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Perhaps not surprisingly, the same two critical issues that corporate R&D programs have struggled with have also affected corporate venturing initiatives. First is the confusion over the ultimate objectives of the research program, which translates into poor decision making and swings between an emphasis on central and divisional research. In many cases, confusion over goals has also characterised the design of corporate venturing efforts. The second problem is an unwillingness to match - or even come close to matching - the compensation offered by independent venture groups.
The classic case of Exxon Enterprises, whose venture capital effort ranks among the earliest and most spectacular failures in the field, provides a vivid illustration. The oil giant (called Esso at the time), seeking to diversify its product line, had launched its venture program way back in 1964.
The program showed all the hallmarks of an effort without a consistent strategic direction. It began with a mandate to exploit technology in Exxon's corporate laboratories; for example, making building materials out of petroleum derivatives. In the late 1960s, however, the fund managers decided to make minority investments in a wide variety of industries, from advanced materials to air-pollution-control equipment to medical devices. This flurry of investments by the corporation was made just before the market went into an extended swoon. In the late 1970s, the strategy changed yet again: the program now focused solely on systems for office use, with a particular focus on advanced computing. Finally, in 1985, Exxon abandoned the venture effort entirely. Each shift in corporate strategy had brought on waves of costly write-downs. The information-systems effort alone generated an estimated $2 billion in losses for the corporation.
What explains this disaster? In part, the lack of a clear mandate from the top was at fault: senior management at Exxon could not agree on the program's overarching purpose. But there was considerably more blame to go around. The corporate venture team came to the project with scant investment experience and made numerous poor decisions. Moreover, various divisions at Exxon insisted on detailed reviews of the program, which were designed with an eye toward shifting the program's direction in ways that the various divisional leaders deemed most beneficial for their interests. These reviews consumed so much time that they distracted the fund managers' attention away from the selection and oversight of investments. Meanwhile, various organizations within the corporation had a hand in structuring the program. For instance, Exxon's human resources staff complained that the venture firms' compensation schemes did not mirror those of the overall corporation. In the late 1970s, the personnel group succeeded in replacing the venture staff's separate stock-option schemes with a standard salary-plus-bonus plan. An exodus of fund managers soon followed.
How do smart companies go so wrong when it comes to designing corporate venturing programs? The confused objectives that characterize many programs may reflect the realities of getting approval of a new initiative. If we think about a traditional independent venture fund, the goal is simple: to maximize the financial returns of the limited partners while behaving in a reasonably ethical (or at least legal) manner. All the limited partners of a typical fund, whether an endowment, pension, or sovereign fund, would heartily agree that high returns are desirable. Now consider the situation of the champion of a corporate venturing program. To get the approval to set up the program, he or she will probably have to satisfy a wide range of constituencies. And to get these approvals, more features are often added to the program: for instance, a target to identify potential acquisitions to please the business development group, an objective about financial returns to satisfy the chief financial officer, and a goal of getting a window on emerging technologies to please the R&D department.
THE ARCHITECTURE OF INNOVATION: THE ECONOMICS OF CREATIVE ORGANIZATIONS
AUTHOR: Josh Lerner
PUBLISHER: Harvard Business Review Press
PRICE: Rs 995
ISBN: 9781422143636
Reprinted by permission of Harvard Business Review Press. Excerpted from The Architecture of Innovation:
The Economics of Creative Organizations. Copyright 2012 Harvard Business Publishing Corporation. All rights reserved.
