The craft of corporate venturing

Photo Amiel Kornel / Senior Managing Director, Spencer Trask & Co. / November 19th, 2014

Over the decades, corporate venturing has evolved through several phases. Recent initiatives reflect growing interest among large companies to include incubators as a capstone of their corporate venturing. Incubators or not, the challenges remain the same: how to grow intelligence, the life-blood of entrepreneurial environments? How can a corporate parent accelerate innovators' learning? The experiences of prolific inventors and craftsmen suggest an answer: by providing product teams with an artisanal environment that favors play, repetition and patience.

The story sounds familiar. A young, technology-savvy entrepreneur builds an industry-leading company with the support of wealthy investors. His initial product rapidly commands 80% market share across the United States. The company recruits talented inventors and, while serving as managers and engineers, some develop technologies for new applications and launch ventures of their own. Within just a few years, the industrialist helps incubate half a dozen successful startups in energy, chemicals and transportation. Many will become leaders in the new product categories they help create.

The industrialist? Charles F. Brush. The company? Brush Electric. The year? 1880.

The Cleveland, Ohio-based manufacturer of arc lighting systems that would illuminate most major American cities within five years remains a best-practices case study in corporate venturing, even today, 135 years later. Brush’s success at venture financing and incubation – documented in a 2006 article by academic researchers – doesn’t seem to have relied on a particular innovation process or program. Rather, he created an artisanal environment where talented inventors could easily collaborate on breakthrough products, meet investors, and launch new ventures. And Brush’s success and reputation conferred credibility on the startups he incubated, easing their fund-raising efforts.

As an early industrialist, Brush hadn’t inherited the stove-piped, process-obsessed corporate mindset that would come to define modern management practices over the following decades. He and fellow entrepreneurs had honed their instincts and skills in the pre-industrial artisanal world. Since roughly 500 years, craftsmen patiently perfected original inventions and, once attaining the level of master, mentored protégés and apprentices through guilds and in their studios.

How did this affect Brush’s approach to corporate venturing? He sought influence, not control, over the entrepreneurs incubating projects in his shops. A flat organization favored collaboration; behaving as a peer, Brush even solved some of his fellow inventors’ technical challenges himself. Applying a business strategy that seems remarkably modern today, he privileged the emergence of a vibrant ecosystem around revolutionary inventions enabled by the newly created electricity grid – the Internet of its time, a pervasive network transporting electrons rather than information bits. Ventures benefiting from Brush’s support eventually sold electric streetcar cables, liquefied-air products, telephone transmitters, arc welding equipment, and electric smelting furnaces, among other breakthrough innovations.

Back to the future
Fast forward to July, 2014. Another energy company, General Electric, opens a “microfactory” to enable inventors unaffiliated with the company to rapidly prototype and test new consumer product ideas. The FirstBuild plant in Louisville, Kentucky expands GE’s open innovation strategy, initiated a couple of years ago with the successful crowdsourcing of a lighter, 3D-printable plane-engine bracket.

Organizers of the initiative hope to attract innovators with expertise outside the disciplines typically found in GE’s own R&D labs. And, according to press reports, they aim to instill a playful, hacker culture at the incubator – which they hope will serve as the initial prototype for a hundred more such artisanal spaces to be opened by GE and its partners around the world in coming years. Initially, inventors whose appliances are commercialized by the company will receive royalties. If the initiative wishes to attract entrepreneurs with greater ambitions, it may eventually need to expand commercialization options to include external venture creation.

In parallel, GE launched a startup incubator last June in partnership with venture-capital firm Frost Data Capital specifically targeting analytical software that will enable “smart” networked industrial equipment. Looking to marshal inventors distributed across the company’s labs, the Frost I3incubator encourages GE’s army of researchers and software engineers to generate project ideas and prototypes, and only then will recruit CEOs to launch ventures deemed viable.

Whether intentionally or not, the launch of these product and venture incubators returns GE to its artisanal roots; currently the ninth-largest company in the world (in terms of market capitalization), GE traces its pedigree to the Edison Electric Company, launched by Thomas Edison in 1878 (Coincidentally, GE was formed when Edison merged with Thomas Houston Company in 1892, two years after Thomson Houston acquired Brush Electric). Edison outran competitors to develop the first commercially viable light bulb in a workshop manned by 20 or so hard-working inventors under his supervision, not unlike the timeless approach favored by artisans in their apprentice-filled studios.

