Is Corporate Venture Dead - and Can Open Innovation Replace It?

Corporate support for research and development is down. It has been deemphasized by market imperatives focused on short term returns and compensation schemes based on metrics that require extremely focused investment.

The question is whether this injures the entire economy by withdrawing from circulation ideas that might benefit from operationally experienced corporate oversight rather than more financially driven venture investment. Collaboration such as the contract research organization (CRO) in pharmaceuticals is one answer. But in the networked present, there is hope for open innovation. The challenge is to what degree that distributed model can work in sectors beyond tech. There is reason to be hopeful, given the rise of collaborative software and a more permeable corporate culture.

Stefan Lindegaard comments in 15inno (hat tip Greg Satell):

"Once upon a time, we had many corporate venture units that invested in external projects as well as in internal projects from the corporate groups that they belonged to.

The number of units declined steadily during the last decade and it continues to do so in the aftermath of the financial crisis. One company that I have always admired is Danfoss Ventures, which is the corporate venture arm of Danfoss, a group with 26,000 employees working with refrigeration, air conditioning, compressors and more.

Unfortunately, Danfoss Ventures – my role model on corporate venture – is now dead. According to Executive Vice President at Danfoss, Nis Storgaard, this is about prioritizing resources where they make most impact.

“The past few years’ development has sharpened our understanding of how important innovation is – but also of how important it is to prioritize investments where they make most difference. And for us this is in our core businesses that have the knowledge of customers and markets as well as the required competences to turn innovative ideas into good business,” Nis Storgaard says.

I have heard similar explanations over the years and this makes sense. Or does it? It definitely raises some questions.

History has shown us that companies will only continue to grow and prosper in the long run if they are capable of morphing into new business areas. This does not have to be totally new business areas or industries. Core adjacencies could work if the borders are pushed continually.

A key benefit of a corporate venture unit is that it can create a safe heaven for smaller, entrepreneurial projects that otherwise would be killed by the larger group and it’s bureaucracy. In theory, a corporate venture unit should be a perfect model to make this happen and thus help companies morph into new business areas. I have been a strong believer in the corporate venture model. Now, I have second thoughts.
So many companies have tried to make this work and if not even Danfoss can succeed then something is wrong with the model.

The big question is what companies should do now. My take is that we will see hybrid models that incorporate the best of the corporate venture model while still having a strong focus on the core businesses. This has not really worked that well in the past, but now we can add a new element to this mix. That is open innovation.

Open innovation not only brings in more diversity and speed by combining internal and external resources. Open innovation also challenges the organization to change in order to deal with the complexity that comes from working with external partners. This will bring a more holistic approach to innovation. We will deal with many different kinds of innovation and we will involve more business functions than what we see today.

Open innovation and the diversity this brings can help companies morph into new business areas – as long as they can figure out how to turn odd-looking ideas into revenues and profits.