Why Corporate Venturing Kills Corporates
And how corporate innovation should be done
Corporate venturing has undoubtedly been the king of innovation buzzwords last year and will probably continue to be so for the coming years. While I understand the relevance and enthusiasm surrounding this trend within the corporate innovation sector, I can promise you that in its current form it is not at all the holy grail of overcoming organisational complexity. Let alone its inertia in this nearing exponential and digital era.
Executive summary
The increasing speed of new technologies create a volatile and uncertain environment for enterprises. This is particularly problematic for the nature of enterprises, which is built on predictability, optimization and certainty.
To become more adaptive enterprises currently turn to corporate venturing to seek out disruptive innovations, but this does not in itself make the enterprise more adaptive. To do so, corporate venturing must be internalized and distributed throughout the entire organisation. We need to make the elephant dance and this can only be done by implementing complex adaptive systems that help us overcome organisational complexity. For this transition we need to radically change the way we view innovation, operations and governance.
So, what are we talking about here?
In short, things are about to become a bit turbulent for companies. The amount of available data is increasing rapidly, computers are shrinking and speeding up simultaneously, everything is becoming connected with everything else and all the middlemen (e.g. banks, insurances, auditors, traders, etc.) are being taken over by much more efficient and trustworthy algorithms.
This development currently leaves enterprises like a deer caught in the headlights of an oncoming truck… and they’re not jumping to safety. The only thing they are doing is wiggling their tails in hopes of it magically propelling them to safety or distracting the truck from killing them.
So why are enterprises not jumping to safety?
The wiggling of the tail
To overcome the exponential technological, economical, societal and moreover existential threat, large enterprises innovate by using one or more of these corporate venturing methods (besides the usual incremental product/service innovation and optimisation):
Incubators
Creating a program inside or outside of the company for employees to work on new ideas. Mostly based on challenges predefined by management or just chosen randomly to come up with “the next big thing.”
Accelerators
When ideas and or startups from the incubation phase have proved to be market viable, they move to accelerator programs. Designed to help the startup scale or be internalized by the corporation.
Startup Studios
Companies provide a workspace for startups in their sector, often offering services such as legal advice, recruitment help, corporate resources and financial aid.
Mergers & Acquisitions
The oldest in the book, mergers and (or primarily) acquisitions of startups have been around for quite a while.
Sounds like pretty good ways to innovate right? I agree, the idea of using LEAN methodologies to iteratively try out new markets, technologies, customer segments and marketing approaches is without a doubt useful in overcoming the otherwise slow pace of innovation of the parent company. It might also increase some corporate agility and make them more adaptive, or let’s say, sensitive to market changes and development. So lets summarize the ‘it’ correctly.
The benefits of wiggling your tail
It improves company culture (for those who are able to participate)
For the people in organisations who have some entrepreneurial drive, working within an enterprise that has corporate venturing programs is a life-saver. You can release your inner entrepreneur without having the social or financial fears of actual entrepreneurship.
It’s a (relatively) quick way to test new concepts
Speed is of the essence when improving adaptability to a increasingly faster changing customer demand. Corporate Venturing safe from the enterprise’s complexity and obstacles such as legacy, mid-management and financial oriented KPI’s
It mitigates risk and liberates teams
When the parent company is left undisturbed from new ideas, ventures are more free to go through the natural iterations of trial and error without having to overcome typical “corporate resistance” allowing for a higher learning ROI.
It offers a window into the future
You get a chance to peek through the window of the future to see what possible new business cases are viable and scalable. A variation and selection takes place within the pool of startups, maximizing the chance of serendipitous development.
Why Corporate Venturing makes sense
It doesn’t really seem that bad, right? Right. But let’s take a step back:
Enterprises do what they are good at: optimization. Meaning things such as minimizing risk, reducing costs and standardizing processes and procedures. Most of corporate IT is aimed at gaining control, understanding and rooting governance in process and procedures.
Corporate innovation is safe when it is controlled, when it doesn’t impact certainty or the optimisation drive of an enterprise. So what we see is that currently innovation is divided into two parts:
- A centralized or decentralized R&D unit that improves products in existing portfolios (incremental innovation) and is in charge of customizing existing products based on customer demand, legislations or new technologies (the non-disruptive ones). Often referred to horizon one — thinking one or two years ahead, aimed at staying ahead or keeping up with competitors.
