The reasons to use an SEU are not unlike the reasons for using any new venture model. Managers may consider a new start-up venture for reasons beyond the obvious urge to break in on the ground floor financially. Financial investment growth has been a primary driver in the past decade and continues to be one today. Throughout the 1970s, 1980s, and 1990s, many firms invested in ventures of all types, including close, strategically orientated projects (e.g., extensions of existing in-house projects, such as Campbell’s adding a new line of soups) and those that are more distant from operations, but pursued for purely financial results, like Phillip Morris investing in a software firm that promises a quick revenue turnaround. In the latter case, the proximity to the core business did not seem to matter so long as a financial return was attached. In fact, one corporate venturing executive cited the move away from strategic to financial goals with the comment, “There is nothing strategic about losing money.” This particular statement summarizes the move toward financial return at precisely the time when organizations were flush with cash and there were an abundance of attractive investment options outside of the firm. Many corporate venturing initiatives turned their attention away from “strategic growth” within their own organization and started to focus their energies on “financial growth” away from their firm (i.e., independent projects that may or may not have had any strategic link to the core business operations). However, the economic collapse from 2000 to 2003 put corporate venturing into a new perspective. Many of the corporate venturing funds collapsed and many of the project investments were completely written off. There were few, if any, added benefits or synergies to the investing company, as the pursuit was purely financially motivated. However, projects that have a “strategic orientation” with the company may provide additional rewards. These include at least four primary reasons to formulate and start an SEU in addition to pure financial gain. These reasons are often interrelated:

Management in a large firm may believe that growth in its core business, although vital, is less attractive than growth in other businesses. This creates a dilemma for operating managers that need to decide between focusing on the strategic fit of new growth initiatives and creating short-term financial gains in areas that may not be germane to everyday activities. By funding initiatives that are outside the firm’s core activities in an SEU venture, the company can monitor these more remote businesses without severely taxing or burdening its manpower, organization, or customer areas. If the new SEU venture is constructed properly, it will create unique new value for the firm along with long-term financial gains.

The steps of implementation require the organizational leader to take a step back and allow the role of the Facilitator to perform his or her fiduciary obligations and do what is in the best interest of the SEU venture. But, for even this to occur, two primary catalysts must occur: the selection of the Facilitator and the selection of the business idea.

For the Facilitator to be effective in his or her role within both the large organization and the SEU, it is almost imperative that the Facilitator be independent from the large organization. But why is this so? In one study, approximately 86% of employees do not feel comfortable approaching their managers or senior leaders with business ideas. They mention lack of “trust” and “comfort” as the two primary reasons.^[1]

For an SEU venture to take place with an affiliation to a large organization, it is vital that the Facilitator build trust with the employees of the large company so that they feel comfortable discussing their ideas and intellectual property. Furthermore, the employees must believe that if they come up with the idea the Facilitator will ensure that they are properly compensated in the new venture. Otherwise the SEU venture may have difficulty attracting internal participants.

One of the most important decisions in embarking on an SEU is the choice of the Facilitator. Many organizational managers will not easily agree to let a third party resolve intellectual property rights or make decisions about external compensation issues. These responsibilities of the Facilitator may coincide with or even replace those of key senior managers. This is likely the most contentious issue in the SEU template. However, it is also at its core. Without an SEU Facilitator to moderate or mitigate conflicts or to handle sensitive negotiations, the large company ends up with an internal model that is doomed to all of the problems described earlier. Large companies require a different model that encourages and facilitates entrepreneurial talent to bubble up from within, or approach from outside. Existing growth models do not easily accomplish this task.

There are a number of companies (and/or individuals depending on the size of the company) that can easily fill the role of the Facilitator. Interestingly enough, many of the companies that previously provided risk financing to large companies can also provide these services, but they are not the primary focal point. Risk capital providers tend to have a harvest orientation toward the small ventures and may not have long-term shareholder growth in mind. However, there are four basic criteria that the Facilitator needs to meet. These include:

A prospective Facilitator may not meet all these criteria perfectly. For example, the fourth criteria states that the Facilitator must have access to angel investors or third-party capital. Although it is ideal that the Facilitator be able to secure funds outside of those obtained from the large organization, it is not necessary (or even desirable) that the Facilitator provide the funds directly. Simply having an appropriate network to bring to the negotiating table should be sufficient for meeting the responsibilities in this requirement.

Furthermore, although the Facilitator role may best be handled in a long-term manner with relatively little turnover, it should be clear to the Facilitator that it is not a job with entitlements or permanence. If intermediate to long-term targets are not met, the Facilitator could (and should) be replaced with other talent.

