Having argued that a business case exists for engagement between large corporates and entrepreneurial ventures and having referred to a framework for conceiving such a programme, I now present some thoughts on how such an engagement might be structured.

Apart from the lack of a strategic focus, one of the principal findings about the reasons for the failure among corporate venture investing programmes is that of not creating the appropriate organisation and incentives. By contrast venture capital funds are believed to have had a higher rate of success because of the way they are structured and their performance-linked compensation systems.

Three features of VCs To understand the distinction between venture funds and corporate venture capital investments, it is necessary to recognise the three central features of venture capital organisations.

First, venture capital funds are pools of capital managed by professional fund managers on behalf of investors. Most of the time these funds are organised as independent funds with a limited life of 8-10 years within which the entire process of investing the funds and harvesting the returns has to be completed and the capital returned to investors.

Second, fund managers get to keep a piece of the capital appreciation they create for the investor in the fund. Thus, the financial interests of the fund manager and the investor are aligned through an incentive compensation mechanism.

Third, venture fund managers engage closely with the enterprises they invest in to ensure that the companies perform well. Towards this objective, fund managers choose their investment strategies such that the investments are in line with their own lines of expertise or specialisation.

Both practitioners and academics argue that each of the features above contributes to the success of venture funds. Further, the absence of one or more of these elements in corporate venture organisations is thought to be responsible for their relatively poor performance.

Xerox Corporation was among the early organisations that realised this requirement. It set up a venture investment programme that mimicked the organisation form and compensation mechanisms of a venture fund. It also staffed the fund carefully and designed deliberately the interaction of the fund management with the rest of the corporate, with impressive results. Indian corporates can take a leaf out of these experiences.

Five simple steps Here are five simple steps for contemplating such an initiative:

Review the corporation’s business portfolio carefully and see whether and how a corporate venture investment programme can complement it from a strategic perspective.

Examine if the opportunities available for investing in entrepreneurial firms constitute a strategic fit to the corporation.

Decide how much capital the company can reasonably set aside to fund such an initiative, and for how long, to invest in such a programme. Given the riskiness of these investments the balance sheet should have the financial capacity to write these investments off in the worst case.

Identify the organisational interface that will engage with the investee enterprises.

Create an investment management organisation that will mimic a typical venture fund management organization, a la, Xerox Technology Ventures.

These are significant commitments for an organisation to make. The good news is that the corporate has a range of options to work, ranging between a low intensity engagement of subscribing to a venture fund to start with and going all the way to creating its own venture fund. The exact choice would be a function of so many parameters that are specific to the company in question. And that is a whole topic for discussion by itself.

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

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