Corporate VCs — venturing with small enterprises

In my earlier pieces, I argued that across the world small companies seem to have been more successful at innovation than large enterprises. Further, I outlined the business case for such an engagement across various sectors in the Indian economy. But how can corporates develop a framework for engaging with smaller enterprises? That is the focus of this article.

Experience from the world of corporate venturing suggests that a clear sense of strategic purpose is essential for large corporates to succeed in their corporate venturing initiatives. While that might sound like an obvious prerequisite to ask for, research shows that not every corporation that started a corporate venture investing initiative followed this simple health warning to its own detriment.

Josh Lerner and Paul Gompers, professors from Harvard Business School, have been studying the organisation and performance of early-stage investing activity, both by investment funds and corporations. Their principal finding based on a large number of investments, unsurprisingly, is that corporate investors performed as well as their professional venture capital management counterparts when they had a clear focus and strategic rationale for their investment initiatives. Academics have identified other factors such as a long-term vision, combined with persistence, as the key factor for success. Corporate venture investing is not for the confused or the faint hearted.

That said, how do companies develop a strategic rationale for such initiatives? Henry Chesbrough, an organisational theorist, provides a useful framework in an article that was published in the Harvard Business Review in 2002. His framework is based on two dimensions: Investment objectives and level of engagement.

Corporate investments could be guided by either strategic or financial objectives. Investments that address strategic objectives are intended to enable the investor acquire new products, technologies or customer segments.

Financially-oriented investments, on the other hand, are expected to produce a financial return on investment.

Similarly, companies could invest in businesses with which they could develop a deep operational engagement, based on their own strengths or resources. Alternatively, they could invest in companies where they would be more passive observers and at best learn from the ringside seat that they can command into the investee’s working as an investor.

Chesbrough’s framework and his typology of corporate venture investments may be summed up approximately in the table. Viewed in this fashion, it must be clear that many of the examples we discussed in my earlier article would fall under one of driving, enabling or emergent categories.

Chesbrough discusses examples of each of these types of investments and infers many useful lessons on leveraging them in pursuit of the investing company’s objectives.

To put this discussion in perspective, it must be pointed out that such frameworks provide a basis for systematic thinking. They are not a magic formula that will work for every company that wishes to pursue corporate venture capital. Eventually, the kind of investments a company makes and the structuring of the investment programme will depend on the specific circumstances and the vision of the corporation in question.

In the next and final part of this series I will present some thoughts on structuring such a programme of investment engagement.

(The author is Chairperson, NS Raghavan Centre for Entrepreneurial Learning at IIM Bangalore. Views expressed are his own.)

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