth. What looks like good initial marketplace success and fantastic growth for a new startup might be either immaterial or quite disappointing for a much larger, more established company. A young startup getting to $10 million in sales is a fantastic achievement in entrepreneurial terms. Doubling sales to $20 million and reaching profitability is even more impressive. For a $1 billion company, however, a $10 million increase in sales is much less exciting. What looks like a promising beginning and great potential from a startup's point of view might disappoint a large, established company by being too little, too late.

From the parent company's point of view, the tangible and intangible costs in terms of diseconomies of scope (scattered or squandered time, attention, resources, and so on) might exceed the relatively small benefits of incubating and funding many small, disparate new ventures. They might become more of an annoying and draining distraction rather than a promising portfolio. Lucent and Xerox decided the benefits were not worth the costs of maintaining such extended, disparate venture portfolios.

At a minimum, incubating to sufficient scale even greatly promising new ventures takes patience and forbearance. Hip discounter Target is one of the most successful retail ventures in recent years, for example. Old-line department store chain Dayton Hudson completely transformed itself over time to the point where its Target division accounted for more than 75 percent of sales and profits. In 2000, the company even formally changed its name to Target Corporation in recognition of this transformation. Of course, Dayton Hudson had opened its first Target store in 1962. This transformation was hardly an overnight venturing success story.

Growing new corporate ventures to scale won't always take that long, of course, especially in an era of accelerated growth and change. To grow something from scratch, however, will almost always take significant time and considerable investment, often more on both counts than many firms are willing or able to commit. The only way to greatly shorten this time and lessen the required investment is to pursue innovations directly aligned, or readily able to be integrated, with an established firm's existing core business—its core R&D and technologies, products and processes, customers and markets, brands and features. Scaling up quickly under these circumstances is a more tractable task of integration, not the more risky and laborious burden of full, stand-alone incubation from scratch.

Venturing's Alignment and Integration Problem

Unfortunately, corporate venturing does not excel at aligning and integrating innovation with the core of an existing firm. Corporate venturing inherently tends to be placed outside the mainstream and distinguishes itself as apart from the parent organization in so many ways. This situation highlights some of the intrinsic strategic, structural, and organizational difficulties of corporate venturing.

Take Wingspan Bank, for example. Bank One founded Wingspan as a stand-alone Internet bank venture. The initiative garnered much attention. With this bold experiment, Bank One seemed to leap ahead of its banking peers in transitioning to the New Economy. After a quick and seemingly promising takeoff, however, Wingspan quickly lost altitude. Enormous advertising and technology expenditures failed to make it soar. Moreover, Wingspan directly conflicted and competed with Bank One's own mainstream online and off-line banking efforts. Wingspan folded by mid 2001 and its accounts were simply absorbed into Bank One. The net result of the experiment? Many observers noted that Bank One seemed to have significantly fallen behind its peers in online banking.

Even in the radical technological upheaval brought about by the Internet, newfangled corporate venturing was not the approach of the vast majority of successful corporate innovators. Most corporate players who made successful, sustained, and profitable transitions to the Internet Age did not set up some separate Internet incubator or new web venture divisions. Instead, companies such as Dell and Southwest Airlines integrated radical innovation and made the Internet core to their respective business models and corporate strategies.

Can You Be Too Free?

Corporate ventures' strategic, structural, and organizational problems often stem from their inherent autonomy. Autonomy was one of the key levers of corporate venturing efforts. It was their primary reason for being. By definition, corporate venturing requires establishment of separate, quasi-autonomous structures and organizations. The goal is to give new ventures the leeway to be unboundedly creative and entrepreneurial. Autonomy is also the problem, however. The end results of such freedom can be unintended and undesirable. In this regard, corporate-venturing activities also frequently suffer from one or more of the following syndromes:

• Neglect?—Corporate ventures that are outside of the mainstream and, therefore, off the headquarters' radar might easily become neglected. After much initial fanfare, many corporate venture efforts soon fade from view and are starved of attention and investment. The parent firm's top management does not have the time, willingness, or resources to bother with the venture. Ventures might suffer from a "stepchild" syndrome. Key people and assets might suffer from attrition. Even ventures with great potential wither. When the parent encounters tough times, venturing efforts are often the first to suffer the biggest cuts—even if they hold out the most long-term promise. GM's Saturn fell into this category. After massive investment, great fanfare, and notable initial success in the marketplace, the tap ran dry. Crucial years passed before any substantial reinvestment went into pushing out new models. Saturn went from being a rising star to a being a bit of a dog.

