The excuses that companies use to avoid venturing tend to fall into three categories: that venturing is irrelevant to many businesses; that it is too expensive; and that it is too risky. Let’s look at each category in turn:

VENTURING IS IRRELEVANT TO OUR BUSINESS

Excuse #1: Ventures are applicable only for radical innovation.

To many managers, “corporate venturing” conjures up visions of businesses experimenting with edge-of-the- envelope technologies, taking their companies out into a brave new world. In fact, ventures based on disruptive technologies, such as the Internet proved to be, or on other radical innovations are the hardest to pull off because they require change in every part of the business.

While there are certainly times when companies need to test completely new ideas, they also should pursue a wide range of less ambitious ventures that have a higher probability of success. These ventures: build on existing corporate strengths rather than trying to develop new ones; cross into immediately adjacent markets and areas of expertise; address customers’ existing needs; and improve profitability in existing markets.

Eastman Chemical Co. [www.eastman.com], whose venturing program has been extremely successful, began with this sort of approach. For instance, it used ventures to build on one of its longstanding strengths—the ability to move materials by land, sea, or air. Eastman picked up new ideas on logistics by taking equity investments in an online chemical exchange and a transportation-management software company. Eastman also set up partnerships and joint ventures with other online exchanges and a logistics Web site.

The Eastman approach is even more important when the economy goes south. What is the first thing a company will cut when in a financial crunch? Expensive, cutting-edge projects with no immediate path to profitability often are high on the short list. Indeed, a number of companies, including several financial-services concerns, killed ambitious, highly innovative ventures in 2000.

A company that overly weights its venture portfolio with attempts at radical innovation is comparable to an investor holding an aggressive mutual fund. The portfolio can produce high returns but also can suffer steep declines. A balanced corporate-venture program, encompassing a broad range of degrees of innovation, will be far more likely to span downturns as well as upturns.

Excuse #2: Venturing isn’t for mature, brick-and-mortar companies.

Many executives in mature, brick-and-mortar companies dismiss venturing as applying only to technology companies, which place such a premium on rapid innovation. Unfortunately for these executives, technology now plays a crucial role in every business and will continue to gain importance, forcing everyone to innovate faster.

Substitute a few words in what these brick-and-mortar executives are saying and you would hear the same excuses businessmen used at the dawn of other economic periods. When Henry Ford created the assembly line, how many companies resisted the cost-efficient technique on the grounds that it didn’t allow for the individual craftsmanship they were known for?

Corporate venturing isn’t for large brick-and-mortar companies? Tell that to Wal-Mart Stores Inc. With a million employees, more than 2,500 stores, and more than a million customers a week, the retailer nevertheless set up an e-commerce site, Walmart. com, as a venture with a separate board of directors and management, including a chief executive and other senior executives recruited from outside the company. Once the venture learned what customers sought, refined its business model, and hired the right talent, Wal-Mart bought the stock in the venture that it didn’t already own and folded Walmart.com into the company’s main operations.

Corporate venturing is only for high-technology companies? Tell that to General Mills Inc. [www.generalmills.com]. In 2000, the food company invested in an online market-research company, MarketTools Inc. [www.markettools.com], which gives it the capacity to conduct three-quarters of its extensive consumer surveys online (compared with one-tenth of them in 1999). With the venture, General Mills spends 45% less on surveys.

Corporate venturing is only for companies addressing new or immature markets? Tell that to United Parcel Service of America Inc. [www.ups.com], which is investing aggressively in new transportation technologies to improve its core business. The delivery service also is investing in ventures that aim to produce software that will let UPS integrate its information systems more effectively with customers and partners, and help everyone manage their supply chains better.

There is only one kind of company that isn’t suited for venturing: a company not committed to growth and renewal.

VENTURING IS TOO EXPENSIVE

Excuse #3: Value is difficult to measure and tough to capture.

Many Wall Street analysts place no value on corporate venturing programs. Instead, they treat such programs as poorly run research-and-development departments. When a program produces a success, it is rationalized away as a one-time event. Executives, focused on maximizing the stock price of their company, adopt the Street’s perspective.

