Are CFOs Killing Future Winners?
In an attempt to spur innovation and avoid bureaucracy, large corporations often create a separate business unit in which to embed their corporate venture activities. By creating a separate entity, the parent ensures an entrepreneurial environment where new ideas can blossom without being killed by bureaucrats working in the head office. The launch of the new venture unit is often surrounded by great publicity, and the guys at headquarters pat themselves on the back for being so entrepreneurial.
Things generally start out well: top management is fully committed and resources are generously provided to the new business unit. However, ventures are no quick wins. They require careful nurturing over long periods of time. Furthermore, ventures typically engage in new territories characterized by extreme technological and market uncertainty. Failure rates are therefore very high, and the ventures typically face liabilities of newness. Empirical evidence shows that, especially in times when resources are not abundant, firms tend to cut down drastically on the funds spent on venturing.
Over the past two years, we researched how eight large corporations organized their venture activities, with the participation of CbusineZ (health Insurance), AkzoNobel, Unilever, Document Services Valley, Eindhoven University of Technology, Sanoma, Rabobank, and NRC (newspaper). Our findings have been published in a new book called Corporate Venturing: Organizing for Innovation, which describes the actual venturing experience of these firms. It provides interesting insight into the pitfalls and successes of corporate venturing, captured in ten best practices. In our blogs, we will share these best practices with you.
In our case study of AkzoNobel’s New Ventures, the new venture unit was killed after an internal review because of the economic downturn of the mid-2000s. Moreover, the parent organization’s view of venturing as a whole also changed in the wake of the departure of a member of the top management team, who was replaced by someone who was not pro-venturing and decided to abandon all venturing activities. Both of these changes occurred prematurely, only a couple of years after AkzoNobel’s New Ventures had started operating. An average venture takes five to seven years to start making money. Even failing ventures can prove to be worthwhile, though, because they provide learning experiences in potentially attractive business or technological areas. It is better to fail cheap in a venture than to take a wrong strategic turn with the company as a whole. Companies are therefore encouraged to develop balanced portfolios of ventures in order to spread their market, technological, and financial risks. These portfolios should be nurtured over a substantial amount of time and not killed prematurely. The premature killing of ideas can lead to missed opportunities and sometimes even to the demise of an organization because it lacks the ability to compete in the future.
Prof.dr. Geert Duysters
Tilburg, September 18th, 2014
Geert Duysters is Professor of Entrepreneurship & Innovation at Tilburg University and academic director of the Tilburg Center of Entrepreneurship. He is a fellow at the Corporate Entrepreneurship Research Center of Tilburg University, and together with Jessica van den Bosch, he wrote the book Corporate Venturing: Organizing for Innovation, published by Edward Elgar.