While business is fundamentally about generating profitable organic growth, it seems as if many companies have forgotten how to achieve it. In their own markets, they often appear resigned to following rather than leading. Innovation has become the subject of seminars, rather than of boardroom action, and attempts at generating growth have been largely confined to swashbuckling, high-risk acquisitions more likely to destroy value than create it.
Shareholders must wonder who really gains from all this. After all, most public companies have only managed an average 5.5% growth over the last 10 years, according to recent studies. Would you describe this as exciting performance? Hardly! And analysts are waking up to the fact that if you dispel the financial fog created by corporate deals, you are pretty much looking at zero growth.
A key reason for this is that today's generation of CEOs came of age in a cost-cutting, bureaucratic culture that lost sight of its entrepreneurial roots. Innovation has been nearly eliminated from the corporate gene pool. One FTSE100 CEO even told me recently that he "seemed to be in the business of managing decline".
But now comes the good news. More and more companies are slowly rediscovering the ability to innovate, to think like entrepreneurs. They are focusing on organic growth, but trying to supercharge it beyond the merely incremental in order to deliver real shareholder value. How are they doing it? By adopting corporate venturing as a tool for growth.
Originating in the US, corporate venturing is the process by which established companies invest in new business ventures, either for generating revenue or for various strategic benefits. Types of corporate venturing vary. A common type is where a company invests in a portfolio of external businesses via a corporate venture fund. US tech giants such as Intel, IBM, Microsoft and Dell, have huge funds invested, and European multinationals including Reuters, Shell and Vodafone have followed suit.
Such corporate venturing investments are often modest, yet the returns can be huge. Siemens' Mustang Ventures, for example, has turned in a 1,100% growth in value to $1.2bn since its launch two years ago.
Corporate venturing also gives lumbering companies access to new markets, technologies, and skills. It can serve as a cheap source of external research and development, which can then be taken in-house or spun off.
But corporate ventures can also be incubated within a company, or set up as a joint venture with another business. Virtually any company, by combining its existing assets – such as intellectual property, brands, skills, customers, processes, and technology – around a new business idea can create a valuable new venture. By doing so, it can also advance its corporate knowledge and re-invigorate its corporate culture. This is what Virgin Group has done, by using its brand to expand into a wide portfolio of activities. Other examples in the UK include Prudential's online bank Egg, and Securicor's online security service SafeDoor.
The importance of organic growth – and its relationship with corporate venturing – are highlighted by the responses from 50 CEOs and directors of FTSE100/250 companies surveyed by Edengene earlier this year. Nearly all - 93% - identify growth as a 'significant issue', and 91% are shifting their focus firmly to an organic approach.
In fact, 86% claim to be venturing in some way, and 76% plan to invest even more this year. FTSE100 companies announced more than £5bn of investment in 2000. For them, innovation-led growth is especially important, as only 50% believe they are successfully exploiting their assets effectively.
And it is here that big companies have a massive advantage over start-ups. Their Aladdin's Cave of assets, which competitors find hard to reproduce, is a key resource for creating and supporting ventures.
A great example is Freeserve, which remains the model for stand-alone corporate ventures. By investing £1m in 1998, retailer Dixons created the world's first free internet service provider. It was a business Dixons was uniquely placed to deliver, by leveraging existing assets – its customer base, stores, sales force and support services, and massive marketing spend. After just nine months, Freeserve achieved a £1.5bn flotation valuation. Dixons exited last year for £1.1bn in Wanadoo stock.
Despite the preponderance of tech and internet-related ventures, corporate venturing is not really technology or sector specific. Its various permutations can be applied to any company in any market: every business can benefit from stronger growth and a keener competitive edge.
So how do CEOs identify a potential corporate venture? Crucially, they must have a breakthrough business idea. This sounds a textbook cliché, but it is really just sharp commercial thinking. It is a high risk/reward option using existing assets. A corporate venture is the best vehicle, as it helps provide ring-fenced resources, a focused management team, and a fast pace to market.
If successful, such ventures can take a company in a different direction from its old core business. Breakthrough ideas tend to exploit 'discontinuities' – often, new technologies that herald wholesale changes in the way business is done. Today, the internet is the biggest discontinuity going, so ventures tend to involve an online element. This may seem at odds with the dotcom crash and the market's ensuing wariness over anything online. But the difference here is that the internet is just a component, and that the dotcorp venture is likely to have all of the key elements required of a viable business – provided for next to nothing by the parent company.
Venturing sounds easy, but it is not all plain sailing. Many companies say they can generate good ideas, but admit the real stumbling block is in implementing them. Successful execution requires a wide range of entrepreneurial skills that simply do not exist in large companies.
Strikingly, when presented with a list of 10 core skills, only 14% of respondents believed their companies possessed them all. So it is fair to assume that few companies are likely to maximise their potential without help.
This shortfall of skills is matched by a lack of the right processes, project management disciplines, and infrastructure needed to develop ideas into revenue-generating ventures. Big company management is often more about governance, risk-aversion and cost-cutting than about speedily building new businesses. The management mindset is further narrowed by inbreeding, which forces maverick innovators either to conform or leave. Internal politics also play a part. The crucial first step in creating a corporate venturing strategy is to overcome such hurdles.
Failure rates of all types of venture are high, due to the natural attrition rates inherent in venture projects. The downside is far smaller than with traditional M&As however, and venture failure itself can be valuable experience.
Not every company has a £1bn Freeserve-type business ready to unearth, but they all have assets which can be used to build a corporate venture.
And what of that CEO who felt he was managing decline? He has just started an organic growth programme. By doing so, he is rediscovering the benefits and thrill of entrepreneurial risk – and reward.
Key skills for executing corporate ventures
How many can your company master?
- Generating high-value new ideas
- Leveraging technology to deliver growth
- Commercialising ideas and assessing their value
- Designing and building new business units/spin-offs
- Taking opportunities to market quickly
- Overcoming internal barriers and obstacles
- Encouraging innovators and entrepreneurs in the company
- Structuring and executing business partnerships rapidly and effectively
- Implementing technology-based projects
- Realising value from ventures for shareholders
- Strategic focus: why are you doing this? Are you seeking ROI or strategic benefits?
- Resourcing issues: do you have the people/money/time to do this?
- Skills: do your staff have analytical, technical, and project management skills?
- Portfolio of ideas:
- do you have a process in place to generate the volume of ideas needed in order to single out those most likely to succeed?
- how will you identify/select the opportunities worth pursuing?
- how will you assess these?
- do you have the resources/skills to develop these opportunities?
- do you have a process in place to generate the volume of ideas needed in order to single out those most likely to succeed?
- HR resources: can you incentivise staff throughout the corporate venturing process?
- Political issues: can you
- steer through the internal politics?
- avoid the venture conflicting with core elements/strategy of your company?
- avoid conflicts with client/supplier relationships?
- ensure support and fast response from key people throughout the company?
- steer through the internal politics?
