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Can Big Companies Become Successful Venture Capitalists
 

Can Big Companies Become Successful Venture Capitalists

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IT’S HARDLY SURPRISING that big companies are attracted to the venture capital (VC) model for new business development. Its track record is enviable: the industry as a whole outperformed the S&P 500 ...

IT’S HARDLY SURPRISING that big companies are attracted to the venture capital (VC) model for new business development. Its track record is enviable: the industry as a whole outperformed the S&P 500 in five of the past six years, and US venture-backed companies have raised more than $40 billion in initial public oƒferings since 1990. Moreover, the model tempts management with the prospect of improved access to business innovation, better retention of entrepreneurial talent, and greater growth in demand for core products.

Yet more oƒten than not, big company attempts at applying the VC model produce disappointing results. Most find it diƒficult to establish the systems, capabilities, and cultures that make good VC firms successful. Even so, big companies can apply the VC model successfully with the right approach and expectations.

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    Can Big Companies Become Successful Venture Capitalists Can Big Companies Become Successful Venture Capitalists Document Transcript

    • STRATEGYCan big companiesbecome successfulventure capitalists?50 THE McKINSEY QUARTERLY 1998 NUMBER 2
    • Maybe, but first they need to understand what makes the model workFour good reasons to try… pick only onePaul Brody and David Ehrlich T’S HARDLY SURPRISING that big companies are attracted to the ventureI capital (VC) model for new business development.* Its track record is enviable: the industry as a whole outperformed the S&P 500 in five ofthe past six years, and US venture-backed companies have raised more than$40 billion in initial public oƒferings since 1990 (exhibit). Moreover, the modeltempts management with the prospect of improved access to businessinnovation, better retention of entrepreneurial talent, and greater growth indemand for core products.Yet more oƒten than not, big company attempts at applying the VC modelproduce disappointing results. Most find it diƒficult to establish the systems,capabilities, and cultures that make good VC firms successful. Corporatemanagers seldom have the same freedom to fund innovative projects, or tocancel midstream those that clearly won’t live up to promise. Their skills aretypically honed for managing mature businesses, not nurturing startup eƒforts.And they lack vital contacts in the startup community.Even so, big companies can apply the VC model successfully. Considersoƒtware manufacturer Adobe Systems, which launched a $40 million venturefund in 1994 to invest in companies strategic to its core business, such asCascade Systems Inc and Lantana Research Corporation. So successful hasthis eƒfort been in boosting demand for its core products that Adobe recentlylaunched a second $40 million fund.If a firm is to apply the VC model successfully, it must first understand thosecharacteristics of the model that are essential to success, and then tailor itsVC program to its own circumstances without losing sight of these essentials.Above all, it needs to be absolutely clear about its reason for launching the≠ For the purposes of this article, we focus primarily on startup or early stage VC financing.We would like to thank Nobuo Domae, Doug Harned, Wolfgang Huhn, Sarah Kaplan, TetsuoKomori, Jürgen Laartz, Seongyeon Lee, Wayne Pietraszek, Eberhardt Schmidt, Lothar Stein,Sungwon Suh, and Jim Wendler for their contributions to our thinking.Paul Brody, formerly a consultant in McKinsey’s Los Angeles oƒfice, is a specialist in high-technology markets at i2 Technologies; David Ehrlich is a consultant in the Kuala Lumpuroƒfice. Copyright © 1998 McKinsey & Company. All rights reserved. THE McKINSEY QUARTERLY 1998 NUMBER 2 51
    • CAN BIG COMPANIES BECOME SUCCESSFUL VENTURE CAPITALISTS?Venture capital’s track record Annual returns 1991–97 Funds raised in US venture-backed IPOs Percent $ million US VC industry 1980 420 S&P 500 Top VC firms earn 1981 770 1992 11.6 an ROI 1982 548 7.6 20–30% 1983 3,031 above 1993 18.8 industry 1984 743 10.1 average 1985 843 1994 13.1 1986 2,128 1.3 1987 1,839 1988 788 1995 49.5 1989 996 37.6 1990 1,188 1996 40.3 1991 3,732 22.9 1992 4,317 1997 28.7 1993 5,033 33.3 1994 3,581 Source: Private Equity Performance 1995 6,736 Database, April 1998, Venture Economics 1996 12,070 Information Services; S&P 500 Composite Daily Return Index 1997 4,750program. Is it to capture more value from strategic assets? To keep up withthe pace of innovation in a fast-moving industry? To boost demand for coreproducts? The answer has far-reaching implications for the design of aneƒfective program.Six essential characteristics of the VC modelSuccess in the venture capital industry rests