Ebb and flow of corporate venturing
The recent GE initiatives reflect growing interest among large companies across many sectors to include incubators as a capstone of their corporate venturing.

In the nearly 135 years since Brush Electric’s launch, corporate venturing has evolved through several phases. With each phase, the level of corporate commitment, the scope of strategic objectives, the investment in new operating models and, ultimately, the initiatives’ success have waxed and waned.

In the late 19th and early 20th centuries, most companies’ formal innovation efforts focused exclusively on internal R&D, with the outputs commercialized through the release of new products and services. Incubating potential spinouts and investing in external ventures were generally ad hoc.

Post World War II, some companies organized more formal corporate venturing programs: They sought to improve acquisition of knowledge about new technologies, business models, and markets; improve early warning of emerging technologies that might disrupt their core businesses; or simply expose their executives to the practices of innovative, fast-moving startups.

In the late 1960s and early 1970s, the emergence of Silicon Valley inspired some large companies to create in-house corporate venture capital (CVC) groups. They had watched enviously as venture investment and incubation on the west coast of the United States became progressively professionalized and created fortunes for investors (Initially, successful high-tech entrepreneurs invested in new ventures, providing expertise and contacts as well. Later, as institutional investors like pension funds allocated capital for high-risk investments, bankers and lawyers flocked to California to manage venture funds).  At companies like Intel and Microsoft, CVC groups began investing in outside startups which could help grow the market for the investing company’s own products (e.g. Intel) or which might later be acquired (e.g. Microsoft).

But by the 1980’s, with the world economy buffeted by oil shocks and recessions, corporate profits shrank, and so did their commitment to external venturing. Interest revived in the exuberant 1990’s with the Internet boom, although that phase would wane as well when the bubble burst.

Most recently, over the past five years or so, companies as disparate as Google, Coca-Cola, Disney, and Samsung have stepped up their initiatives in outside venture investing. More than 475 CVC groups have been created since 2010, according to the media firm Global Corporate Venturing, bringing the total to about 1100. The trend is attracting interest from other companies around the world who don’t want to be left behind. Corporate venturing is increasingly viewed as a necessary core competence, not a nice-to-have in the innovation arsenal.

And significantly, many of these companies are also investing in startup incubators as an extension of their corporate venturing strategy. Great companies, they realize, are built, not found. According to a Boston Consulting Group study published in June 2014, nearly a quarter of the top 30 (by market capitalization) companies across six innovation-intensive industries in the U.S. have created incubators. Most active are telecommunications companies, with 47% having incubators, and high-technology firms, with 30%.

Some, like GE, created their incubators in partnership with companies or universities having specific domain knowledge, supporting technologies, or access to 3rd-party funds. Others seek partners with advisory expertise and a ready network of prospective mentors. Disney, Barclays Bank, Sprint, Kaplan, and Nike are some of the companies who, in the last 18 months, have created incubators in partnership with Techstars, one of the leading independent incubators in the U.S.

The secret sauce: artisanal venturing
To optimize corporate venturing, experts such as Evangelos Simoudis advocate defining clear business goals, capturing those goals in key performance indicators (KPIs), establishing a staged-gate review process, gaining leadership’s active support, and creating a favorable corporate climate through organizational alignment, among other best practices.

Ultimately, though, these practices are necessary but insufficient for improving the rate of success of corporate venturing. They emphasize operational and capital efficiency – core requirements of industrial environments – but do little to grow intelligence, the life-blood of entrepreneurial environments.

Successful innovators continuously seek intelligence of three kinds (see illustration below). Like craftsmen (and -women), they focus almost obsessively on perfecting their tools and their dexterity in the use of those tools (technical intelligence) and sharing knowledge with other innovators and stakeholders (social intelligence). Combined, the two in turn facilitate acquisition of market intelligence, the ultimate arbiter of success, as developers test and refine prototypes. And this is true for internal corporate incubation as much as for external incubation of startups.

“In the past, you would have done an Excel file and build a Powerpoint,” said Sean Carney of Philips’ Digital Acceleration Lab in the Netherlands. “But now we’re able to physically hack these products together, get out some rudimentary user testing, and actually prove to <corporate decision-makers> that there’s real value potential for these products.”-
Learning spiral in venture incubation
amielimage
Source: Amiel Mark Kornel
How can a corporate parent accelerate innovators’ learning? The experiences of prolific inventors and craftsmen suggest an answer: By providing product teams with an artisanal environment that favors play, repetition and patience.

