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Is Corporate Venture Dead? Is Open Innovation the New Thing?

June 11, 2012 Innovation, Open Innovation 20 Comments

NOTE: I just had another great visit in Silicon Valley and one thing I picked up this time is the surge of corporate venture like initiatives in the area. I met with several such units and I was pleased to learn that they work on a combined platform of corporate venture and open innovation activities.

This was one of my conclusion when I first published this blog post almost two years ago and my visit in Silicon Valley is why I am re-posting it. Let me know what you think.

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Once upon a time, we had many corporate venture units that invested in external projects as well as in internal projects from the corporate groups that they belonged to.

The number of units declined steadily during the last decade and it continues to do so in the aftermath of the financial crisis. One company that I have always admired is Danfoss Ventures, which is the corporate venture arm of Danfoss, a group with 26,000 employees working with refrigeration, air conditioning, compressors and more.

Unfortunately, Danfoss Ventures – my role model on corporate venture – is now dead. According to Executive Vice President at Danfoss, Nis Storgaard, this is about prioritizing resources where they make most impact.

“The past few years’ development has sharpened our understanding of how important innovation is – but also of how important it is to prioritize investments where they make most difference. And for us this is in our core businesses that have the knowledge of customers and markets as well as the required competences to turn innovative ideas into good business,” Nis Storgaard says.

I have heard similar explanations over the years and this makes sense. Or does it? It definitely raises some questions.

History has shown us that companies will only continue to grow and prosper in the long run if they are capable of morphing into new business areas. This does not have to be totally new business areas or industries. Core adjacencies could work if the borders are pushed continually.

A key benefit of a corporate venture unit is that it can create a safe heaven for smaller, entrepreneurial projects that otherwise would be killed by the larger group and it’s bureaucracy. In theory, a corporate venture unit should be a perfect model to make this happen and thus help companies morph into new business areas.

I have been a strong believer in the corporate venture model. Now, I have second thoughts. So many companies have tried to make this work and if not even Danfoss can succeed then something is wrong with the model.

The big question is what companies should do now. My take is that we will see hybrid models that incorporate the best of the corporate venture model while still having a strong focus on the core businesses. This has not really worked that well in the past, but now we can add a new element to this mix. That is open innovation.

Open innovation not only brings in more diversity and speed by combining internal and external resources. Open innovation also challenges the organization to change in order to deal with the complexity that comes from working with external partners. This will bring a more holistic approach to innovation. We will deal with many different kinds of innovation and we will involve more business functions than what we see today.

Open innovation and the diversity this brings can help companies morph into new business areas – as long as they can figure out how to turn odd-looking ideas into revenues and profits.

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Currently there are "20 comments" on this Article:

  1. Martin Duval says:

    I agree with your ‘hybrid model’ to come Stefan.

    When it comes to Corporate VC (and generic VCs as well) a difference should be made between the ones aiming at ‘early stage startups/disruptive projects’ (closer to Corporate incubators) versus the ‘later stages’ ones (closer to Merger & Acquisition units).

    To me we are here talking about the ability of a major Corpoaration to address the former ‘early stage’ ones, in line with what is expected from an Open Innovation strategy.
    Therefore a new breed of ‘Corporate Venture’ should have the ability and skills to:
    - identify and scout new ‘early stage’ startups/projects/technologies
    - contact them, without ‘scaring’ them with a genuine sense of Partnership
    - analyse opportunities for a pilot project to test the new technology/service/product
    - assess the scalability issues in case of full deployment
    - manage the overall funnel: identify/contact/anlayse/partner/test
    - understand the opportunity and if it makes sense to take a minority share in that company/business: it could be for different objectives such as making it sustainable for its own operational needs, believing in a strong market potential, try to lock it from being used too early by direct competitors, may be secure a first option for stronger later % share if not acquisition

    I believe an ‘hybrid & new breed Corporate Venture’ model should include:
    - a focus on speed to test and try pilot projects
    - proximity with the marketing and R&D teams: far from the former model and cliché of 4 Investment managers isolated on a skycrapper floor…
    - ideally the ability to test projects with a collaborative platform to get feedback from Beta Test customers
    - a budget to build and manage a portfolio of ‘minority shares’ early stage companies to deliverg a fair ROI over a 2 to 3 years period in addition to the operational success stories brought by the launch of new innovative products and services

    ‘SFR Development’ in the Telco space in France used to be close to that model (http://www.sfrdeveloppement.fr), do you know about more examples of that type ?

    • Stefan Lindegaard says:

      Hi Martin, great comments! I especially like your input on what a hybrid model should include and be able to achieve. I will think further about this and see if I can find good examples that resemble this. Not anyone right now…

      Stefan

  2. Jarl Rosenlykke says:

    Hi Stefan,

    First of all a great article on an interesting topic.