- An isolated innovation team in charge of Corporate Venturing. These usually report to the CMO, CIO or CTO. Their aim is to look at trends, see which startups are popping up in their industry and provide input for horizon 2 and 3.
The place of Corporate Venturing is thus away from the actual business for which it is meant. Which makes sense, because venturing with the entire company would be quite the challenge, to say the least. Office politics, cross-department budgeting, short-term thinking by mid-management, the list goes on…
But does it really make sense to keep the more radical or impactful innovations outside of the company? To answer this we need to take one more step back.
Wait, why do we innovate?
A business, simply put, produces products or services that customers want. No products, no customers — no business. That’s it. The rest (HR, Marketing, Sales, etc) is aimed at supporting that business, not in itself a critical part of a business. To keep customers, and with it business, we have to keep up with their demand and new ways to do so- this is where innovation comes in. Innovation is the magical bridge between what customers need, or didn’t even know they needed and what the business thus should offer.
Back in the day when customer demand didn’t change all that much, the need for innovation was minimal and thus incremental. Bread was bread, bricks were bricks and wine was wine. But fast forward to a few centuries later and we suddenly see that a TV is not just a TV anymore, but a home entertainment center that connects family and friends and recognized your face by walking by and adjusts its settings just for you so it feels like a part of your identity.
Size, speed, memory and adaptability all started to evolve so quickly to the point that what used to be the first miraculous and privileged connection to the internet, within years became a human right.
As we can see, the speed of evolving customer demand is not going to slow down anytime soon. And with that, planning ahead what products you should make or understanding what your customer want has to shift from some odd years from now, to some odd months from now. Eventually maybe just even weeks or even days, but logically this isn’t very realistic. To plan ahead, is to know your destination beforehand, but in the future customer demand will become a moving target. Your innovation strategy thus has to evolve from planning to sprinting. We don’t know the target and will never know unless we start moving.
The responsibility to hit that moving target lies with the corporate venturing team, for internal/central R&D teams are working on incremental innovations. And this is where it goes wrong: the future of your business should not depend on the creation of external ventures, but on the transformational ability of your organisation. The ability to step away from merely producing products or services and start design businesses.
When your customer needs become increasingly vague and ambiguous and the market turns volatile and uncertain, your ability to innovate can not be limited to a few small ventures on the side. You need to be able to address the full potential of your enterprise to develop completely new markets and stay in the lead. Be big and fast, not small and fast. Make the elephant dance, not the mice run.
We need to rethink the role of innovation. Shift it from a job-on-the-side to your core activity, your only means to survive.
Why corporate venturing is not enough
Even though the essence of Corporate Venturing is good (using LEAN methodologies, focusing on talent, etc.) keeping it outside or on the edge of the company is bad.
Talent leaves the company
When you crowdsource for ideas and select the most talented, creative and pro-active folks to enter incubators and accelerator programs, those who ultimately remain within the mothership are the old, uncreative, conservative, cautious and non-digital natives. Not a promising bunch to help integrate complex new technologies and business-models into a legacy filled organisation.
Little or no control over spin-ins or -outs
Enterprises like efficiency, not redundancy. Evidently the redundancy of variation and selection is pushed to the furthest outside edge of the organisation and prone to be more of a marketing or corporate social responsibility activity than a spirited destination of venture capital. Often startups who shout they do “something with A.I. or I.o.T.” get accepted in corporate programs by a lack of business viable ventures, usually aimed at obtaining certain talents within the startup.
Spin-ins don’t fit
When ventures actually turn out to be of use for the parent company, e.g. after completion of an accelerator track or acquisition, they are internalized. But a startup is a startup, and a corporate a corporate. The often instinctive way of working within a small collective intelligent group is not easily translated to a rigid, structured corporate. This situation often results in the parent company obtaining the IP and relevant goodwill (usually after the founders jump ship for lack of promised freedom and autonomy).
