Article | Harvard Business Review | October 2013

Corporate Venturing

by Josh Lerner

Abstract

For decades, large companies have been wary of corporate venturing. But as R&D organizations face pressure to rein in costs and produce results, companies are investing in promising start-ups to gain knowledge and agility. The logic of corporate venturing is compelling: A well-run fund can help a firm respond quickly to changes in markets and gain a better view of threats. In some cases, it can stimulate demand for a company's own products. And its investments may earn attractive returns. During their first three years as public companies, firms backed by corporate venture funds show better stock price performance, on average, than companies backed by traditional VCs. Managing corporate venture funds is not easy. Some companies have seen their venture initiatives fail, and even firms with successful funds have struggled to make use of the knowledge gained from start-up investments. Six steps can help companies avoid the pitfalls. Align goals. Corporate venture funds are more successful if the business of the corporate parent and of the portfolio firm overlap. Streamline approvals. A complicated decision process can burden the fund with too many goals and lead to ineffective investing patterns. Provide powerful incentives. Companies that don't offer adequate compensation to their venture capitalists will face a steady stream of defections. Tolerate failure. A zero failure rate may indicate that the fund is playing it too safe. Stick to your commitments. If a company is seen as a fickle investor, professionals will be wary of joining its venture unit, entrepreneurs will be reluctant to accept its funds, and independent VCs will be hesitant to join in. Harvest valuable information. Companies need to invest as much in learning from their start-ups as they do in making and overseeing deals.

Keywords: Venture Capital; Knowledge Acquisition; Corporate Strategy; Research and Development; Business Startups; Innovation and Invention;

Citation:

Lerner, Josh. "Corporate Venturing." Harvard Business Review 91, no. 10 (October 2013): 86–94.