    However I do seem to miss the point about open innovation being better at morphing companies into new areas, as I believe that the main problem remains the same?

    You write: “as long as they can figure out how to turn odd-looking ideas into revenues and profits”

    But isn’t that the exact same problem, as in corporate venturing? Of course by morphing, you escape to trouble of running multiple business models, however the people inside the current organization may not be fit to execute whatever the new business is morphing into. Especially in a time where people fire everyone who is not part of the core business – and then there is no one left who has the time or ability to take care of new business areas.

    To me the quote from Nis Storgaard sounds like the age old dilemma of exploration or exploitation. And in times of trouble people stop exploring to make revenue now on what they know.

    I might be wrong here, but could you explain why open innovation is better suited for doing just that?

    As an example of an external corporate venturing company (and I do see corporate venturing as a partnership between an external and an internal partner – not just a company creating a dual business model internally) I would suggest looking into Pilot Lite Ventures – a UK based company who sounds a lot like what you describe above.

    Jarl

    • Stefan Lindegaard says:

      Hi Jarl, my point is that external collaboration helps expand the mindset of an organization. The employees are challenged by the views of others and such friction often provide new inspiration. Hopefully, they will be capable of absorbing this inspiration and turn it into business. Pilot Lite Ventures does look interesting and I think such specialist/intermediary units have something to offer to larger companies.

  3. At DSM we simply say that Corporate Venturing (including the special legal entity called DSM Venturing) is just one of the many tools to make Open Innovation work.
    One does not replace the other.
    R.Kirschbaum , VP Open Innovation

    • Stefan Lindegaard says:

      Rob, this makes sense. I hope we get a chance to meet up in the near future. It would be interesting to learn more about your activities.

  4. Rein Vosari says:

    As someone who has been actively involved with Innovation and Creativity since 1978, I find it amusing that there is not the (general) recognition that various “processes” have a natural life-cycle.

    3M has been using elements of “open innovation” for more than 30 years…others have as well.

    There has always been the opportunity to make or buy…buying someone else s work in the form of an acquisition, is much easier…a strategy utilized successfully by Oracle, Microsoft, or Harold Geneen at ITT

    So…there is (very) little new under the sun !

    • Stefan Lindegaard says:

      Hi Rein, you're right that companies have always worked with external partners to some extent. However, I would argue that they have not done so on innovation in such a structured and organized way as we see today at many companies. This is what is new under the sun – and this will help create winners and losers.

  5. Hi Stefan, I agree with your well-argued point. Open Innovation allows companies to explore whatever time horizon they want to, whether it is short term product acquisition, medium term technology development or long term fundamental research. They can do so without major commitment to fixed resource or technical competencies. With the corporate venture model, a lot of the IP has been created by internal research groups, whose inventions have deviated from corporate strategy, and are then spun out using venture groups because the company is no longer interested. Open Innovation allows companies to work with the best in the world, and retain flexibility.

  6. Rein Vosari says:

    Ummm…and exactly HOW do companies know what is "the best in the world"…Seriously get real !

  7. Leo Borj says:

    I think the "open trend" will also encourage intrapreneurs, this is, to be an entrepreneur in a corporate environment which is an hybrid. Intrapreneurs are a good approach to test new markets in the company, to run spin-offs, to address new regional areas, etc. All these activities are innovative itself and integrates ideas and resources out from the company (open) but managed by people from the company, the intrapreneur.

  8. James Mawson says:

    Hi Stefan,

    That’s a great post and some really thoughtful insights; thanks. There’s some interesting academic research on how corporate venturing outperforms VCs on financial returns because of the strategic connections to the parent company and quite a few launches often based at least partly off open innovation so I think your blended approach is gaining ground but there’s more thoughts at http://www.globalcorporateventuring.com .

    Cheers, Jim

  9. John Heap says:

    A good discussion. In summary, it suggests that open innovation is A new thing, not THE new thing. If we keep our minds open (as all true innovators do) we must accept that there is a variety of models to be used singly or in combination … in different situations … for different contexts … and by different organisations.

  10. Marco Rubin says:

    All sorts of commentary possible on the above thoughtful thread.

    I ran a corporate venturing shop for a Fortune 500 in mid '90s. In the States, my experience is that the main culprit with corporate venturing continuity issues over the decade(s) — or lack thereof — hinges on the lack of awareness the CXOs tend to have when it comes to understanding the strategic and sometimes difficult to quantify value it delivers to the corporation.

    Most large corporations tend to be run by finance types and not people with strong innovation backgrounds. Their Boards, who are responsible for setting strategy, are even more clueless,'

    I recognize I am simplifying /generalizing much and many exceptions exist, however, it is often this very disconnect and NOT the efficacy of the model (or variants) that tends to undo the glue when seeking an obvious corporate organ to shut down — either borne out of financial necessity (budgets in the red) or when the optics of shareholders demands such a sacrifice albeit shortsighted.