• Conflict?—Venturing units might end up, intentionally or unintentionally, in direct conflict with R&D and business units from the mainstream of the parent organization. Instead of focusing on outside competitors, both the venture and the established parent unit might focus on attacking each other for scarce resources. Both venture and parent units might battle to sell to the same customers and partner with the same partners. Customers and collaborators get confused. The logic of internal competition sounds good in theory, but often ends up in duplication, higher costs, and lower performance for both the original parent unit and the venture itself. Many new internal Internet venture units faced this dilemma as they catered to the parent's existing customers (for example, Wingspan Bank), with the only real difference being the online channel format.

• Not Invented Here?—Even if no direct conflict exists between the venture and the parent organization, a Not Invented Here (NIH) syndrome can cause difficulties. NIH might be a technical problem, an emotional problem, or both. Autonomy means that the venturing unit is disconnected from the firm's normal R&D and business development processes. NIH feelings on the part of those in the parent organization simply might indicate that the venture's innovations are widely off-the-mark; they don't meet the company's needs or specs. On the other hand, even technically useful corporate venturing might suffer from a more emotional, two-way NIH bias. Those in the venture view the parent organization as stifling and backward. Venturers typically want to start fresh and new with their inventions and ideas—even to pursue them outside the parent firm altogether—rather than tap into the firm's existing resources and capabilities. Meanwhile, those in the parent organization view the venture folks as a bunch of overpaid, arrogant upstarts—or even worse, as direct threats. (In some of our cases and interviews, managers and engineers specifically cited intentional sabotage of ventures because of such ill-will and related dysfunctions.) Knowledge does not get shared and cross-fertilization is stifled between the venture and parent. Even good ideas might be ignored or trashed instead of transferred and nurtured. Politics and personalities take over. Venturing efforts ranging from Xerox PARC to GM's Saturn found themselves in this situation. Enormous potential learning either was technically off-the-mark or even good ideas were squandered because of "softer" but contentious internal dynamics.

• Out of control?—The autonomy of corporate venturing might cause financial, organizational, and sometimes even legal difficulties. "Corporate budgeting kills innovation," the warning went. Normal budgeting, control, and risk-management procedures might be suspended or altered to give corporate ventures more freedom to experiment with radical new things, accelerate their funding and development, and attract and retain top talent. If everything works well, that's great. But Murphy's Law often takes over and venture freedom turns to chaos. Unfortunately, the parent usually remains liable for the chaos that its ventures create. Enron, of course, is the exemplar in this category. Many of its corporate ventures should not have advanced beyond the brainstorming or experimental stage. But supposedly old-fashioned management controls were ignored. In fact, these controls were scorned and ridiculed and replaced with supposedly "cutting-edge" budgeting, valuation, and risk management techniques more fit for the New Economy. High-upside rewards and incentives for venture managers (e.g., deal-based bonuses, phantom options, etc.) can worsen this situation by perversely promoting extreme risk taking. Of course, Enron is an extreme case, but it's far from the only case. During the past few years, many investment boondoggles have involved such (literally) out-of-control venturing.

Diverging Approaches Toward Cars of the Future

GM's Saturn division typifies a combination of these problems: distraction, detraction, neglect, and NIH. As a brand-new attempt at transformational innovation, Saturn initially had great success. With billions in new investment—a new physical location, new plant, and so on—General Motors established Saturn as a novel and completely separate division. The primary intent was to help GM make and sell small cars that could better compete in quality and features with Japanese imports. A secondary objective was to experiment with an entire host of new ideas to try to help GM learn and rethink the way it made and sold cars. In the early 1990s, Saturn quickly gained many fans, including customers and industry analysts. Its reengineered manufacturing techniques (e.g., more "enlightened" and participative labor practices) and novel use of materials (e.g., plastic, no-dent body panels) and its fresh, more customer-friendly marketing and sales (e.g., flat, "no-haggle" pricing) all gained accolades.

Before Saturn could even move on to a new base model or brand extension, GM became distracted and neglected Saturn. Lingering problems within the company's core and an upturn in lucrative pickup and sport utility vehicle sales diverted GM's attention from Saturn. Saturn languished, with few new products and a waning critical and customer fan base. Sales began a long, hard slide. Management and labor turmoil ensued. Corporate learning was limited. Perhaps not surprisingly, GM's overall small-car and sedan offerings also continued to flounder. Many of Saturn's much-touted innovations—from materials to marketing—were never adopted by other divisions of the parent company. Instead, R&D and design, materials and manufacturing, management and labor, and sales and marketing approaches from GM's other operations began to seep into Saturn and started to transform it into just another (troubled) division of GM.

