Adventurous Capitalists

Monday 5th February 2001

Stuffy, ponderous corporates and nimble, agile entrepreneurial start-ups are opposite ends of the spectrum, and ne'er the twain shall meet. Right? Wrong. Corporates offshore, and a few here, are starting to put serious money, energy and senior management time into unlocking the latent entrepreneurial potential in their own companies - and often in their own ranks.

This new trend has a name: "corporate venturing". There are two ways it works. The first is to get your employees to come up with great ideas for new businesses and then set up the best ones as new units, or new companies, with funding. The second is for corporates to start acting as venture capitalists, taking non-majority stakes in companies that look as if they might be future winners. Or both.

The best-known proponent of corporate venturing in New Zealand is Carter Holt Harvey, which has set up a $15 million New Ventures fund for venture capital investing. The biggest part of that fund is likely to be spent through its "i2B" (ideas to business) programme, launched on July 10, where employees are asked to come up with entrepreneurial ideas for potential development. Consultancy firm McKinsey said CHH would be doing well by international standards if they got a couple of hundred ideas from their 11,000-strong workforce. Instead, they received more than 500 ideas in the first eight weeks. CHH whittled these down to 16 ideas that have reached business plan stage, of which between three and five are likely to go through to development. Some may be set up as internal CHH divisions; others could end up as separate companies with the entrepreneurial employee and CHH both taking an equity stake.

CHH chief executive Chris Liddell says the rationale for New Ventures/i2B is one-third financial ("In less than five years, new ventures are going to add hundreds of millions of dollars to the value of this company") but two-thirds cultural. The process of whittling the ideas down has involved employees doing two-day workshops to develop business cases and being teamed up with senior managers as coaches. As the selection process drew to a close at the end of last year, some employees were working full-time on their business plans. All these people (including the senior managers) now have invaluable experience in what being an entrepreneur is all about, says Liddell, who believes the programme will help him create "a big, successful company with an entrepreneurial culture".

Unstuffing the culture

Isn't this all a bit risky? Tying up employees and management isn't cheap, and there's a risk of any ideas that are chosen falling over. Liddell believes the biggest risk for his company is in not going down the corporate venturing path. "If we put our heads in the sand and pretend that carrying on as we have been is enough to succeed, we will be disappointed. Corporate venturing is a key to adding value to our company ... We have a wealth of intellectual property and entrepreneurial potential in our people. When we unleash that, we will transform this company. It is going to be very exciting - and very profitable."

Remember, Finnish cellphone company Nokia used to be a pulp and paper company too.

Fletcher Challenge has also entered the corporate venturing fray recently - one of the outcomes of company restructuring in the second half of 2000 was setting up Rubicon, a "business developer".

"Rubicon will be an ongoing, active business, with a defined strategy to commercialise new technologies that have the potential to capture high-growth, high-margin opportunities in emerging industries," Fletcher Challenge chairman Roderick Deane said at the launch.

US chip-maker Intel is a prime example of the giant corporate-meets-venture capitalist side of corporate venturing. Having carved out its market position on its ability to innovate internally, Intel is now a major external investor in technology start-ups. In the third quarter of 2000 alone, Intel invested $US166 million in 33 venture capital-type deals. The company is in the venture capital business for both financial and strategic reasons, executives say. First, it can leverage off a large and growing set of relationships around industries in which it has an interest. Second, the more relationships it has, the more valuable the intellectual property it has access to, across the network it is creating. There are three possible outcomes for any successful company that emerges from the scheme: it could become part of the Intel group in the future; it could deal with the company in other ways, as a supplier, partner or customer; or it could be sold off at a profit.

Bottomless pit

Let's be clear. Corporate venturing is not all plain sailing. There's the chance all the ideas will be no-hopers, thus wasting finances and management time. There's the possibility of demotivating employees whose ideas don't get chosen, thus having the opposite effect to that intended. And given that most venture capital fails, there's quite a good chance you will pump heaps of your hard-earned corporate cash into an idea that, eventually, goes nowhere. That is what happened with FedEx's Zap Mail initiative, a combined fax and hard- copy delivery service that was finally canned after soaking up $US600 million over three years.

At the other end of the spectrum, there's yet another potential problem: that your stuffy corporate culture will stifle the entrepreneurial spirit the corporate venture part of the business is trying to foster. Take Kodak. Some time ago, the company realised it was getting slow and creaky (product evaluation and development cycles were around 15 years), and started up an internal corporate venturing programme. From 4000 ideas submitted, a measly 14 received the royal nod. But then, insiders say, corporate hierarchy applied the same suffocation that had been slowly strangling the company - exactly what the corporate venturing programme was supposed to put an end to. In the words of one of the venture managers: "Kodak took control away and killed the entrepreneurial spirit."

Only four ventures survived; three of those were sold. The corporate venturing programme, the beneficiary of substantial company funding, was declared a failure and canned. The bottom-line losses, combined with the quenching of Kodak's nascent entrepreneurial spirit - made worse by the false revival - mean it has taken some 10 years for Kodak to once again face the strategic imperative of fostering innovation and entrepreneurialism.

Just for the big boys?

When it works, however, corporate venturing can also be a way for small to medium-sized enterprises to resolve the age-old dilemma of how to balance the need for a company to "stick to its knitting", with the desire of some employees to branch out in new and potentially profitable directions. Corporate venturing allows creative middle managers, for example, to put their money where their mouth is, by taking a stake in a new company - part-owned by the original firm - to turn their entrepreneurial ideas into reality. The former middle manager-turned-entrepreneur might well accept a pay cut in return for getting shares in the new firm, which will also reduce the risk for the parent company. The parent firm gets a stake in a venture which might turn out to be very profitable, and the passionate, driven new boss hopefully makes things happen. In addition, the middle manager has improved his or her net worth and gained invaluable experience, and a message of encouragement for sound, profitable innovation is sent out to others in the parent firm.

Next month: the dos and don'ts of corporate venturing.

Simon James is a venture capital manager and consultant, s.james@vcm.co.nz

He will co-host a corporate venture forum in Auckland on March 1, www.iir.co.nz

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