Given that the SEU is a relatively new concept, it will not be possible to find a consulting individual or company that features services directly targeted for SEU formations (though over time this will change). However, the types of companies that can provide these Facilitator services include the following:

As a starting point, the large organization needs to prepare the initial due diligence, customize the general SEU template, and meet with a variety of potential Facilitator candidates. The large company should then prepare a “short-list” of potential candidates (i.e., those that met their threshold to conduct business) for the SEU entrepreneurs to select from. Consequently, both the large organization and the SEU entrepreneurs have input in the selection process and should feel comfortable sharing sensitive information with the Facilitator. The notion of a Facilitator “short-list” keeps each of the Facilitators at arm’s length and encourages competition among the different prospective participants, even after a selection has been made (i.e., in the event the large company or SEU wants to later change). Given the requirements of expertise, there are likely dozens of different companies, and literally thousands of individuals, that would be able to meet the demands of the SEU Facilitator role.^[2]

The Facilitator will fill two primary job functions within the large organization: (1) provide a filter of business ideas from within and outside the organization and (2) third-party arbitrator of the negotiations within and between the SEU and large organization.

In the first role, the Facilitator will differentiate or “filter” good ideas from bad. Further, the Facilitator should become a familiar, trustworthy figure to whom employees can discuss various ideas they might like to explore. Employees throughout all departments and ranks should feel comfortable forwarding their business plans or ideas to the Facilitator who will then select among those that merit additional attention.

Once an idea has been selected by the Facilitator, it is then polished to present to those individuals inside and outside the firm for potential funding. At this time (coinciding with the SEU formation), the Facilitator helps negotiate the terms of the intellectual property rights and distribution (if any doubt exists), leasing, ownership, or rental terms of intellectual property, allocations of equity interests among deal participants, and the handling of conflict resolution as problems arise.

Because the Facilitator may be assisting multiple employees/projects during the same time period, there may be a need to help navigate various projects and ideas at different stages of development. Consequently, the Facilitator at a major firm needs to have a full team facilitating the deal process, disseminating information, and negotiating a variety of deals at the same time.

After the legal paperwork formalizing the SEU is complete (much of the paperwork should be standardized), the company can pursue financing and assembling its key team of entrepreneurs/employees. As an unbiased third party, the Facilitator should assist with much of this process.

After successfully gaining approval among key decision makers to establish the SEU, the Facilitator becomes an essential catalyst in growth formation. The Facilitator becomes involved almost daily with various roles and functions within the SEU and provides numerous functions in addition to deal flow generation and filtering. They include but are not limited to the following:

Some of the services occurring at the early stages of SEU development (e.g., deal filter and business plan facilitation) provide a direct benefit to the large organization and should be paid for corporate cash flows. Once the SEU is established and funded, it should pay for any continuing services or obligations. This means that the Facilitator is being compensated directly by both the large company and the SEU. Consequently, the Facilitator is not entirely independent (as mandated in the template) as there is the potential for bias depending on the amount, timing, and expected delivery of future cash flows. However, where possible the SEU template should impose a process that minimizes the threat of bias by the Facilitator.

The Facilitator should be excluded from the Harvest decision and have no economic bias surrounding a final sale or IPO. Also, the Facilitator should probably not be a voting member of the Board of Directors, although the Facilitator’s presence at Board meetings may be allowed (or even encouraged). Further, where possible the SEU should build in various success or bonus payments to the Facilitator for specified targets or goals. The primary source of revenue to the Facilitator should derive from ongoing services to the SEU (i.e., outsourcing for payroll, accounting, staffing, etc.). In this manner, the Facilitator will derive economic incentive to build the SEU into a larger, more secure company. As the SEU increases in size it will command more services that will directly benefit the Facilitator.

The Facilitator should be granted some large deferred bonus payments, in lieu of cash payment, in the early stages of the business plan development. Otherwise, the Facilitator will be creating a role not unlike a classic venture capitalist with a harvest incentive. The Facilitator should not be placed in a position where there is an economic incentive to force the company toward an early or convenient harvest. The primary role of the Facilitator should be in developing the value of the SEU and this goal should not be comprised or motivated by an opportunistic harvest.

One of the toughest decisions in the beginning will be in allocating the equity among all of the key stakeholders. The Facilitator will be central to the decisions in helping determine the appropriate distributions. The SEU equity should be allocated among seven basic constituencies: (1) the large (parent) organization, (2) the EntrePartneurs or entrepreneur(s) outside of the organization (“Reverse SEU”), (3) third-party financiers, (4) the Facilitator, (5) the new venture board members, (6) the entrepreneurial employees or EntrePartneurs within the SEU, and (7) a safety bucket (for other key stakeholders and unforeseen circumstances).

Although the precise level of equity participation will vary with each organization depending on intellectual property rights, entrepreneur contributions, and third-party financings, the relative equity contributions should be reflected in ownership allocation per Table 7.1.