The development and launch of Toyota's and Honda's hybrid (gas-electric) cars provides a contrasting example. Electric power was supposed to be a profoundly disruptive technology for the automobile industry—a classic and compelling sign of the need for corporate venturing. Yet, Toyota and Honda responded in a different fashion. Their gas-electric hybrid ideas and related technologies were not born and developed in some newfangled, off-line corporate venture. Instead, these initiatives represented core R&D and executive commitments to new power sources, fuel efficiency, and environmental responsibility. In particular, Honda's efforts were not at all "outside the box." In fact, its first mass-production gas-electric hybrid took the unremarkable form of a classic Honda Civic. Toyota's Prius likewise helped it gain a lead of at least a couple years in commercializing this fairly radical (if not in appearance, in locomotion) alternative to the traditional automobile.

An Established Operating Company Is Not a VC Portfolio

Beyond corporate venturing broadly defined, corporate venture capital itself raises other specific issues about the nature and purpose of corporate venturing. One key difficulty with uncritically applying a VC/startup-like approach to the needs of corporate innovation stems from the fundamental differences between an established operating company and an equity investment fund that invests in startups. Quite simply, an operating company is not a venture capital firm. Some analogies just don't fit.

The primary goals, resources, and capabilities of a successful, established operating company are different from those of a successful, independent, financially driven venture-capital fund. Fundamentally, operating companies are not purposed or designed to fund and nurture many diverse and far-flung startups, especially those whose technol ogies and businesses are not of demonstrable material concern to the parent firm's core business. A VC's guiding logic is inherently financial. In contrast, an operating company's guiding logic must be strategic, even if a key end is to ultimately produce good financial results.

There's a reason why VC funds typically have long life spans, for example. Normally, initial VC investments take quite a while to pay off. In the short term, cash mostly flows out and even write-downs and write-offs occur as some early venture investments inevitably stumble. This negative volatility is standard for VC firms; the big gains come years later. In contrast, larger publicly held operating companies operate on continuous budgeting and reporting cycles (such as quarterly revenue and earnings estimates and reports). Severe volatility is frowned upon and rudely punished by financial markets. For operating companies, a tension always exists between short-term operating planning and performance and long-term investing. This tension can test the patience of even the most farsighted corporate managers. When the going gets tough, many CVCs get cold feet and quickly exit the venture capital business almost as quickly as they rushed into it at its peak.

Risky, long-term bets on uncertain new technologies or businesses, especially those that fall outside the parent company's focus, are difficult for many companies to justify and sustain. In theory, more "strategically oriented" corporate VCs can and should be more patient than supposedly fickle, purely financial VC investors. The empirical evidence shows otherwise. In practice, because of the realities and constraints of running a real company, corporate VC investors tend to be much less patient. This only exacerbates their losses, as they perversely tend to bail during the worst times.

"Strategic" Corporate Venture Capital

The consistent message of the empirical evidence and accumulated experience is that corporate venture capital efforts are more likely to be successful when they do not stray too far from core strategic goals aligned with the purpose and focus of the firm's core businesses.^[5] CVC efforts need some freedom and autonomy to roam and explore cutting-edge investments. Simultaneously, they must be kept anchored. Being strategically guided does not imply that such investments do not need to make sound financial sense as well. Even the greatest strategic ideas can be senseless at the wrong price. In this regard, Intel Capital's mission statement has the right balance: "Make and manage financially attractive investments in support of Intel's strategic objectives."

It's easy to make such a mission statement. Virtually any company could adopt almost a word-for-word motto for their own CVC program. It's the judgment and execution of this balance that causes difficulties. In practice, what exactly are the strategic and financial bounds? What is, or is not, really a strategic investment? Enron Broadband Ventures invested in a wide variety of seemingly unrelated web startups, from entertainment providers to online talent agencies, all with the strategic logic that they would help provide content for Enron Broadband. Beyond strategy, exactly what are the financial criteria and objectives by which to manage a corporate VC fund? Should they be more liberal or more constrained because of the parent firm's directive to pursue strategic investing?

