Wanted: Corporate Venturers (Weak Businesses Need Not Apply)

Wanted: Corporate Venturers (Weak Businesses Need Not Apply)

When American Express was assessing how the Internet would affect its business model, the company decided to test uncharted waters by dipping a toe.

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Wanted: Corporate Venturers (Weak Businesses Need Not Apply)

When American Express was assessing how the Internet would affect its business model, the company decided to test uncharted waters by dipping a toe. It took a small stake in a precocious start-up, online business-to-business exchange. Early returns led to a second round of investment, and to American Express learning a lot about business-to-business e-commerce, and making some money to boot.

So the recent history of corporate venturing at American Express began with an informal, but successful, foray. In a keynote speech at a February forum on corporate venturing hosted by Harvard Business School Publishing and Bain & Company, American Express CEO Ken Chenault joked, "I probably didn't even know about it at the time." Chenault's company soon formalized a venture group. They formed a fund and established principles to guide both investments and management participation in a way that would grow the company's core businesses and strengthen the brand. Other major, mature corporations have taken similar initiatives, which explains why corporate venture capital spending has skyrocketed 158% annually since 1997. With such dizzying growth, one has to ask: Is it a business fad or growing trend? (See "Top of Mind" chart below and Bain Strategy Brief entitled Corporate Venturing: Management Fad or Lasting Trend)

According to Chenault and other forum participants, the short answer is: "Corporate Venturing is here to stay." But there's a caveat. Companies venturing from a strong core, with intent to strengthen and expand that core, have the best chance of success. "Often when people venture, it's because they fear there is no more potential in their core strategies," continued Chenault. "They create a separate group specifically to experiment outside the core. But we believe that all venturing should leverage core assets." Eleven other presenters and panelists at the New York City-based forum echoed Chenault's philosophy. Their experience dovetails with findings of a newly published Bain book on driving sustained, profitable growth: Profit from the Core: Growth Strategy in an Era of Turbulence.

For one thing, says Chenault, venturing helps a company to recruit better people and help its core business grow. "It may be hard to believe, but there are some really talented people whom we can't attract to American Express, and our venturing activities have extended our network," Chenault revealed. "We're no longer limited by the talent we can generate in-house." Chenault said his venture partners, schooled in start-ups, bring energy, ideas, diversity, focus and expertise to new business building.

American Express has three operating principles for venturing. A venture must:

  • provide superior value to customers the company chooses to serve
  • do so in a way that achieves best-in-class economics
  • do so in a way that enhances the brand

"These are simple rules. but they are incredibly hard to follow," says Chenault. "And you have to follow all of them, one isn't enough." The principles allow Chenault, as he puts it, to listen and get out of the way. "Great strategies are sometimes post-rationalised," remarked Chenault. "But if you use principles and criteria, and have an overriding vision, you can move forward aggressively without a clearly defined and agreed-to overriding strategy."

While the panelists agreed on the rationale for corporate venturing, to reinforce or expand a strong core, they diverged on how to achieve this objective. Panel moderator John Donahoe, Bain's Worldwide Managing Director said: "What strikes me is that corporate venturing is still very much a developing field. There are some key principles driving the most successful ventures, but no agreed wisdom on how to go about it." Donahoe traced the stop-and-start pattern of corporate venturing over the last 25 years and identified two strains. The first strain promotes venture capital—taking passive stakes in companies outside your business—as American Express did initially and panelist WorldCom does today. The second strain, business building, takes place when firms allocate financial and human resources to build and manage new businesses. Such businesses can be built in an autonomous space within the corporation, as panelist UPS had done with its e-logistics group. Or firms can venture outside, building legally separate businesses, which is the approach taken by commodity shipper Cargill, another panelist. Cargill recently set up a joint venture called Level Seas to auction cargo space with partners BP Amoco, Royal Dutch/Shell and venture capitalist eVolution, the fourth member of Donahoe's panel, entitled "The Strategic Venture: When to Reach Outside."

American Express moves ventures forward by putting both cash and people in the game. When the venture group finds a partner company that meets its service requirements and can help further product development, American Express takes an ownership stake. Where that stake is 5% or more, the company looks to obtain a board seat, and always ensures active involvement in the initiative by buying in. "We want influence over product development," said Chenault. If a partner says 'no', it means he or she just wanted our money." In addition, the venture has to be a profit center. "If you're going to be innovative," said Chenault, "you need to make money. If profit rigor stifles creativity, you have the wrong manager."

On the other hand, EMC CEO Mike Ruettgers, makes a point of not getting too involved in hands-on management of his ventures, which are geared to probe and reveal new developments in EMC's core data storage business. These days, EMC just buys stock in a venture to track success. Says Ruettgers, "After my fourth executive (sitting on a venture's board) came to me and said, 'We're having trouble with the CEO, and I'm nominated to find new one'—or, 'There's trouble, and I'm going to have to spend time selling the company,' we got out of that loop." Like other participants, EMC works to apply venture capital sector disciplines to structuring ventures. Disciplines such as: tying compensation closely to management goals, measuring success regularly and concretely, and staging, even "drip-feeding," funding to reward progress.

Ruettgers remarks preceded a second and final panel on "Managing the Venture: Partnerships and Opportunities," moderated by Harvard Business School professor Henry Chesbrough and including AOL Time Warner, Shell, Glaxo SmithKline and investment bank Credit Suisse First Boston. All panelists agreed that no matter what your company's response on "how" to execute ventures, internal challenges remain. Glaxo Smith Kline's 20-year-old SR1 health venture fund has to manage to a budget so their gains don't spike the parent's earnings. Said SR1 president Brenda Gavin. "We have to tell our CEO at the beginning of the year—here's the cash we're going to return, here's the cash we're going to put out."

The Shell Internet Fund, just one year old, and aiming to harness the Internet to core assets to create new products and services, has to prove its efforts won't eviscerate or cannibalise those of business development. Petra Koselka, president of Shell's fund, commented, "The key challenge has been identifying strategic returns, and figuring out how we will transport learning back into the organization."

Some ventures will bite back; outside ventures can grow up and compete with the core. Inside ventures may eat your current job by overtaking or redefining core businesses for the better. Mark Rhoney, president of UPS's venture group says this augurs for building a ring-fence around the venture group and taking people out of their line jobs to populate it. Says Rhoney, "You can't ask people to be functionally schizophrenic." Richard Bressler, CEO of newly formed Time Warner Digital, is nurturing technologies that could evolve to compete with the parent, and he has an answer for skeptical investors. "Venture capital is our antenna," said Bressler, citing the learning that permeates the company from ventures like its stake in online magazine Synapse. "Venturing enables us to think about setting up divisions for tomorrow, not today."

For all corporate ventures, old or new, passive investors or business builders, a big part of success is the avoidance of error. Keynote Chenault cited the greatest pitfall as failure to rigorously analyze the capabilities of a target investment. "Don't be enamored by the solo entrepreneur with a great story and no management team," he warned. Rather, identify partners you can trust, and build long-term relationships, applying the same rigor you have for in-house hires. "And watch out for three things: first, stringent cash management; next, moving to second objectives too early, and third an immature or incomplete product offering." Where American Express failed, he said, was where they jumped in too early and found the opportunity was small-the margins were weak, the market size was low, and the partner had trouble scaling up. "This is a seductive area," Chenault cautioned, "With compelling people who can convince you anything is possible. Look before you leap."

David Johnson is managing director of Bain's New York office. David Harding is a director in Boston.


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