Corporate Venturing Shortcomings

1
Corporate Venturing Shortcomings

• Lack of experience in the market entered
• Entered market already served by parent
• Lack of sustained top management support
• Adverse selection
• Costs and benefits accrue to different managers
  
• Conflict between strategic and financial
  objectives
• Inadequate risk/reward compensation
• Competition for scarce internal resources if
  venture successful
• Long decision-making chains

2
Advantages of Venture Capital
Incentives - Gain-sharing arrangements between
VC, limited partners, and entrepreneurs assures
better alignment of incentives Staged investment
at milestones, learn as you go, better focused
for the business model, always the threat of
discontinuance. Corporate ventures less strict
in reacting to failed milestones. Also, cash
given up-front in chunks and progress reviewed
annually as part of regular budget
cycle. Rigorous Surveillance - VCs frequent and
intense monitoring of progress (19 times per
year). More information and faster feedback.
Reviews for corporate ventures more rigorous at
higher levels as venture progresses in time and
financial and human resources committed Unconstrai
ned by existing corporate business models
3
Advantages of Corporate Ventures

• Longer funding horizon (more than six years)
• More money (scale) available for these
  ventures, e.g., IBM 360
• Control over complementary assets (especially
  tacit onesbrand, reputation,
  knowledge-based)
• If the corporate venture was in a related line
  of business, the venture did better (matched
  VCs performance)
• Retain learning (through retained personnel),
  lesson learned (through post-mortems) and
  availability for future ventures. Need a
  culture that celebrates failures (3M). No
  failures means no risk taking

4
Location of NVG Between CV and VC
LUCENTS LOCATION Pseudo-equity used Staged
funding Outside VC board Outside Board, CEO No
specific fund length Shifting to bigger
deals Re-acquisitions Limited career risk
VC
CV
NVG
Incentive intensity
NVG
Financial Discipline
NVG
Monitor
NVG
New Business Models
Time horizon
NVG
Scale of Capital
NVG
Complements
NVG
Learning
NVG
5
Lucents New Ventures Group (NVG)
Incentives hybrid compensation system Lucent
employees had forego annual bonus and fringes in
return for phantom stock. Outsiders had to
learn to deal with overheads, corporate policies,
annual operating plans Financial discipline -
staged funding, allow VC investment, hire outside
CEO, adaptable business model Monitoring More
external, e.g., like VC Business models can shift
if necessary. Longer time horizons - no fixed
life, no drive to liquidity Scale - fund bigger
projects than typical VC Complementarities -
Gather inside intelligence about industry trends,
strategic direction consistent with
Lucent Retention of learning - Personnel can
rejoin the company if venture fails. Better
recruitment because the competition for hiring is
usually startup firms.