Corporate Venturing Spurs Innovation, but the Fit Has to Be Right

Corporate venturing has been growing in recent years, as manufacturers seek to increase their pace of innovation and reduce their time to market. Under a corporate venture capital (CVC) model, a company creates an internal subsidiary to develop and nurture a portfolio of outside entrepreneurial firms with promising new technologies that fit the company's expertise and markets.

CVC-funded innovation gives the parent company access to the kinds of inventiveness and agility found in startup technology companies. At the same time, entrepreneurs receive funding and other resources they just couldn't get otherwise. And if the venture is successful, the incentives can be high for everybody.

As an example, the venture wing of semiconductor and wireless technology company Qualcomm has earmarked $100 million for investment in digital and wireless health companies, known as the Qualcomm Life Fund. Through the Qualcomm Ventures CVC unit, Qualcomm has taken participation in such startups as heart-monitor company AliveCor, fitness tracking startups Fitbit and Noom, and medical device manufacturer Sotera. Such investments provide Qualcomm with pathways into the emerging wireless health market.

Intel Capitalinvests in startups that are innovating in the larger "technology ecosystems" that parent company Intel thrives on. Since 1991, the venture unit has invested some $11.4 billion in 1,418 companies globally, in a broad range of sectors that includes data-center and cloud technologies, digital media, Internet of Things, security, services, open-source technologies, mobile devices, tablets, and wearables.

In 2011, Intel Capital invested in Borqs, a Beijing-based mobile communications startup specializing in Android-based technologies. The two companies have engaged in joint R&D efforts, which, according to Intel, have enabled it "to further its strategy to support and optimize multiple operating systems to work with Intel architecture."

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Borqs' scientists now contribute to R&D for all of Intel's mobile chip projects. In turn, the infusion of CVC resources has enabled Borqs to expand into vehicle systems, wearables, and satellite communications.

According to Boston College management professor Thomas A. Chemmanur, CVC activity has been around for decades, but the practice has increased in recent years and now accounts for 15% of overall VC investments.

Chemmanur thinks the CVC model is better than conventional VC at sparking innovation. The organization model of the CVC, he argued, provides a better environment for launching new ideas and creating groundbreaking products.

Under a CVC model, the sponsoring parent company gives the startup a ready market for its new product, along with organizational support to help that product make it in the real world. In contrast, a traditional VC-funded startup begins its life in greater isolation. The money is there, but the startup has to gear itself up with less support.

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In addition, designers and inventors in startups often operate under stronger incentives that promote innovative thinking. Taking such a startup under its wing can help foster more creative thinking for the parent firm.

One possible pitfall: A CVC operation has to function within the context of its parent company, and this context can sometimes work against the innovation efforts. Harvard management professor Josh Lerner warns that the problems encountered in CVC setups are often "rooted in incompatibilities between two mindsets: that of the risk-loving, sometimes ruthless venture capitalist, and that of the process-bound corporate executive."

The venture unit and its position within the firm need to be carefully designed, according to Lerner, or "venture capitalists can become ensnared in the agendas of myriad corporate stakeholders or demotivated by inadequate or poorly designed financial incentives."

On the positive side, though, a CVC model can allow for a beneficial and symbiotic relationship between the parent company and the entrepreneurial firm. Chemmanuur said: "[A]n entrepreneurial firm is more likely to establish a strategic alliance with a CVC parent with which it has a technological fit," so the startup can "operate close to the industrial expertise of the parent company." The funding provider, which is familiar with the technology, is in a position "to better evaluate the quality of the entrepreneurial firm's R&D projects and to better advise [it]."

Lerner agrees. He and colleagues studied more than 30,000 investments in startups and found that "corporate venture funds are more successful if the stated focus of the corporate parent and the business of the portfolio firm overlap." Such well-aligned programs, he said, "are less likely to be terminated and more likely to go public, produce higher numbers of patents within four years of going public, and have better stock price performance."

Al Bredenberg is a writer, analyst, consultant, and communicator. He writes about technology, design, innovation, management, and sustainable business, and specializes in investigating and explaining complex topics. He holds a master's degree in organization and management from Antioch University New England. He has served as an editor for print and online content and currently serves as senior analyst at the Institute for Innovation in Large Organizations.