•          Play – In traditional industrial companies, play is rarely a requirement for efficient production. In artisanal startups and incubators, though, a playful approach is a must-have component of learning. Among its many benefits, play provides motivation and sustains drive in situations of high stress and ambiguity. “I never did a day’s work in my life,” Edison said. “It was all fun.”

When his invention for recording sound was threatened by a phonograph being developed by Alexander Graham Bell, Edison assembled a multi-disciplinary team of several dozen scientists and engineers for a 3-day “lock-in.” “Making the full scope of his organizational resources available to any employee working during the lock-in, Edison galvanized the best thinking about how to address an unexpected competitive shock,” writes innovation historian and theorist Sarah Calidcott in Midnight Lunch. In recent years, software coders, scientists, engineers, designers, inventors and entrepreneurs have increasingly turned to “hack-a-thons” – and even to open-innovation contests drawing on expertise of much larger virtual teams – to solve problems and accelerate innovation.

Such structured play enables individuals or teams to create prototypes in a failsafe environment. “For centuries, musicians, painters, and dancers have utilized the strategies of play to create masterpieces,” writes Robert Nussbaum, Professor of Innovation and Design at Parsons School of Design, in Creative Intelligence.  “When we play, we try things on and try things out. … We throw away what doesn’t work and build on what does. We can play alone or compete against someone else; we can collaborate with another person or a team against a larger enemy. We may lose a game or a battle, but there is always the chance to start again.”

•          Repetition – Customized tools and techniques tuned to the target innovation should form the foundation of a corporate venture incubator. Repeated use of such an innovation platform for handcrafting and testing prototypes will progressively improve the developer’s innovation “dexterity” thanks to what NYU professor Richard Sennett, in The Craftsman, calls “the virtue of repeated practice.” Multiple revisions of a product or service, or even more radical “pivots,” implemented without a repeatable process and familiar tools fail to provide this benefit.

Since the early 1990’s, software developers began applying iterative techniques promoted by Japanese experts in knowledge acquisition. These defined methods are designed to improve speed and flexibility of multi-disciplinary product development teams, especially when ambiguity about customer requirements or technical feasibility are high. Applied now more broadly to any development project, the so-called Scrum technique emphasizes the use of cycles, or “sprints”, of fixed duration. At the end of each sprint, the team enjoys the satisfaction of having collectively reached a near-term goal and can adjust longer-term objectives and plans, as needed.

Whereas developing a product platform helps reduce market risk (various core capabilities can be packaged into a diversified portfolio of products), developing an incubation platform – whether to develop products or business models – mitigates execution risk by favoring learning.

Furthermore, in markets like the Internet where product-related innovation rarely confers sustainable competitive advantage, codification and mastery of the startup’s incubation platform can strengthen competitiveness, contribute valuable intellectual property, and attract potential acquirers who covet its capabilities and people as much as its products.

•          Patience – Adopting the optimal pace for handcrafting the startup’s initial offering is as important as play and repetition. In a world defined by the acceleration of everything, entrepreneurs are exhorted to hustle. Speed is considered critical to seize emerging market opportunities, maintain a 1st-mover advantage, and triumph over competitors. Willingness to slow down, shift direction, or even abandon a project often runs contrary to the psychology of startup founders. They’re reluctant to view the path already traveled as a “sunk cost.” They feel compelled to press on.

This may make sense for a well-resourced venture needing to satisfy early customers and deliver financial returns to impatient investors. But for the seed- stage startup or corporate-funded skunk-works still winding its way through the fog of yet-to-be-charted markets and business models, rushing ahead may be a recipe for disaster.

An incubator should provide the place for this to happen. “The true entrepreneurial space has a longer-term horizon,” according to Paul Sagan, former CEO of Akamai. “You really have to keep those resources separate and let projects rise or fall on their long-term capabilities, without being affected by the short-term needs of the larger organization. … The long-term, crazy, new stuff has to live in a different place.”

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Innovative corporations are investing in venture-craft environments that facilitate learning via playful, collaborative interaction among inventors, customers, and even investors. Through iterative use of contests and hack-a-thons, mentorship from experienced entrepreneurs and experts, and access to shared resources that enable rapid prototyping, they encourage both in-house product developers and externally funded entrepreneurs to tinker with, share, and test new technologies and business models, in the hope that some will eventually become modern-day Charles Brush’s and Thomas Edison’s.

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