  11. Ian Graham says:

    IMHO corporate venture still exists and will continue to exist, however, it has morphed into essentially open innovation. The two examples that I am aware of are; Google spawning Googlets (hope I have spelled that correctly) and IBM Extreme Blue. Small high performance teams doing really cool and creative stuff. That said most companies lack the resources of a Google or IBM. Corporate Venture has changed.

    The entire corporate landscape has changed and the really cool innovation in ICT, Mobile, Digital Media and Web x.0 is driven largely by distributed, networked, light and nimble start-ups rather than large corporations anyway.

  12. Ignaas Caryn says:

    I think corporate venturing and open innovation (e.g. supplier innovation) are very complementary and should be part of a holistic approach to innovation. The same can be said of engaging in early stage and later stage ventures at the same time (which I agree can and perhaps should be treated in a different way) to create short term innovation and secure long(er) term options. Furthermore a close cooperation between industry players, knowledge institutions and government organizations should be part of the innovation strategy as well, especially in early stage but also later on.

    Such a holistic approach could make innovation and corporate venturing less depending on the economic cycles or changing CEO's.

    For example at KLM, we engage with Dutch start-ups (early stage) via the Mainport Innovation Fund. Next to KLM, also the Schiphol Group, Delft University of Technology and Rabobank are partners in this seed capital fund. This way the fund can act not only as a financial investor in start-ups, but also as a strategic partner. For example, KLM and/or Schiphol can act as 'launching customer', share industry and market knowledge, etc.

    The fund is also offers the opportunity to scout early stage companies and developments.

    Later stage ventures are set-up directly with relevant parties, for example suppliers, to bring on board all needed competencies. The format of cooperation varies from long-term cooperation agreements to setting -up joint ventures.

    In both approaches the (short term or longer term) link with the current business(es) is carefully defined and business owners/sponsors involved. For the short term link(s) there is a close cooperation with the relevant business unit(s) from the moment the opportunity is explored to secure the business integration and benefits later on.

    In concluion, no guarantees, but a hybrid model increases the chances of success considerably.

  13. Russ Conser says:

    Great question, Stefan, and I support Martin's nicely concise description of an ideal 'hybrid' model. I think that's exactly what we try to be in Shell GameChanger, so I guess we'e an example, but I don't think I myself have even articulated it so well! Well done, Martin.

    The only thing I might add is to put literal emphasis under his quotes re 'minority shares' for pilot projects. From my experience, if the relationship does involve equity, a minority position is indeed best. But I think other contractual relationship mechanisms involving limited IP or market rights, or anything else of mutual benefit, can also work really well. Thus, ownership of shares doesn't have to be the only basis for commercial structure.

    Finally, from my experience, the "stories" you list are much more powerful in fact than any measurement of ROI.

  14. Jens Albertsen says:

    Sorry for innovating on the definition of Open Innovation – Kirschbaum/Graham/Caryn has touched upon the subject – but isn't corporate venturing defined as one approach to Open Innovation – meaning corporate venturing is Open Innovation? The main purpose of corporate venturing is to acquire a minority equity stake in order to have strategic influence on the company and a simple contractual approach to get the economical benefit of the corporate input.
    This brings me to the next underlying issue in all comments – economical benefit of innovation? I can only agree with Caryn/Marco about the issue of quantifying the results of Open Innovation. In a world controlled by CFO's quantifying results is crucial. Wether the world is best served by bringing more CFO style into innovators or Innovator style into CFO's is a question I will leave open to be discussed. Perhaps a better quantification of results could be a first move to a more stable corporate Open Innovation platform, which will survive the economical cycles!?

  15. Stefan,
    I agree with my colleague Rob Kirschbaum from DSM that Corporate Venturing (CV) is just another (though potentially big) arrow in the quiver of Open Innovation (OI). That’s also the concept I used to set up the CV fund of SABIC in 2011.

    However, there are indeed a couple of dead bodies on the road of CV. They are mostly related to CV funds run by Finance with the prime objective to maximize return on capital employed.

    CV as part of OI should be run by Innovation Management. Its capital should be seen more like an R&D expense rather than capital invested (even if the tax man would not agree). The return on investment should be measured in the business units commercializing the fruits of CV rather than on capital employed in the fund. Obviously, the CV fund should cash in on investments which turn out over time to be non-strategic for the corporation to further fund strategic ventures.

    Joachim von Heimburg, Innovation Architect and Executive Advisor, former global GM Innovation SABIC

  16. Jack Smith says:

    Very interesting breakdown, indeed. It’s nice to have such information available in one location and some ideas for new and different directions to take to help one stand out.

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