A strategic logic for corporate VCs introduces other challenges that professional, independent VCs simply do not confront. Independent VCs diversify their portfolios in multiple ways; they do not have the directive to support any specific company's strategy. This reduces their risk and increases the returns of their portfolios. Most VCs can make emotionless, sectorless decisions about what to buy, what to keep, what to sell, and what to kill. For strategic CVC investors, this logic does not apply. The strategic directive is a good guide in its own way, but from another perspective, it's also a ball-and-chain. Strategic investing implies that the fund's investments are focused and constrained, and therefore are relatively undiversified. For CVCs, this implies a forced choice between either taking on more systematic risk (correlated not only within their own portfolio, but also with the parent firm's core businesses) or ignoring the strategic logic to diversify into more distant and unknown territory.

Strategic CVC investing also sets up potential conflicts with funded companies in ways that independent venture capital does not. Unlike independent VCs, strategic CVC funders want something from their investments beyond just lucrative financial returns. They want early and privileged access to new ideas and new technologies that help the parent company. They want an early scoop and favorable terms on being able to license, partner with, or acquire if a funded startup should hit it big in one way or another. These parental interests raise strategic, organizational, and financial dilemmas that independent VCs simply do not have to deal with. Inherent conflicts exist between the interests of strategic CVC funders and the distinct interests of startups in maximizing their own success. A startup may want to pursue more and different partners, for example, or want to shop itself around and sell to the highest bidder.

To address such conflict-of-interest concerns, many corporations establish internal "walls" that completely separate the parent company and its CVC fund. Such walls prevent the parent from having privileged access to, or undue advantage over, the funded startups. The dilemma of these arrangements is that they remove the compelling strategic logic for companies to fund CVC investing in the first place. If companies gain no special privilege or advantage or information by investing, what's the point of investing?

None of these tensions and challenges alone is reason to abandon the concept of corporate venture capital. However, all of them must be addressed for success. They must be carefully balanced in order for CVC activities to function well.

More Mature CVC Approaches

Not surprisingly, the more successful corporate venture capital programs both predate and survive the most recent CVC boom and bust. The pharmaceutical industry provides several good examples of these more balanced, eclectic, and patient approaches. For example, GlaxoSmithKline's S.R.One was founded as a wholly owned, venture capital affiliate of SmithKline in 1985. S.R.One has separate offices and management, including a non-disclosure policy (except otherwise with permission) between S.R.One and GSK regarding any of its portfolio startups. By 2004, S.R.One cumulatively had invested nearly $400 million in over 100 companies (such as Amgen, IDEC, Sepracor) and continued to actively invest. Beyond achieving good financial returns, S.R.One's guiding mission was to invest in companies of potential collaborative interest to its parent. This meant investments in health care, primarily in pharmaceuticals and biotechnology. In addition, GSK also invests in other more diverse (but still health care–focused) ventures through participation in outside-led, independently managed venture funds, such as Euclid SR. Johnson & Johnson, Eli Lilly, Merck, and other pharmaceutical majors have pursued similar carefully balanced and eclectic CVC strategies. Firms in a variety of other industries also have managed to do so with reasonable success, including companies such as Eastman Chemical and its Eastman Ventures unit.

Aligning Funding with Focus

Even within such relatively successful efforts, most CVCs have increasingly recognized their own limitations. As corporate venturing and corporate venture capital interests expand beyond the core domains of their parent firms, greater "outsourcing" is both useful and appropriate. This means soliciting greater involvement and investment from professional, independent VC firms and other types of outside partners. Even if originally developed in the parent company's own R&D labs, for example, non-core innovations are often best funded and managed with someone else as the lead—not the parent. Both the parent company and the partner(s) might reap considerable benefits, while allowing each party to focus on what it does best. The agreements between Coller Capital and Lucent, BT, and Philips are good examples of such an approach.

For core innovation needs, companies that focus too much enthusiasm on corporate venture capital might be led to ignore the myriad other ways available to tap into the energy and ideas of the startup world. An established company need not invest a single cent of corporate venture capital in order to do so. Many of these alternatives are more focused and direct, and yet more flexible; they might help a company avoid some of the key drawbacks of CVC investing. As we discuss in the next few chapters, companies can pursue direct investments in startups; co-development agreements with startups that provide initial seed funding and then periodic milestone or progress payments; targeted joint ventures or structured licensing agreements; and a whole host of other options. These alternatives tend to be more directly guided by and linked to the core R&D and business-development needs of the parent company, and therefore tend to be more successful.

Smart companies always have directly or indirectly invested in innovative young upstarts with great strategic and financial promise; this concept is nothing new. The growth of the more formal concept of corporate venture capital is what is relatively new. Yet, the old approach of direct investment sometimes can be more effective. With direct corporate investment in young innovators, for example, there is less of the strategic-versus-financial conflict of using more formal corporate venture capital funds. Instead, either the corporate treasury or individual divisions themselves can make direct investments and manage them much more clearly for the growth and success of the investing firm's relevant core businesses.

