More and more corporations are turning to corporate venturing as a way to promote growth and increase company value. The trend is that companies are now transforming their innovation programs into business ventures and platforms for commercialization.
There are those who predict corporate venturing will develop into an asset class of its own because companies see the value of sponsoring programs or initiatives over which they can exercise a degree of control instead of just purely investing in venture funds.
Corporate venturing comes in many definitions. Global law firm Taylor Wessing defines it as various strategies to spin out or start up new businesses from more established companies. The new businesses are used to target new markets, diversify the mother company’s line of products, and or hedge against the competition.
The Swiss Federal Institute of Technology ETH Zurich defines corporate venturing as an approach of more established enterprises to create and develop new businesses that are independent from their mother companies and whose aim is to develop new business ideas.
The National Institute of Standards and Technology of the U.S. Department of Commerce defines corporate ventures as programs that established firms invest in for the purpose of identifying and sourcing emerging technologies.
In this article we explain the three emerging CV strategies: the Spin-In, Spin-Out and Spin-Along strategies.
Venture Capitalist Bruce Cleveland defines Spin-ins as startups founded by individuals who work with an established parent firm. Spin-ins develop technology and products that are aligned with the objectives of the parent firm, but maintain its activities on a separate balance sheet. When the startup achieves a technical milestone, it is absorbed by the mother firm, hence, it is referred to as “spin-in.”
Cleveland adds further a spin-in does not have to focus on technology alone. The parent company, sometimes working with investors, can establish a real company with real revenues of its own and spin it back in once it achieves certain milestones.
Spin-In Strategy: Cisco
Among companies with spin-in strategies, many consider Cisco to be the most successful. Cisco’s Corporate Development unit is identified as the lead department for the company’s investment activities. The unit was created in the mid-1990s and has a $2 billion fund. According to Cisco, the unit functions as “a strategic pair of “eyes” for the Company.” It’s primary task is identifying common elements found in the company’s marketing, sales and engineering departments. Once identified, the unit looks for opportunities that connect these departments and their businesses with the aim of contributing to the overall growth of the Company.
According to the U.S. Securities and Exchange Commission, a spin-out is a newly-formed company where the parent company holds a stake in equity. Investopedia adds, a spin-out takes place when a parent corporation “breaks off parts or divisions of itself to form a new corporation.” The spin-out takes along with it some of the parent company’s assets and equipment. The SEC defines a spin out as when the parent company has a stake in the equity of the newly formed company. Henley Incubator defines Spin-Out as “exit of business or technology leading to value gains for the organisation.”
Spin-out strategy: Philips Electronics
Philips Electronics’ spin-out strategy is spearheaded by its venture capital arm, Philips Corporate Venturing. PCV functions under the Corporate Strategy group within Royal Philips Electronics. According to the company, PCV was established in 1998 and functions as the company’s “radar” – to look out for partnership opportunities and new technologies for the company’s businesses. PCV aims at firms that: a) can contribute to the success of the company’s investment portfolio and, b) can be beneficiary to a strategic partnership with Philips.
Aside from the PCV, Philips has also put up three corporate venturing units: the Lifestyle, Healthcare, and Lighting & Cleantech Incubators. The overall objective of these units is to create strategic opportunities for growth for the company. In certain cases, technology licensing or spin-out will be taken into consideration. Just recently the company recorded the spin-out of five companies from its Incubators: Civolution, amBX, priv-ID, Intrinsic-ID and Serious Toys.
Professor Rene Rohrbeck of Aarhus University defines the spin-along strategy as an integration of aspects found in the other strategies. This approach offers companies the opportunity to commercialize the results of their R&D endeavors and also the benefit of “spinning-out non-core activities.” The spun-out company will still get dominant control from the parent company and maintains a first buyer right.
Professor Rohrbeck adds, this strategy offers the firm opportunity to externalize innovation activities. This benefits the company with the possibility of a higher market, greater proximity to the customer and having to face a lower risk. The risk is reduced because it is shared with employees and other investors.
Spin-Along Experience at Deutsche Telekom
The spin-along strategy is closely associated with Deutsche Telekom Laboratories. At one time, the company felt the need to challenge the perception that large companies have limited capabilities when it comes to pursuing radical innovations. The entry of VoIP (Voice over IP) technologies and the merging of telecommunication and IT were realities that the firm had to face. In addition, government regulation of the telecommunication sector was bringing down profits of major players in the market, Deutsche Telekom included.
Because of these challenges, Deutsche Telekom turned to the adoption of a spin-along strategy. As of this writing, a best practices observation is not yet available in relation to Deutsche’s experience with spin-along. Prof. Rohrbeck did mention that discussions took place on the transfer between the spin-outs and the parent company’s R and D division.
Spin-Along Experience at Cisco
Cisco’s spin-along objective is to maintain focus on being customer-orientated while continuing to work at exceeding expectations of customers.Cisco terms its spin-along method as ‘put/call’ or ‘spin out/buy back’ strategies.A new business development team was created by the company to handle this hybrid strategy. The team had to address several challenges in implementing the method:
- Identifying the type of structure that would best leverage the company’s assets by the new spin-out firm.
Identifying how the structure will strike a balance between being independent and later prepare itself to be absorbed by the parent company.
Establishing a productive relationship between the new unit and Cisco personnel.
Identifying Cisco’s initial ownership stake with the new unit.
And, striking a balance between providing the right amount of incentives to the new unit’s management without upsetting current Cisco personnel who would take part in assisting the new firm’s integration.