In search of game-changing new ideas, many companies are broadening their quest for growth-driving innovation beyond their internal R&D efforts and M&A activities. In this final blog in a series of three, we look at strategies that can create value from innovation.
Whilst these strategies are neither new nor innovative in their own right, when correctly applied they enable companies to engage with other organisations in various stages of development. This holds true from start-ups still in product development to companies in their early growth stages to mature enterprises. It also enables companies to commit to a range of time horizons with varying levels of financial investment.
- Business incubation
- Strategic partnerships
- Mergers & Acquisitions
- Internal R&D
The different routes are summarised below, looking at proximity to core business and time to impact of each strategy:
Proximity to core business
Time to impact
|Business incubation||New / adjacent||4-10 years|
|Venturing||New / adjacent||1-7 years|
|Strategic partnerships||New / adjacent||1-7 years|
|Mergers & Acquisitions||New / adjacent / core||1-3 years|
|Internal R&D||Adjacent / core||Ongoing|
Mergers & Acquisitions and Internal R&D are topics that have been covered at length in numerous other blogs, papers and reports. In this piece we will focus on the first three routes listed on the table above.
Creating value through Incubators & Accelerators
Incubators enable companies to support and collaborate with a handful of promising start-ups for as long as three years. Sponsoring companies make equity investments of as much as 25 percent and afford the start-ups access to corporate resources and facilities. The start-ups selected for incubation have significant interactions with their corporate sponsor, at both the corporate and business-unit levels.
Accelerators, in contrast, enable rapid screening of a large number of start-ups focused on a particular technology or region. Support takes the form of a structured business-development curriculum for a fixed term (typically, three months). The start-ups invited to participate in the accelerator are usually on the verge of launching revenue-generating activities, and the corporate sponsor promotes their development by granting them access to office space, technical support, high-quality mentoring, networks of other start-ups, and funding sources. In return, the company gains early access to promising ideas and companies. The corporate sponsor typically makes no equity investment in the start-ups, and interaction at the corporate and business-unit level is limited. Some companies, though, will take small equity stakes (5 percent or less) to lock in access to an especially promising venture.
Strategically aligned investments that are removed from the core business
In recent years, many companies have turned to venture investing to locate and acquire innovation in areas adjacent to their core businesses.
Once prone to boom-and-bust cycles, corporate venture units are lasting longer, investing more, and, increasingly, co-investing across industry lines. Recognising the competitive advantage that innovation confers—and wary of missing out on a disruptive innovation that could render their current business models obsolete—companies are establishing venture business units at an ever-accelerating clip, and industries that formerly ignored the venture-investing world are jumping into the game and scrambling to catch up.
Industrial companies in the US, for example, are spreading their investments widely but maintaining a strong focus on related industries, committing capital to clean technology, information technology, and healthcare.
They have the full backing of senior corporate management, which is actively involved in designing the venture unit, formulating investment strategy, and implementing processes to capture the full strategic and financial value of their investments.
The strategies of the venture units are tightly aligned with the parent company’s overall business and innovation strategy, and ideas gleaned from venture investments flow by well-marked routes into the larger corporate innovation pipeline.
Exemplary corporate venturing units also have clear and consistent investment parameters, with well-defined search fields and risk tolerances, and they accept the occasional failed investment as inevitable.
Most of all, the best corporate venture units, as well as the leaders who guide them, understand that greater than the risk of failure is the risk of not investing at all.
Financial boosts from strategic partnerships
Companies seeking short-term product development, commercialisation, and rollout of outside innovations typically opt for strategic partnerships with already established start-up companies. The typical strategic partnership involves creating a new legal entity to hold the partnership’s assets and oversee operations, with the corporate partner providing a combination of equity and debt. The start-up partner is usually a late-stage, revenue-generating company.
Because financial rather than strategic concerns motivate most partnerships, companies entering into these arrangements should clearly define their financial expectations, such as 12 to 18 month revenue goals, return-on-capital benchmarks, and a firm timetable for recovery of all invested capital.
A growing number of large companies are forming strategic partnerships to close knowledge gaps and drive value creation for both partners. When executed effectively, strategic partnerships enable each partner to expand or more deeply penetrate its market with products or services that complement its own product portfolio, without having to invest in noncore activities. Partnerships are especially valuable to companies seeking quick entry to a particular market or business line because of technological disruption, new market entrants, or aggressive moves by competitors.
Appropriate governance structures are crucial to any partnership’s success. The deal should spell out in detail the roles, responsibilities, and obligations of each partner and identify the business units on each side that will be accountable for the partnership’s operations and results. Partners are typically active owners, governing through either majority control or, in the case of minority shareholders, a board seat. Exit transactions usually involve either public offerings of shares in the partnership or the buyout of one partner and the subsequent integration of the partnership’s financial results into the acquirer’s books.
This is the third in a series of three blogs that takes its inspiration from a report by the Boston Consulting Group (BCG) called “How Leading Companies Search for Their Next Big Thing”. You can read the entire report here