Research and Development Innovation: The Shift from Traditional R&D to Corporate Venture

In 2017, $782 billion was spent globally on R&D, an 11% increase from 2016, which was largely driven by Chinese efforts as well as by global conglomerates, such as Amazon. Yet, often enough, traditional internal R&D can focus on the development of incremental technologies and innovations that protect and prolong the life of existing business models and revenue streams. This is great in the short to medium term, however, it can hinder long-term business growth, as these business models or revenue streams may not be appropriate to address future challenges and may also lead to disruptive new ideas being overlooked.

However, there is considerable overlap between corporate venture and internal R&D, especially from a product development standpoint. Ironically, as the general pace of ‘external’ innovation accelerates, internal R&D organizations no longer have the capability to disrupt or anticipate disruptions. So, what are the differentiators between the two innovation approaches, and, why is an internal R&D strategy (in isolation) no longer sufficient to keep corporates at the forefront of their industries? Below, we will deep dive into the trends in corporate R&D and the benefits of a more externally focused corporate venture innovation strategy.

Corporate R&D in a Hyperconnected World of Innovation

R&D can be defined as the operational part of a business that seeks knowledge to develop, design, and enhance products, services, technologies, or processes.

R&D is dominated by the some of the world’s largest organizations — companies with 10,000 employees account for 50%+ research spending, but those with fewer than 500 employees account for less than 20% of total expenditure. Interesting, no?

This shows the disparities between corporates and SME’s, however, there are other issues associated with internal R&D:

• Switching innovation and R&D approach — a new CEO, CFO, or Head of R&D can result in the abandonment of previous innovation efforts
• Declining return on investment — research has shown that returns have declined 65% over the past three decades
• Tying R&D spending to results — a difficult process, which can often be over-amplified by management
• Increasing impact of external innovation and corporate venture — researchers calculated that every dollar invested in venture capital was 3 or 4 times as effective in stimulating innovation as a dollar invested in internal R&D

The Rise of Corporate Venture Capital

Corporate Venture Capital is becoming a real force, yet, you could be excused for not seeing it straight away if you look at the percentage of global venture capital deals that included corporate investment (only 12% in 2017). The real clue is the amount invested, which has increased from €50 billion (2016) to €147 billion (2017), giving corporate venture capital investments an impressive compound annual growth rate (CAGR) of 31%!

Benefits of Corporate Venture Capital

As the amount of capital being deployed by corporate venture increases, here are some of the reasons why corporates are employing such strategies as well as the associated benefits:

• Learning and R&D — can help bring knowledge of new tech/ innovations from the edge (both in core and adjacent sectors) back into the business
• Customer acquisition — new business development angle for corporations
• Start-up/ corporate collaboration — corporate venture capital can introduce the core business to new and exciting partners
• Product differentiation — the corporate can add the start-up’s product to their sales offering
• Grow demand for core business products — investment can help develop an ecosystem for the core business to flourish
• Utilize underused assets — e.g. infrastructure assets, procurement, HR, etc
• Branding — develop a new digitized corporate brand
• Integrate a start-up mindset — promote the entrepreneurial spirit in the core business

Challenges of Corporate Venture

Unfortunately, corporate venture is often set up outside the established corporate structure. When this happens, R&D and other functions can see the function — corporate venture arms, incubation, acceleration, etc — as a pet project of senior management that are competing with R&D efforts, not complimenting them.

To be most effective, corporate venture needs to be part of an overall corporate innovation approach that clearly sets out how innovation tools complement the traditional R&D function. It needs to be like an API connecting innovation ecosystems to the core business.

Corporate venture needs to be embedded in the capital allocation process. It needs to be part of the culture of a company; therefore, to ensure the integration of strategic investments, companies have to give R&D access to the corporate venture portfolio or even reward R&D departments for leveraging these companies/ products, to achieve clearly defined companywide innovation objectives.

Corporate Venture as Part of an Innovation Strategy

The shift from traditional R&D to corporate venture is certainly well underway in many of the world’s largest companies. R&D still has a huge amount of value, but it cannot be done in isolation. It must be part of a more holistic innovation strategy that is incentivized correctly and truly embedded within the culture of a company.

Corporate venture is becoming a key part of corporate innovation strategies as well as a major source of capital within the investment ecosystem. However, it can also bring huge benefits to corporates as it can leverage and tap into the kind of innovative thinking necessary to keep up with the rapid changes in the marketplace, particularly those associated with digital transformation.

A global outlook is imperative to leverage a robust corporate venture strategy — not only in terms of accessing the most unique and applicable innovations but using this global investor outlook to create a strategic vantage point. While companies look to pick the winners, it is important to detect the weak signals in a very noisy market. This is especially true in early-stage investments, which provide an educated way to discover innovation both in core and adjacent industries. These signals serve to tighten the feedback loop between corporate R&D units and the market, allowing the company to better protect itself from emerging competitive threats.

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