“When confronted with dynamic, complex challenges and environments, successful organizations adapt and innovate, and they do so relying first on the trust and relationships of their people, and secondly on a culture of speed and agility.”
Disruption is all around us, and it should be no surprise that today, innovation is at the very top of most corporate strategic priorities. Ten years ago, who would have predicted that an online retailer would have a market capitalization twice that of Wal-Mart? Or that the largest hotelier in the world would not be Marriott (1,190,604 rooms) or Hilton (804,097 rooms), but an online peer-to-peer home sharing service with more than 3,000,000 housing unit listings? Or that the market value of a leading U.S. car manufacturer would be surpassed by an electric vehicle company with one-tenth the U.S. car sales? The reality for most corporations is that the rise of innovative technology has made these types of unexpected and dynamic disruption events commonplace. Ultimately, however, most corporate venture programs (CVPs) (especially at non-tech companies) succeed or fail based upon the merits of their internal execution and external reception, which are each driven by value-focused employees and efficient processes, not technology. Through the development of a series of processes and systems (what we call the “innovation infrastructure”) companies, whose core business is not technology, can systematically leverage existing resources in order to find, analyze and implement processes and technologies capable of driving sustained market performance even in resource constrained environments.
Relationships and Disruption
Recalling our experiences as former military leaders where disruption was the enemy combatants’ objective; relationships and trust, both internally with the other members of the unit and externally with partners and allies, mattered more than even the most sophisticated technologies, weapons or tools. Similarly within the context of business, a deep connection with both internal (e.g., shareholders and employees) and external (e.g., suppliers and customers) constituents drives value creation. Unfortunately, the specter of technological disruption often clouds these relationships and creates fertile ground for disruption.
Dynamic and complex business challenges and the compounding pace of technological advancement (see Moore’s Law) implies that successful organizations attempting to stay at the forefront of technology will consistently have to expend corporate resources just to keep up. For companies that must jump on this technology treadmill, the threat is that technology becomes an outsized consumer of corporate resources and distracts from core profit driving initiatives. A non-tech company that confuses technology, as a surrogate for relationships with customers, investors and employees, is lost. A robust CVP, thoughtfully designed with innovation infrastructure, can serve as a boon to businesses searching for technological relevance without cannibalizing core profitability.
Corporate Venture Programs – A Non-Tech Company’s Best Response to Disruption
The meteoric rise of corporate venture funding ($7.5 billion in 2015, PWC MoneyTree report) is a strong signal that many successful companies are keenly aware of the risks posed by disruption. Countless well-established industry leaders (e.g., Wal-Mart, Intel, Google, Holiday Inn, Time Warner and General Motors) are injecting capital into their respective CVPs in hopes of achieving technological dividends. Because no single IT development team or vendor can truly anticipate the ultimate impact of a new technology on a business unit, without first focusing on the corporate constituents, most technology efforts will be unnecessarily speculative.
Even technology companies, who possess elevated levels of industry knowledge and rigorous technology selection and investment processes, frequently have trouble distinguishing between technology winners and losers and could benefit from CVP innovation infrastructure. In 2015, Google’s “other bets” section, which includes Google Ventures, experienced an operating loss of approximately $3.5 billion. The highly selective tech incubator Y-Combinator, whose 3%-5% acceptance rate eclipses that of Harvard University (5.4% in 2016), still experiences a failure rate of around 90% amongst its invested tech companies. The most recent example is Tilt which experienced a valuation decrease of 97% when in February 2017 it sold to Airbnb for $12 million after having achieved a 2015 valuation of $375 million. Unlike non-tech companies, technology for technology enterprise is a pursuit that reinforces brand and underlying value, regardless of outcome. In a youthful tech environment where something as ephemeral as a company’s “viral coefficient” can drive billions of dollars of value in the capital markets, huge losses are natural and even expected. However, in non-technology companies, who seek to use technology to drive “core business” value, the investment focus must be aligned with the needs of corporate constituents – not the latest technology trends. When properly structured and focused, CVPs can critically de-risk the prospective nature of technology investments. The construction of a CVP’s innovation infrastructure is the critical first step, because it allows for regular communication and collaboration across the enterprise.
Innovation Infrastructure – A Bridge to Innovation
The complexities of disruption require CVPs to leverage all available corporate resources to inform its strategy and decision-making. Through innovation infrastructure, a CVP is empowered with insights and information from corporate constituents. At the most basic level, a CVP’s innovation infrastructure consists of the following four elements: (i) a joint operating company cohort (JOCC), (ii) a venture capital accelerator, (iii) an innovation lab and (iv) a corporate venture capital fund. Together these elements promote the exchange of information regarding constituent needs, market risks, sound technology investments and company capabilities.