The possible range of equity participation reflects the terms that might be entered into under the SEU indenture or legal document. However, as a practical matter, it may be preferable to set a desired target or “ideal” range for equity participation as shown in Table 7.1. Although it may be easiest to allow the parent the largest and majority ownership (i.e., equity) stake, it may not be in the parent’s long-term interest to do so. Thus, it may require some ingenuity to draft an agreement (through IP leasing rights or short-term rights of application) that allows the SEU entrepreneurs to participate in a significant manner. In the absence of a worthwhile ownership stake for the SEU entrepreneurs, it may be difficult to garner the entrepreneurial spirit necessary to grow the venture. Further, if the equity stakes are not balanced according to some predetermined ranges, problems may develop later that might potentially undermine the long-run growth of the SEU venture or strategic link to the parent.

Table 7.1 shows a preferred range for the parent organization in the 20 to 49% level with 40% being the desired target. This provides the parent organization significant ownership rights but does not provide for operational control. Because the SEU should evolve as a traditional entrepreneurial unit, keeping the parent’s ownership less than 50% will be helpful to ensuring relatively low interference in day-to-day operations.

The preferred equity range for EntrePartneurs is in the 20 to 60% area with 25% being the desired target. Although the entrepreneur partners may be entitled to a small equity percentage for having put together the deal, it is their continuing efforts and sacrifice of secure salary and benefits that earns them a higher stake. The entrepreneur stake should be sufficient to motivate this group, but not be so high as to alienate or generate animosity among the other key stakeholder groups.

The Facilitator, for all of the duties and functions he or she performs, will receive no more than 5% of the SEU’s equity, but most likely fall to approximately 1% of the stake. The Facilitator will spend considerable time working with the entrepreneur(s) from start to finish, but his or her compensation, as stated earlier, should primarily derive from fee income and bonus.

The New Venture Board members should receive more than a relatively small stake in the venture and should not have a significant ownership. The range for this group should fall in the 1 to 5% ideal range with 3% being a reasonable target.

Third-party financiers, other employees (key stakeholders), and a cushion or “safety bucket” (to be distributed as needed) should comprise the remaining shares. This additional equity may amount to 30%+ of the organization and should be allocated as the needs require.

The composition of the SEU board should reflect the ownership stakes and interests of the key stakeholders. Certainly among the members are the lead entrepreneurs with voting privileges, along with a representative from the parent company. The parent can select a member from its new business ventures group (if one exists) or may select a member from its strategy group. The Facilitator should also be a member on this board, however in this model will not have voting privileges when it comes to the final exit strategy (unless the Facilitator has an insignificant ownership stake). The Facilitator should be allowed to vote on other items. Without some voting power, the Facilitator cannot truly maximize the SEU venture and have a voice in steering it toward its potential. If there are any third-party financiers, they should have a representative on the board as well. However, any third-party financiers should realize that the SEU is not set up with a time clock or harvest strategy.

Large, public organizations need a new approach to growth. They need a model that rewards risk-taking and provides incentives to those who develop the intellectual capital as well as those members that seek an entrepreneurial path. The new growth template should leverage the intellectual capital, distribution networks, and cheap access to capital made available by the parent organization yet not be encumbered by the parent’s sluggish culture or management’s greed. Further, the new model needs to be insulated from self-serving venture capitalists, dealmakers, corporate officers, and other consultants or advisors that might drive management into behavior that serves special short-term interests at the expense of long-term wealth creation.

The SEU template is not perfect and does not fit all organizations. However, it offers better flexibility and ways to achieve long-term growth for the large organization than other models that typically reward short-term financial gains. The model attempts to minimize the potential for economic bias and behavior among stakeholders that could undermine the long-term development of the SEU. However, so long as any economic model is dependent on paid consultants (such as a Facilitator) for advice, it is always possible that personal motivation will bias the results. But this should not imply that a system should be banned for its imperfections. Rather, it offers a starting point for further refinement and application.

The SEU model uses an unbiased third-party Facilitator to act as an intermediary between the parent and entrepreneur. The parent may argue that this Facilitator introduces yet another layer of oversight, cost, and delay that could be handled within the parent organization. This will likely be untrue. Although management may not welcome a Facilitator entering the SEU template as a participant that usurps its duties and responsibilities, the relatively small deals suited to the SEU template would otherwise be too time-consuming for senior management to oversee.

Existing venture models need some modifications to make them work better! Entrepreneurs within a company often do not share their insights or expertise. Large companies are thus losing entrepreneurial opportunities each year, along with the potential for added revenues and profit. Things need to change for the large company if they are to grow stronger over time. The SEU model, with the proper oversight from senior management (at the parent company) and implementation of an independent Facilitator, provides a workable solution.