The Financial Times

A Disciplined Path to Profits

A Disciplined Path to Profits

Corporate venturing offers a disciplined path to profits.

  • min read


A Disciplined Path to Profits

Many companies, from Philips to Microsoft, have tried to imitate the venture capitalists of Silicon Valley. Many have lost their investments, often in technology or internet ventures, on the Nasdaq, the Neuer Markt or on start-ups that went from incubation to resuscitation without going through an initial public offering.

Yet companies such as Reuter and Schwab have made a bundle on corporate ventures. Half the 451 executives responding to Bain & Company's global Management Tools 2001 survey say they plan to invest more in internet initiatives, while 42 per cent of last year's corporate venturers abandoned the tool, pointing to poor choice of ventures and lack of skills.

If you are confused, you are not alone. Corporate venturing is tricky. What transforms it from a high-risk fad to a path to profitable growth? The answer may interest UK companies, which last year invested Pounds 5.7bn in corporate venturing to create a market worth Pounds 1bn, according to British Venture Capital Association/ European Venture Capital Association research.

Fifty of the FTSE 100 firms have corporate venturing arms. The best corporate venturers, such as British Petroleum's BP Digital Ventures, have posted more than 30 per cent returns on their investment. Two conditions have encouraged corporations such as Reuters, BP, Shell, American Express, Philips, Schwab, Otto and Tesco to risk this route to profitable growth. First, more urgency. Lush capital markets in the 1990s allowed entrepreneurs to set up successful, stand-alone businesses that might have been the ventures of traditional corporations. Does Maxwell House regret its failure to launch a Starbucks? Or Waterstones an Amazon? Some corporations feel that they missed such opportunities—and have set up a venture fund to seize them in advance in future.

Second, more discipline. Venture capitalists demonstrated last decade that their approach to funding ventures—they drip-feed cash in the early stages, with life support contingent on the venture hitting successive financial targets—earns higher returns than traditional new businesses budgeted and launched by corporations. Managers of ventures have their compensation tied to its success. Undergirding cash discipline is strategic discipline. Corporate ventures closely linked to a company's core strategy have proved most successful. For example, eSchwab, Charles Schwab's online trading venture, identified the same customers and used the same assets as Schwab's traditional discount brokerage offering. But eSchwab lowered costs and increased convenience to customers. The success of Schwab's online venture, now, led the company to transform its core. Today, more than 70 per cent of Schwab's customers bring their assets into street level branches but more than half their stock trades take place online.

Ken Chenault, chief executive of American Express, told a recent Bain-sponsored CEO Forum on corporate venturing that he boils down his strategy to a few principles to guide external ventures. These disciplines, coupled with sound execution, support a series of solid European successes in corporate venturing. Tesco, for example, teamed up with Otto, Germany's top online company, to launch Tesco Direct, combining Tesco's mass market retail skills with Otto's direct marketing skills. Today, Tesco Direct leads the UK in mass market home shopping.

On the other hand, Philips set up a venture fund in 1998 to leapfrog its own research and development, which was entrenched within a heavy corporate structure and lacked a network to identify new markets and products. Philips planned to take stakes in technology companies as a form of external research and development. However, it was struggling simultaneously to resuscitate its core electronics business. The venture failed.

Royal-Dutch Shell Ventures focuses on rationale and execution. Petra Koselka, president of the Shell venture group, told the forum that her team asked at least three questions before making an investment: Does this fit Shell's strategy? Does it take advantage of our assets? And can it be big? Her team canvases Shell's operating units for ideas and offers to take them out of a politically charged environment into the ventures group. If a venture's rationale holds, Shell Ventures has the cash (relationships with VCs) and expertise (VCs on staff) to test it, nurture the best ventures and transport profits and return learning into the organisation.

One of Shell's investments, a joint venture with BP Digital, Goldman Sachs, Morgan Stanley and Total-FinaElf, is the Intercontinental Exchange, an Atlanta-based, online energy exchange for over-the-counter derivatives such as energy, metal and ores, launched in October. Within its first week the exchange posted trades on more than 40m barrels of crude and refined oil derivatives, 240m mmBTUs of natural gas and natural gas derivatives and 6m megawatt hours of electricity. In May, the exchange launched a process to buy its competitor, the International Petroleum Exchange, for Dollars 67.5m (Pounds 48m). The combined daily trades of the two exchanges totals Dollars 3.5bn.

Another company venturing close to its core is British Telecommunications. Its Brightstar venture division is scouring the company's 15,000 patents for growth ideas. Brightstar has plans to launch six more companies this year based on BT patents and estimates revenue of Pounds 2bn within three years.

One of the UK's most successful corporate venturers is Reuters' Greenhouse Fund, an early investor in the internet portal Yahoo and the internet security company VeriSign. Greenhouse added 10 per cent to its parent's bottom line in 2000. Having combed Reuters' core businesses for ideas, the fund now is turning its sights to other sectors and therefore spinning off to allow it the freedom to work beyond Reuters' sphere of influence.

So what betters the odds of corporate venturing? First, companies should know why they are venturing and stay focused on the way a venture relates to a strong, core strategy. Are they supplementing R&D, like Philips? Exploiting underused assets, like BT or Shell? Or defending their core business against incursions, like Schwab? If a venture's relationship to your strategy becomes tenuous, the venture should be spun off, as Reuters has done with Greenhouse. If your core business or strategy is weak, your venture is handicapped.

Second, companies should get the "how" right, by adopting venture capital funding disciplines: rapidly feeding cash or closing the spigots based on a ventures financial results; and engaging a highly committed management team, with expert advisers and incentives tied to the venture's success.

Corporate venturing offers a disciplined path to profits. Assume the disciplines and you transform one company's high-risk gamble into another's well-hedged bet.

Gerry Mulvin is a vice-president of Bain & Company in London and a leader in the firm's corporate venturing practice. Darrell Rigby is a director of the firm Boston and founder of Bain's Management Tools survey

Ready to talk?

We work with ambitious leaders who want to define the future, not hide from it. Together, we achieve extraordinary outcomes.