Do You Have to Pay to Play?

In many other ways, without investing a single dollar in direct venture capital funds, a company still can proactively and strategically tap into the vast and dynamic innovation networks represented by the larger VC community and its myriad funded startups. In fact, there's little reason why most companies should not be aggressively engaged in these networks in one fashion or another. Even with zero direct CVC investment of its own, a company still can tap the vibrant energy and ideas of VC-fueled innovation.

By actively monitoring and communicating with VC-led innovation communities, smart companies can continually scan and sense important developments in their respective technology and industry environments. They can actively be on the lookout for new ideas and intelligence, new technologies and products. They can seek early and favorable access to potential innovation licensors, alliance partners, and even potential targets for future direct corporate investment or outright acquisition.

How do such strategies work? These cash-poor but idea-rich CVC strategies recognize the recurring reality that venture capital often is better handled by independent, professional venture capitalists, not directly by operating companies. Yet, they simultaneously recognize the reality that there is enormous value to be discovered in VC-fed innovation networks.

Take IBM's recently evolved (and still evolving) approach to corporate venture capital. IBM does have substantial investments in numerous outside, independently managed VC funds. But these investments are relatively passive and indirect. Based on its own recent experience and learning, IBM struggled to find a compelling strategic logic for pouring massive amounts of capital into its own, directly managed CVC funds. Instead, IBM decided to tap into VC-fueled innovation using a more indirect, but still very active and strategic, approach. Using a series of VC "relationship managers" in different sectors, IBM continually and proactively communicates to the wider VC community its critical current, and projected future, technology and innovation needs. IBM's strategy helps energize a network of dozens of friendly and interested VC firms who then, on an ongoing basis, help IBM locate and tap into the relevant VC-funded innovations and innovators as they come to fruition.

Why and how does this type of creative but cash-poor approach to corporate venture capital work? It's a simple win-win scenario. IBM gets its technology and innovation needs and wants communicated widely and aggressively, and therefore better and more quickly fulfilled. In turn, VCs and their funded startups get favorable access to an incredibly rich customer, strategic partner, or potential acquirer—i.e., IBM. Without investing a single cent in direct venture capital, a company need not (and should not) forgo the rich potential benefits of tapping into vast and dynamic VC-driven innovation networks. IBM tries to keep a core focus on what matters—fueling its core businesses with new and necessary innovation. It does not focus on directly dabbling in disparate VC investments, however exciting and novel that may seem. Ironically, IBM sometimes even finds itself the potential (preferred) partner or acquirer for startups funded in part by its competitors' CVC funds.

In effect, what happened in 2001–2003 was a return to more normal, rational, level-headed views of corporate venture capital. Interest in CVC continued to be high, but corporate approaches to this latest "innovation in innovation" were now more cautious. In 2003, for example, the total number of CVC deals and number of companies invested in remained almost double the level of the mid 1990s. However, according to the National Venture Capital Association, CVC dollars represented only 6 percent of total VC funding, down from a high of 16 percent in 2000. Moreover, total CVC investments were equivalent to just one-half of 1 percent of overall corporate R&D spending. These investments continued to play an important role in the whole innovation mix. But CVC's surprisingly small proportion of the total amount invested reflected a belated acknowledgment of the limited function of corporate venture capital in solving the core problems of corporate innovation.

The Need for Core Venturing

The overall message is not that corporate venturing is a futile cause. Instead, the message is that corporate venturing as it is so often practiced is not a panacea for the innovation challenges of large and established companies. We only suggest the usefulness of a more sober view of its limitations and its possibilities, its downsides and its upsides. Being more aware of, and proactively planning for, the common problems of corporate venturing helps increase the chances of success of venturing efforts (see Table 2-1).

Table 2-1. The Promises and Problems of Corporate Venturing

The bottom line is that, rather than a company stagnating and losing its edge because of a lack of corporate venturing, it's possible for a company to lose its way and destroy value precisely because of its corporate venturing. Corporate venturing in practice has frequently been a misplaced focus. Paradoxically, it's typically inherent in the nature and structure of corporate venturing to neglect or impede core innovation, not advance it. Value creation through innovation needs to be at the center of the organization, not at the periphery; core innovation must be the focus. Ultimately, this determines overall firm performance and decides a company's success or failure. Corporate venturing efforts therefore need to be closely aligned with and readily integrated into a core innovation strategy. We return to this issue a little later.