Professor Ikhlaq Sidhu and I recently started talking about how the interest of corporations in the innovations created by startups is leading to changes in corporate R&D models, an area he has been studying for some time. As we continued our conversations we felt that it will be important to start publishing some of our thoughts. This is the first of what we hope to be a series on posts on how startup innovation is impacting corporate R&D models. Please also see.
The World of Innovation Has Changed
A great deal has changed in corporate innovation since the days of Bell Labs and Xerox PARC. While these models of advanced work led to so many innovations and created tremendous broad economic value, though not always to the lab’s corporate owner, it is clear that large scale, insulated corporate research is no longer the most common model for entering new markets or developing technologies of the future. Even Alphabet is re-evaluating the mission of Google X.
What has changed? For most companies, open innovation and new venture acquisitions have become extensions of the firm’s advanced R&D portfolio. At the same time entrepreneurs and their investors have become much more effective and skilled at efficiently creating new startups and bringing technology and business model innovations to market. And finally, a significant fraction of University lab work has now evolved from the traditional “publish or perish” model to one that is today closer to demonstration, design-oriented, and more applied than ever before.
All of these changes are now converge towards a new model for creating and managing portfolios of innovation.
My previous post in the corporate venture capital (CVC) series provided a broad historical perspective on the sector. In this post I review important lessons learned by CVCs that have been operating for many years and several economic cycles and best practices being used by newer CVCs. The lessons in this post would be of value to CVCs looking for best practices and corporate leaders whose companies have already established venture organizations or are considering doing so as part of enabling innovation.
In the previous post I introduced a five-dimensional framework to employ while setting up a corporate venture group and discussed in detail two of its dimensions: strategy and people. The corporation must establish a long-term strategy for its venture group. As part of this strategy it must create a set of objectives, formulate an investment thesis, decide on the stage of the target investments, the life of each fund, and the amount per investment. Recognizing that venture investing is a peoples business, the CVC must pay particular attention in hiring well. A CVC group may have up to six different teams depending on the scope of its activities and overall strategy. Next I will present the three additional dimensions: the incentives to offer to the members of the corporate venture group, generating the right deal flow to achieve the group’s strategy and satisfy its investment theses, and guidelines for the CVC group’s governance.
In the first part of the series on corporate venture capital I explored how the disruption of institutional VCs (IVCs) and the imperative for corporations to innovate provide an opportunity to corporate VCs (CVCs) to make their mark in the startup ecosystem and be viewed as viable and valuable financing sources to private companies. In the second part I provided more context on CVCs by presenting a brief history of corporate venture capital, and detailing the characteristics of CVCs during the dot-com period and today. In this blog I discuss when corporations should be establishing venture funds, I introduce a framework for creating venture funds and discuss two of the dimensions in this framework.
The business models of large corporations are being disrupted faster than ever before, e.g., Netflix is disrupting the video distribution industry, while new lucrative markets being created by innovative startups, e.g., Uber, Nest, and SpaceX. As a result of these developments, corporations are starting to realize they will need to re-invent their disruptive innovation model. We have proposed a new model that brings together corporate venturing, intrapreneurship, corporate development and business development. In order to determine whether they can successfully achieve their disruptive innovation goals, corporations will also need to find a way to measure their track record under this model. For this reason they must identify the right Key Performance Indicators (KPIs), which I call innovation-KPIs, to distinguish them from execution-KPIs. Silicon Valley’s ecosystem, particularly VCs, can play a key role in the innovation model’s re-invention and offer best practices for relevant innovation-KPIs.