Continual j-curves drain the parent company’s cashflow
The last (but not the least of reasons why Corporate Venturing in its current form is killing corporates softly with their own hands) is of a simple economic nature. When you continually invest in ventures, who normally have (deep) j-curves, you can not continue to finance them when a) there is a lot of redundancy and b) somewhere between 30% and 70% of your core business is about to evaporate due to disruptive technologies like the blockchain.
(The minimal ROI received on venture funds and corporate venturing in general is both currently unknown/not open to public and in essence it’s overall just a naive thought that a startup of a few months or years old would somehow disrupt the market surmount to the overall loss of 30% to 70% percent of the corporate’s turnover.)
There are more points to be made, such as the disregard for cultural roots and the overshooting of the customers needs. But I think the point is clear: Corporate Venturing is the easy way out for corporate innovation.
Moving the body
The obvious question remains: How do we move the body?
Well, when we look at the reasons why Corporate Venturing is not enough, we can see that the core of the issue is the translation of the good parts of corporate venturing to ways of corporate innovation from within. To use the LEAN and iterative processes to innovate and involve the entire company, within all of its complexity, hierarchy, rigid systems, structures and politics.
This entails a fundamental change in the way corporates operate and a total transition. A paradigm shift is needed.
(To be clear, I’m not talking about the digital transformation, that’s what companies should have started doing in 2001, I’m talking about a fundamental shift in the entire way of working and organizing, a so called metasystem transition.)
Perhaps a more apt metaphor to use is that of the external and internal combustion engine. The invention and first implementation of the external combustion engine started the industrial revolution. Big steam engines were able to power things such as boats and factories. But it wasn’t until the internal combustion engine was developed that the true potential of a combustion engine was enabled and later used to power things such as cars and airplanes.
The same applies to innovation, we have to move the external approach of corporate venturing to the internal workings of corporate innovation so we can kick-start this new exciting era. But it’s not going to be an easy transition.
A shift in control
When it comes to the exponentially faster evolving everything, we as humans are the bottleneck to an integral and continuous form of innovation. For instance; most CIO and/or CTO’s already have little idea about what exact programming languages or hardware is used to solve their IT challenges. They depend on their subordinates to have the right competences. This level of trust depends on clarity which in turn makes distributed control possible. People who know what they’re doing should decide what is best, not the people solely interested in acing their KPI’s.
The lack of ability to control top-down at an increasing speed needs to be overcome. Hierarchy is and always will remain necessary to spread relevant information, knowledge and experience through the organisation. But when people with their rather limited mind to comprehend all the inner workings of increasing complexity, their big ego’s and sense of entitlement — we need to accept our dependency on new types of dissipative systems to help us govern, understand and act as an organisation.
A shift in focus
When we start to depend less on human intelligence and focus more on how system can help us thrive as individuals, teams, organisations and nations by becoming collective intelligences, we will see how Artificial Intelligence doesn’t take away our jobs, but instead provides opportunities to create new and more meaningful jobs. All routine and administrative tasks can be done much quicker and reliable by digital assistance, allowing us (humans) to focus on things that are more more challenging and thus fulfilling.
The focus of scarce resources will have to shift from managing tasks and budgets, to managing talent and personal development. We will shift from a labor-productive society to a knowledge-productive society. Making work a fulfillment, not an obligation.
What’s next
The tipping point is nearing soon and we better be prepared. In order for the readability of this article I will stop here. In the next articles we will dive deeper into understanding the social and economic impact of these systems and how we can start to work with them.
Remember, it’s a paradigm shift, not only in how we innovate, but more importantly in how we operate our businesses and work together with others. It is only the beginning of a very interesting new era and we have the privilege to be a part of it.
Here’s an overview of new articles being written as we speak:
- Making elephants dance
On working with distributed systems, talent cultivation and mobilizing a self-organizing collective. - Corporate innovation differences in China, America and the EU
On how our cultural roots dictate how we should govern and innovate - The Leapfrog effect
On using the collective intelligence of your organisation for non-linear innovation and recursive design.
About me: I’m an innovation researcher and managing partner at RBLS, an innovation company located in Antwerp. We develop services and tools for the transformation of enterprises in close partnership with established firms. If you’d like to know more about how your organisation can prepare for the new era and start its transformation, feel free to contact me at maarten@rebelsofinnovation.com
