Corporate Venturing: Entrepreneurship on the Inside

by Kenneth Liss

Can big companies ride the entrepreneurial tiger to transformation and renewal?

Yes, said participants in the panel discussion "Corporate Venturing: Entrepreneurship on the Inside" at the HBS Entrepreneurship Conference. But getting there presents special challenges for the companies and for those who want to help them reinvent themselves.

"We think about all these great large companies that have failed," said HBS professor Michael Roberto, who moderated the discussion. "But there are lots of great examples of new business creation and corporate venturing leading to transformation" of large firms.

What are some of the challenges you've faced, he asked the panelists, as you've tried to start new ventures inside of companies?

The biggest challenge, said Dipender Saluja, who leads a thousand-person technical services venture within Cadence Design Systems, "is the extreme form of change that management teams within companies have to go through. The degree to which that change is hard is tied to how well you are doing when you attempt to do something like that within the company.

"The most common theme," he continued, "has to do with timing and also how much they've tended to cannibalize internal businesses that exist. There's usually a lot of resistance to anything that seems to cannibalize, even though it may be obvious that the ultimate result of that cannibalization is going to be much bigger and more exciting."

Separating The Wheat From The Chaff

Scott Stevens, director of new business development at EMC Corporation, said one of the biggest challenges for EMC was figuring out how to interpret changes in the industry. "There are lots of changes happening in our marketspace," he said. "We're trying to separate the wheat from the chaff, figuring out which ones are truly fundamental, or disruptive, changes versus more complementary changes to be incorporated into our current business model."

It's one thing, he said, to separate new business ideas from the core business, hopefully never to be integrated back in. "But to try to take your core business, if your market's going through a fundamental shift, and migrate it on the fly without separating it out is a very big challenge."

Incentive structure is a big issue for most large corporations trying to nurture innovation, said Ashton Perry of Lucent Corp.'s Lucent Venture Partners. "It's hard enough to incent an entrepreneurial team in the way the external market will incent them without raising all kinds of questions about equity compensation within the company."

A key, said Perry, is "understanding that, biting the bullet, and saying we will give these people an opportunity to get rich if they succeed at what it is they are choosing to do. We'll also load them up with the risk that an outside entrepreneur would have."

Finding And Retaining Talent

Large companies may actually have an advantage when it comes to finding talent for new ventures, said Cadence's Saluja. "There's an interesting dynamic that we've seen over the last year or so. With the extreme shortage of people on the outside, in some cases it's actually a competitive advantage for the large corporation if they can incentivize and motivate internal people, because they have access to a talent pool that doesn't always exist outside."

At the same time, developing new businesses can provide large companies with a potent retention mechanism. "Companies are tending to lose people who are not that interested in the pension plan but want to go out and do something exciting," said Saluja. "The core businesses themselves are bleeding the talent out at a pretty high rate.

"Almost everybody is looking at how do you really get something exciting going within the company so that you retain this talent."

Robert Latoff, a leader of the Growth and Business Building Center at McKinsey & Company, said big companies often have to rethink the way they do things when starting new businesses. "The business processes that they often have baked throughout their steady state operations don't fit, in terms of the risk compensation profiles, the expected or demanded precision in projections going forward, and the level of uncertainty.

"You ask a big company to be almost schizophrenic with regard to risk profile. That's hard to do. It's not impossible, but it's hard, it's unnatural."

Going For The Right Fit

"You have to recognize the skills that you have, while valuable in one setting, may not be the perfect fit — and go for the perfect fit," Latoff added. "Make no compromise on talent when you're starting a business. At the end of the day, this is about return on talent, not return on capital."

Lucent's Perry noted that large companies looking to nurture innovation don't necessarily have to look inside. "The notion that the innovation should come from within the company may be inappropriate, at least for certain kinds of innovation," he said.

"If you look at companies like Cisco and others that depend less on R&D, you'll see they have taken a different model in the new economy. They essentially said, 'We will use the innovation in the marketplace, and we will signal to that marketplace what it is we're looking for and hope that they'll design businesses that we want to acquire and will fit the niches in our portfolio of product or in the innovation trajectory that we've designed.'

"Frankly, I think a smart corporation would be wise to be tapping that talent in that way as much as you're doing internal nurturing. There's not just one solution to creating the innovative products you want for your business."

Networking And Connections

All of the panelists agreed that connections are key in pushing new ideas through in large corporations.

"With information technology shooting through the roof and the ability to collect and share information, the thing that is going way up in value is your personal connectedness and network," said Latoff. "Your ability to create, sustain, and, in opportune moments, exploit your connectedness and network is huge.

Finding a champion within a company is absolutely critical, added Roberto. "That's where networking comes into play. Somebody higher in the organization who essentially gets it gives it a legitimacy that is really important.

"You have to signal to people the fact that you've gone through what's considered a legitimate process. You may have come up with this totally on your gut instinct, but that's not the way you sell it. You're going to sell it by portraying it as something you went through in a very rational, systematic way."