Four Elements of Innovation Infrastructure:
2. Venture accelerator
3. Innovation lab
4. Corporate venture capital fund
Joint Operating Company Cohort
The JOCC brings together key executives and managers of a corporation’s operating companies and/or value driving segments to share pain-points, best practices and opportunities with the CVP. Members of the JOCC should each have broad perspectives on the strengths, weaknesses, challenges and opportunities of the operating companies they represent, and should generally be comfortable “challenging the status quo” and considering innovation at every turn. Although geographically dispersed and operationally decentralized, the numerous perspectives form a mosaic-like picture – that in turns provides the venture team with the information necessary to better understand and allocate its resources. The U.S. Special Operations Forces (SOF) community routinely collaborates and shares tactical best practices that permeate to the top of the U.S. military and, in many instances, becomes codified into widely-practiced, life-saving military doctrine. Like these SOF methods, the JOCC serves as an enterprise model for efficient and impactful corporate behavior in highly competitive environments. The lessons derived from the JOCC are then integrated into the efforts of the innovation lab and the evolving strategy of the CVP to drive tangible value in an ever-changing and competitive business environment.
The Venture Capital Accelerator
The venture capital (VC) accelerator is the facilitator for all the corporation’s venture efforts. The accelerator must (a) expedite the execution of strategic initiatives and (b) develop and maintain relationships with internal constituents, such as executive teams, operating units and the innovation infrastructure stakeholders. The VC accelerator allows for agility within the innovation infrastructure. Like the SOF Strike Force (a team tasked with successfully executing complex missions through speed, expertise and streamlined communication), the VC accelerator is comprised of a small number of diversely trained individuals who can:
Quickly and accurately understand business operations and their impact on corporate constituents;
Intake, process and report copious amounts of information to corporate leaders efficiently and on a timely basis; and
Rapidly respond to the dynamic challenges corporate leaders face.
The VC accelerator also acts as an informational nexus, capable of quickly translating knowledge and insight from one segment of the innovation infrastructure to another. To maximize its effect, each team member of the VC accelerator must be deeply embedded in the corporation, its constituents, and the venture community.
The innovation lab is a collaborative effort between the research community and technology professionals who together seek to drive value by exploring technology frontiers and translating technological complexities into actionable insights. These insights help decode the language and culture- barriers inherent to technology. Participation by actors from a variety of backgrounds, enables the innovation lab to access otherwise isolated knowledge and to better understand the impact of these solutions on constituent interests. It is critical that the corporation’s innovation lab possess four features:
Direct line to a senior executive sponsor (support and buy-in);
Geographic dispersion and autonomy (from corporate entity);
Co-location with technology/innovation community; and
Frequent internal constituent contact – to facilitate salient information flow, in and out of the lab.
Venture Capital Funds
The venture capital fund’s purpose is to make capital contributions to: the people, processes and technology that promote the relationships that drive tangible value over the long term. The venture capital fund deploys the capital necessary to enhance the corporation’s innovation mechanics and serve its constituents. From 2011 to 2015 the number of large venture capital programs rose 79% to 801 enterprises globally. For these venture programs, the total committed dollar amount contributed to their CVPs, quadrupled to nearly $7.6 billion. Two critical capabilities are needed by the venture capital fund to foster value through its investments:
The ability to rapidly identify entrepreneurial companies and teams that are likely to generate value for the corporation; and
The ability to quickly take sensible equity positions for fair prices.
To better understand the value presented by venture capital funds, we again turn to a simplified military example. Prior to the 2007 U.S. “surge” in Iraq, the U.S. military had developed an incredibly persuasive counterinsurgency doctrine that seemed unflappable, but lacked the necessary combat resources to breathe life into the strategy. It was not until the U.S. committed the necessary resources, including the deployment of an additional 20,000 combat troops in the form of “The Surge”, that many of the American counterinsurgency goals were achieved. Likewise, corporations that are unwilling to commit the resources (capital) necessary to build and maintain the corporation’s innovation infrastructure, will likely not see the tangible economic benefits despite possessing even the most sophisticated strategies.
Conclusion – Innovation Occurs at the Speed of Relationships
It is clear to most that capturing innovation and avoiding disruption are prominently in the minds of most corporate leaders today. In response, there has been a rise in the existence and funding of corporate venture programs. Unfortunately, many of these programs rely on investment strategies pioneered by technology companies centered around the acquisition of the best industry-relevant technology. While a corporation’s venture efforts can use technology as a tool, the core focus of a corporate venture strategy should be maintaining and developing a more fundamental business asset – relationships. Such a focus requires broad-based enterprise collaboration facilitated by innovation infrastructure that allows for regular and systematic enterprise communication to occur and strong relationships with corporate constituents. It is these relationships that are fundamental to identifying and understanding the various needs and capabilities across a corporation, that will, in turn, inform venture investment and ultimately deter disruption and insure long-term organizational success.
https://ldrinvest.com/wp-content/uploads/2017/06/pexels-photo-164531.jpg7501125LDRhttps://ldrinvest.com/wp-content/uploads/2019/07/Full-White-Logo.pngLDR2017-06-30 18:53:032018-10-18 19:37:10Innovation at the Speed of Relationships