With the dilution of the R&D monopoly most Fortune 50 company could wield through mass corporate research parks such as Xerox’s PARC, organizations have begun to compensate through external technological innovation. Given the reality that no single organization has more than 1% of the global R&D budget, and the fact that many innovation require a multidisciplinary approach, there is no corporate R&D body capable of internally meeting all of a company’s R&D needs.
In the corporate market, external technology innovation has taken two dominant forms: technology scouting and corporate venture capital (CVC). Open innovation focuses on identifying potential external innovations that can be implemented into, or create new products, while corporate venture capital focuses on identifying and investing in new firms that may disrupt the market or serve a highly profitable niche.
Although corporate venture capital remains the more well-known segment, organizations are increasing blurring the lines between corporate venture and technology scouting, as a consensus around their benefits begins to emerge.
Corporate Venture Capital
Corporate venture arguably has a long history, with the first major example being DuPont’s investment in GM in 1914 and beyond. In a pattern mirrored by other successful corporate venture programs, DuPont blended both financial and strategic motivations: Du Point saw the potential for huge financial returns in the growing General Motors, but also anticipated that growth in GM would also spur demand for its line of paints, varnishes, and artificial leather products. Since then, corporate venture has oscillated in motivations from diversification due to anti-trust regulations, investment in new technologies and industries, or strategic investment to secure markets for other corporate products.
However, the success of corporate venture has largely focused on the aims to achieve technological innovation, as the financial argument for corporate venture fails to be alluring to large organizations. This is mainly due to the fact that even if a CVC program demonstrates double digit returns every year, the amount of money companies are willing to commit to these efforts mean that the overall impact on corporate profits is minimal.
Intel Capital, seen as the leader in the CVC world, has largely used its corporate venture program as a means to acquire new technologies and to create ecosystems and supporting products for its own internal R&D products. This hybrid approach is strategic in nature, as the company sees more value in obtaining technology and product support than the financial returns on their investment. This does not mean that Intel will continue to support failing investments, but that the strategy isn’t focused on optimizing investments for returns. This enables Intel to increase market share and demand for its products while securing access to technology for future endeavors.
Open innovation largely addresses the same issue as CVC, but from a different direction. Rather than investing in companies to obtain new technologies or obtain financial returns, open innovation focuses on externalizing the R&D function in part to augment internal product development. This is done through efforts such as crowdsourcing, licensing promising technologies, or outright buying technologies and integrating them directly into the organization.
Open innovation emerged out of the growth in skilled workers and the potential capabilities of external vendors. While before large corporations could obtain most of the skilled R&D and technical talent in the labor force and concentrate them on internal projects, the huge increase in amounts of skilled workers and their ability to start independent firms that could specialize in technical areas at a lower cost than is possible internally made a internal-only R&D model unfeasible.
Furthermore, the increased interdisciplinary nature of innovation means that no organization has the financial means and expertise to simultaneously innovate in every possible field. Given that organizations are naturally myopic, it’s difficult to compete against niche, specialized firms in every technical area of research.
The main distinction lies in that open innovation seeks to directly impact organizational profitability through implementing new technologies that improve competitiveness, rather than indirectly obtaining profits or strategic positioning through investment in other organizations.
Is there really a difference?
Given the way that most organizations use corporate venture, the distinction between corporate venture capital and open innovation efforts is minimal. Both serve as pathways for new technologies or innovations to enter the R&D pipeline of the organization, as well as allow internal efforts to remain grounded in latest research within a sector.
Many organizations have realized this minimal distinction and have largely blended their operations; venture groups will seek out both startups for investment/acquisition as well as use these investment opportunities to scope out a use case for a technology and determine whether there is a potential for internal use.
Even when groups seek out companies, they are based around a specific technological need and/or market, with a definite area of interest being pursued. This reality means that corporate venture capital is deeply intertwined with open innovation efforts, with both seeking to directly and indirectly benefit the organization.
Enabling Open Innovation
Despite the strategic benefits of using corporate venture capital to support internal R&D and business unit efforts, many organizations do not have the necessarily tactical insights to successfully pull this off. With this in mind, how do organizations create systems to enable close collaboration between venture and R&D?
In order to be successful, R&D units and and CVCs must be able to seamlessly share data across units to evaluate technologies, identify needs, and remove silos from the organization’s internal processes. By eliminating barriers to communication, CVCs are able to better focus their efforts towards technologies and companies that best support product ecosystems or identify new markets.
Furthermore, organizations frequently waste time in search and evaluations due to data silos. While one business unit might have searched and evaluated a technology and found it lacking, this information is rarely transmitted company wide. Hence when another business unit finds the same technology, it goes through another evaluation process rather than being discarded. In this scenario, business units would have no idea of past interactions, history, and technical data that led to their previous decision. This process wastes organizational effort and leads to doomed opportunities getting further down the pipeline before they are ultimately disqualified.
Organizations can resolve these issues by investing in software tools that allow for shared evaluations, secure and reliable access to past data while improving accountability at the individual and company level. Software tools allow for unified portfolio reporting while creating an environment where all innovation data can be stored and analyzed.
A successful long-term corporate venture capital strategy rests fully on the ability of CVCs to coordinate with internal R&D and business units to identify the best opportunities for the organization. However, without effective software tools to manage the process end-to-end, these efforts will fall flat. Fortunately, many organizations have identified processes and tools to enable innovation and coordination across silos. See how we've worked with major corporations like Dow to help them manage their innovation efforts.