Corporate venturing is in fashion. But it is causing a lot of frustration, in part because executives are not going about it right.

Passive investment by a corporation in a new venture grew 158% a year from 1997 to 2000, following a 2%-a-year decline in the mid-1980s. Active investment to build new businesses, another form of venturing, also grew.

Yet few corporate managers say they are satisfied with this tool for generating growth. Why? Most of the 350 corporate venturing programs worldwide have foundered.

In many cases these ventures fail because they stray too far from the corporate parent's core business. Companies invest in unfamiliar fields, and lack the experience needed to conduct effective due diligence. Or the ventures distract managers from their essential duty—managing the core business—and as a result performance for the company as a whole is below par.

Despite this gloomy trend, the financial sector has generated some rare successes. American Express Co. and Charles Schwab & Co. have established strong core businesses as launchpads for corporate ventures, then pursued opportunities close to that core and applied tough management principles to create profitable businesses.

Start from a strong, well-defined core business. Before contemplating expanding to new businesses, define the competitive boundaries of your current core business and evaluate its full potential. Then mine that core for all it is worth.

American Express keeps its 30-plus equity investments in other companies close to the charge card business. Ken Chenault, Amex's new chief executive officer, discussed his company's approach in February at the CEO Forum on Corporate Venturing, sponsored by Bain & Company and Harvard Business School Publishing.

"Often when people venture, it's because they fear there is no more potential in their core strategies," Mr. Chenault said. "They create a separate group specifically to experiment outside the core. But we believe that all venturing should leverage core assets."

Stay close to that core... The farther a venture strays from the parent company's core business, the greater the chance it will stumble, or distract management from managing that core.

At American Express, MarketMile, kicked off in March, explores a new business without detracting from the company's core. Amex invested $17 million, while the electronic marketplace maker Ventro pitched $13 million into MarketMile, an online platform for companies to procure stationery, computers, office equipment, and even temporary staff. American Express hopes its investment will get the company in on the ground floor of new business markets for its core charge card. MarketMile incorporates this card into the exchange's purchasing process.

...Or manage the jump to a new one. If your core business is becoming obsolete, corporate venturing can help you direct a successful new business model back through that core, and redefine your business. Consider Charles Schwab's 1995 venture to bring its brokerage business online. The move was an attempt to defend and strengthen its core.

As E-Trade and other dot-coms began nibbling at its business, Schwab launched eSchwab inside its own walls. By 1997 Schwab was struggling to manage the different price and service levels offered by its two parallel businesses.

Schwab made a bold decision to transform. It priced all trades at $29.99, giving up revenue and margin in its offline accounts, and the newly named Schwab.com became the centerpiece of all its electronic services.

Today, 70% of new assets come to Schwab through street-level branches, while about 85% of trades take place online. Both channels are indispensable to sustaining Schwab's rapid, profitable growth.

Incorporate disciplines from the world of venture capital. Successful private investors have a clear plan for each of their investments. They know what goals the business should pursue and have a strategy for exiting the business when the time is right. Though corporate venturers often have motives beyond the purely financial—such as to test technologies or business models—they can benefit from venture capitalists' detailed approach to due diligence, rigorous financial controls and staged funding.

American Express makes all its ventures into profit centers, so there can be no financial drains. Mr. Chenault says that corporate venturers' biggest failing is incomplete analysis of the capabilities within a target investment. He said, "Watch out for three things: first, stringent cash management; second, moving to second objectives too early; and third, an immature or incomplete product offering."

He said American Express failed by jumping in too early—and finding the opportunity small. The margins were weak, the market size was low and the partner had trouble scaling up.

Inside or outside? Let strategic goals decide. Ventures like MarketMile at American Express—a step away from the core business—are best built outside the company. So, too, are projects that rely on different capabilities from the core. But some ventures that are very close to the core can grow up within the existing business, as Schwab's online brokerage venture did.

Schwab built eSchwab in-house but ran it like an independent division—with its own profit-and-loss responsibility and its own staff, cordoned off in a separate part of the building to sharpen management focus and insulate against naysayers.

Is corporate venturing for your company? Chief executive officers are rating profitable growth their No. 1 goal, and corporate venturing has become one important tool for achieving it. Potential venturers should consider a number of questions:

1. How closely is the opportunity related to the core?
2. Should we develop the idea inside or outside of the current business?
3. Should we take outside money or fund it ourselves? Do we have the money?
4. Do we have the right managers for this business, or should we hire from outside?

Today, you need to get both the "why" (rationale) and "how" (execution) right to successfully launch a new business and keep it in orbit.

Mr. Donahoe is worldwide managing director of Bain & Company, a consulting  firm in Boston. Mr. Spinelli is director of Bain's financial services practice, and Mr. Schefter is a Bain & Company vice president.