Will your company’s next innovation be your next business?

Most companies use innovation to create a new product offering, solve an internal operations problem or improve value delivered to the customer. But they keep their solutions within their businesses, ignoring the broad market appeal that often exists. Visionary CEOs, on the other hand, have been highly rewarded for taking those solutions to the market through corporate venturing strategies.

I’ve seen a number of those innovations turn into software-centric web products that can be a competitive advantage for the company, but which are then spun-out through new ventures that can attract high valuation multiples, in some cases exceeding those of the parent.

Corporate venturing is the strategic allocation of a company’s resources to purposefully start new businesses. Some are started inside the business (internal corporate venturing) using informal activities like a Skunkworks project or ad hoc idea creation. Others are externally focused, such as investing in an emerging outside company or an indirect investment through a company-sponsored fund.

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We’ll confine this article to a review of internal corporate venturing strategies, since little has been written about the topic and since the strategy offers potentially high rewards, specifically when the strategy is grounded in the development of proprietary software-centric services  that, while serving an internal need, become the foundation of a valuable new company. (Note: These software centric companies are often spearheaded by CEOs in everyday businesses, not software visionaries and whiz kid developers.)

You may not be familiar with the term corporate venturing, but I am sure you’ve seen the results all around you.

Some of the region’s highly regarded companies provide examples. Metavante, which was formed in the 60s as M&I Data, is a corporate venture of M&I Bank.

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Another is Quad/Graphics Inc., a company known for innovation since its formation 36 years ago. A corporate venturing strategy at Quad has spawned a number of new businesses that initially served the parent but then began serving a larger global market as subsidiaries. One of those businesses is

QuadTech, a technology-centered subsidiary formed in 1982 as the R&D arm in support of its parent. The firm gradually expanded its customer reach outside the walls of Quad after creating a competitive advantage for the parent and then leveraging its culture of innovation.

QuadMed is another company nurtured at Quad Graphics before competing in the open market. QuadMed was founded in 1990 to control the skyrocketing health care costs for more than 10,000 employees. Although out-of-control costs were not unique to Quad, the corporation’s culture of innovation supported a bold approach to solving the problem, including hiring primary care physicians and building on-site care facilities, pharmacies and health fitness facilities. After its internal success serving Quad Graphics, and reported savings of 30 percent over average Wisconsin companies, it was ready to go to market directly to businesses faced with the same health care cost concerns. Today, QuadMed is a national leader in employer-sponsored healthcare.

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But you don’t have to be a large company to capitalize on internal corporate venturing.

Zywave was formed inside insurance broker Frank F. Haack & Associates in Wauwatosa and now is a leader in providing software-based reporting solutions to insurance brokerages nationwide.

EMSystem was started by the emergency physician group, Infinity Healthcare in Mequon, and is now a national leader in web-based communications and resource management for emergency services providers.

FurstPerson, based in Chicago, is a leading recruitment process outsourcing (RPO) services firm. The company leverages web-based simulation, analytics and assessment tools to dramatically improve hiring and retention outcomes for clients with call center operations. FurstPerson was launched and nurtured inside a family-owned temporary staffing firm before spinning out in 2000.

Those companies all employ fewer than 150 people. They also leverage proprietary web-software technology as a delivery mechanism for their services. In addition, they are poised for continued growth and margin expansion. That’s a great business model. What all of the parent companies have in common is strong market expertise and a willingness to apply resources to innovation and forming new ventures.

What is now known as FurstPerson was formed inside a traditional staffing business that had been around for 25 years. But company chief executive officer Jeff Furst noticed client interest in a specific area of the business and realized there could be a broader market for a technology-enabled service.
FurstPerson was initially able to leverage the back-office infrastructure and resources of its parent, so it could focus on sales, investments in software and organic growth. By 2002, its new business model began to take shape and, since then, FurstPerson has achieved more than 500% growth in revenues.

Businesses spawned from an internal corporate venturing initiative have increased odds of success vs. a pure start-up. While start-ups face the daunting task of launching with few or no customers and little structural support, an internal venture can leverage the parent’s infrastructure including the customer base of the parent, its established relationships and the infrastructure of the parent in its formative years. In addition, the operating parent can be a forgiving beta customer and a reference.

From the standpoint of the parent, corporate venturing provides a framework for innovation, access to new markets or monetizing a market niche – even if it takes years before the new entity stands on its own. Worst case, corporate venturing can lead to new products and services for the parent.

Corporate venturing does, however, require patience and, often, a willingness to let the developing entity operate under different standards. While the parent company must support the efforts, internal corporate venturing activities are often best accomplished when the innovators on staff are given a certain amount of operational freedom.

How do you know if your company is right for internal corporate venturing? From a review of companies formed via corporate venturing, a set of conditions and best practices can be seen.

 

Conditions that foster internal corporate venturing market success include:

  • Deep knowledge and experience in a market niche by the parent and leadership team.
  • The operating company’s support for innovation, including a willingness to let new ventures mature at a realistic pace.
  • Existence of a solid customer base that can be accessed by the new entity. This is key, because it lowers the cost of bringing in revenue. 
  • Ability to scale the new entity through technology rather than through people.
  • Once developed, an ability to have a substantial price advantage against existing solutions.
  • The parent’s reputation and stature in the marketplace as an innovator lend credibility to the new venture.
  • Strategic and broad vision that ponders whether a corporate developed “solution” can be commercialized into the broader market.

 

Best practices of internal corporate venturing include:

  • Use corporate resources and expertise to hone the new idea.
  • Formalize your corporate venturing activities.
  • Establish and support a sufficiently separate brand identity for the new entity.
  • Plan transitions thoroughly to ensure the survival of the venture as an independent.
  • Maintain accountability without suffocating the innovative spirit of the new venture.
  • Tap into the expertise of industry peers for feedback. That group is also your first set of customers.
  • Use marketing skills to position the new venture as independent at the appropriate time.

 

Take a look at your company to see whether it has the right stuff for corporate venturing. With a formal, strategic approach, complemented by the efficiencies of today’s web-based software technologies, your ideas could lead to great rewards.

Kelley Starr is president of Thin Air Software, based in Wauwatosa. He is a contributing writer on technology and business strategy topics. Thin Air Software provides custom software engineering, outsourced Web product development, and managed services for its clients and partners. He can be reached at kelley.starr@thinairsoftware.com.

 

 

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