Wall Street’s emphasis on quarterly financial results creates another problem. Because corporate-venture groups often take large stakes when investing in outside companies, it often is difficult to liquidate such investments quickly. Thus, executives don’t see such investments as helping deal with the constant pressure for short-term results.

The focus on Wall Street’s demands misses the point of corporate venturing—creating strategic value.

Agilent Technologies [www.agilent.com] had it right when it launched Agilent Ventures, its first venture fund, in early 2001 and said the fund would invest $100 million a year. “We’re going after [technologies] we think can bring us some strategic benefit, instead of primarily financial benefit,” explained Maximilian Schroeck, Agilent Ventures’ managing director. Agilent was looking for investments in companies that provide the components underlying communications networks, as part of its product strategy in the optical and wireless networking business.

Similarly, New York investment bank JPMorgan Chase & Co. [www.jpmorgan.com] views its venture arm, LabMorgan, as a vehicle to locate and develop technologies that will bolster its “e-finance” strategy. In late 2000, for example, LabMorgan invested in a start-up business that gives wealthy customers an online overview of all of their holdings, across financial institutions. JPMorgan’s strategy team had determined that catering to people with high net worth would be pivotal to the firm’s growth.

Sony Computer Entertainment America, a division of Sony, spun off an internal venture as a separate company in 1998. Sony was focused on developing console and CD-based games, especially those for its popular PlayStation 2. It worried that it couldn’t give enough attention to the development of EverQuest, an online subscription game, so it made the game the basis for the new company, Verant Interactive Inc. [www.verant.com]. Sony retained an option to repurchase Verant and soon was glad it had, for while Sony had been concentrating on expanding its established markets, Verant quietly had been creating a new market. EverQuest—a fantasy game in which each subscriber adopts a role and interacts with others, perhaps by cooperating with others on quests—reached its first-year goal for subscribers in the first week. Almost a quarter of a million people signed up to pay to play the game in the first six months. Another division of Sony repurchased Verant in May 2000 and gave Verant control over all the division’s online game businesses. The move bolstered sales and revenue, but the biggest advantage was strategic: Through its Verant venture, Sony established early dominance in the market for a new, fast-growing type of game. [For more information, see “Homeward Bound,” Context, June/ July 2001.]

Excuse #4: R&D does the same thing at lower cost and with less risk.

Some companies see venturing as a duplication of strategic measures they already budget for, principally research and development. But this just isn’t the case. Corporate venturing and R&D aren’t alternatives. They complement each other.

As an investor, a company can tap into more new, strategic technologies than is possible through R&D alone. At the same time, a failure for one of those investments hurts less than for a big internal project. Roger Mowen, Eastman Chemical’s chief investment officer and senior vice president of global customer services, says that if one of his venture investments collapses, it won’t damp corporate morale the same way that closing an in-house project would. “I can more easily walk away and move on to the next one,” Mowen says.

Pharmaceutical companies, known for their reliance on internal R&D, have taken this complementary approach for more than a decade. GlaxoSmithKline (when it was SmithKline Beecham) used its internal venture unit to become an early investor in Synaptic Pharmaceutical, a maker of drugs that modulate the nervous system; Corixa, which concentrates on treatments for cancer and infectious diseases; and Cogent Neuroscience, which develops drugs that target diseases of the brain and nervous system. More recently, in late 2000, Merck & Co. and Eli Lilly & Co. announced large venture-capital funds that are designed not to invest in new drug development but rather to focus on the commercialization and distribution of drugs over the Internet.

“We are separate from R&D,” says Per Lofberg, head of Merck Capital Ventures. “We are focused on investments that can help the business side of the business.”

Excuse #5: Venturing is affordable only in a bull market.

The cost argument against venturing gathers steam during an economic downturn. But “you can’t just do it in good times,” says Mowen, of Eastman Chemical. “You have to have continuity over a number of years or else there is no point starting.” In fact, in the economic cooling at the end of the 20th century, the companies with the largest research and development budgets—computer-services provider International Business Machines Corp., software concern Microsoft Corp., and chip maker Intel Corp.—actually increased their spending. Many corporate venture groups argue that an economic downturn is the best time to invest, because valuations are reasonable.

A slowdown also may offer the opportunity to grab an advantage over competitors that are busy retrenching. When Belgian movie theaters took a battering at the hands of cable and videos during the 1980s, many theater operators cut back or went out of business. Bert Claeys, however, spent the time thinking about what was keeping people away from theaters. If customers wanted the comforts of home, then the company would provide them in a theater. The result was a new kind of movie theater, called Kinepolis, characterized by better seating and wide spacing, as well as huge screens and leading-edge sound and visual systems. In its first year of operation, Kinepolis drove a 40% increase in Brussels’s movie-going market, and captured half of that additional audience.

VENTURING IS TOO RISKY

Excuse #6: Corporate venturing burst along with the Internet bubble.

Until the Nasdaq Composite Index plunged almost 10% on April 14, 2000, companies viewed venturing as a vital corporate tool to secure a role in the “new” economy. In the minds of many, the market decline changed all that. Suddenly, the argument that corporations had no choice but to race Silicon Valley start-up businesses to the outer edge of innovation no longer seemed so compelling. Suddenly, the temptation to sit back, cut costs, and wait to see what the future might bring didn’t seem so much like whistling past the graveyard.

The arguments are easy to understand. Why go out on a limb that already had collapsed underneath formerly menacing new competitors? When the Street demands results this quarter, why concentrate resources on something that might not yield quantifiable results for several quarters—if then?

Investment patterns by corporate-venture funds, however, show there still is optimism about corporate venturing. Venture Economics estimates that at the peak, in 2000, 16% to 17% of all venture financing came from corporations, up from 2% in 1994. Despite all the subsequent negatives for corporate venturing, companies still provided 13.5% of all venture-capital investments through the third quarter of 2001. Intel, for example, said it plans to invest $1.3 billion in 2001, on a par with its venture investments the year before.

Many companies recognize that the underlying reasons for venturing haven’t disappeared suddenly. The level of investment still being made in corporate venturing in particular and in innovation in general makes it clear that any established company hoping to sleepwalk through a downturn runs the risk of being overtaken by wide-awake competitors.

Excuse #7: We tried corporate venturing, and it didn’t work.

When executives sometimes dismiss venturing by saying they tried it once, and it didn’t work out, the operative word is “once.”

Keep this in mind: Only one in 10 venture investments is likely to be a runaway success. Two others of the 10 will provide a normal return. The rest will fail. That means a company’s first venture will have a 70% chance of being unsuccessful. Companies that decide they will try one venture and only move to a second if the first succeeds may end up like Fireman’s Fund Insurance Co. (www.the-fund.com) which made substantial investments in two insurance e-businesses in 1999. When neither worked out, the insurer closed its venture office, shutting off an important avenue for innovation.

The only way to do venturing is to build a portfolio. If you make a wide range of investments, you aren’t taking on greater risk, you are managing the risk. Investing small amounts in many risky ideas can generate some steady, spectacular returns, even if individual investments don’t. While most investments may not pay off, the winners will more than cover the minimal losses on the failures. Silicon Valley does have something to teach big corporations about start-up businesses.

Look at it this way: Would any pharmaceutical company consider maintaining an R&D program that has only one research project? Of course not. Drug makers spread their R&D budgets over dozens of potential products, hoping to find that one blockbluster medicine.

Excuse #8: New ventures fail too often to be viable for us.

Perhaps the greatest challenge for some companies isn’t the fear of failure so much as their definition of it. When Thomas Edison produced the first light bulb that worked, he explained that he had made more than 200 previous attempts. “How did you feel about all of those mistakes?” a journalist asked him. “They weren’t mistakes,” he replied. “Every failure told me something that I was able to incorporate in the next attempt.”

That is exactly the attitude a company needs when it is trying to introduce something different and important. Ventures provide the opportunity to experiment, to learn without the risk of catastrophic failure, and to apply that knowledge throughout the entire organization.