on six essential characteristics.Each poses a challenge for managers in a corporate setting.Clarity of focusVenture capital firms have a simple goal: take a pile of money and make itbigger. Their steady focus on financial returns facilitates decision making:all VC professionals have the same ultimate objective, and their performanceis easily measured. In addition, VC firms usually have a clear idea of whatconstitutes an attractive investment. They are likely to focus on specificindustry niches; to look for business concepts that will excel if the industryevolves as they believe it will; and, most important, to insist on the presenceof a strong management team.Although corporate managers oƒten have just as clear a strategic focus intheir core business, they typically run into greater ambiguity with ventureprograms. Their biggest challenge is to establish clear, prioritizedobjectives. Simply making a good financial return is unlikely to besuƒficient, while other objectives – acquiring new technologies, enteringnew markets, reenergizing corporate culture – oƒten compete for attention.Moreover, corporate managers are unlikely to receive the regular exposure52 THE McKINSEY QUARTERLY 1998 NUMBER 2
    • CAN BIG COMPANIES BECOME SUCCESSFUL VENTURE CAPITALISTS?to new ideas that VC firms enjoy, and the criteria they use to evaluateideas are oƒten intolerant of the risks inherent in launching a new typeof business.Willingness to weed out the losers…Venture capital firms view each funding decision not as a project approvalbut as an option on future decisions. They reduce their exposure by investingin small increments until the key risk factors are resolved. With only one inten ventures becoming a hit, VC firms manage their portfolios ruthlessly,weeding out likely losers early. Cutting losses on failing ventures can make abig diƒference to overall returns.Abandoning ventures in this way has never been easy for large corporations,whose projects are oƒten underpinned by personal relationships, politicalconcerns, and vague strategic objectives. In addition, many make fundingdecisions as part of an annual budgeting cycle rather than in accordance withproject-specific milestones.…and support the potential winnersStruggling startups are oƒten in need of seasoned managers. “The realshortage is not ideas or money,” several VC firms told us, “it’s managementtalent.” The best VC firms supply both guidance and management resources.They oƒten sit on the boards of the companies in their portfolio, oƒferingadvice based on years of startup experience. They also search for and developlasting relationships with skilled entrepreneurial managers.Leading VC firms are renowned for their dedication to finding top talentfor their ventures. Kleiner Perkins Caufield & Byers hires entrepreneurialmanagers as CEOs in waiting, keeping them on hand for a portfoliocompany in need. Such firms also build up active networks with largecorporations, helping develop strategic relationships when a portfoliocompany is in need of manufacturing expertise, a specific technology, oraccess to a particular market.Rich in talent though they may be, large corporations oƒten struggle to findmanagers with startup experience. Approaches that work well in a corporateenvironment may fail when decisions need to be made quickly on scantinformation. Worse, the most appropriate corporate partner for a new venturemay turn out to be a competitor of the parent company, making it diƒficult forthe venture to secure access to important capabilities.Knowing when to quitThe fourth characteristic that distinguishes the successful VC firm is areadiness to terminate investment when the firm can no longer bringdistinctive value. Most VC firms boast expertise in managing startup risk THE McKINSEY QUARTERLY 1998 NUMBER 2 53
    • CAN BIG COMPANIES BECOME SUCCESSFUL VENTURE CAPITALISTS?and growing new companies, but readily admit their inexperience when itcomes to adding value to mature businesses.Corporate managers, on the other hand, usually do possess the skills tomanage a venture that has reached maturity. They are oƒten justified inkeeping and supporting a business that has encountered growth pains. Evenso, a change in competitive dynamics sometimes makes getting out the rightdecision. Unfortunately, the option of spinning oƒf or selling a venture thathas run into trouble is seldom considered until it is too late.Flat organizations and quick decisionsVenture capital firms share several attributes with the startups they fund.They tend to be small, flexible, and quick to make decisions: even majorinvestments can be concluded in a few weeks, perhaps days. They have flathierarchies and rely heavily on equity and other incentive pay.Corporate managers usually operate in a more traditional setting. Decisionscan take months, especially if large sums are involved. Where oƒfered, equityand incentive pay rarely reach the share of overall compensation or the rawamounts to which VC professionals are accustomed.Reputation as attractive capital investorsVC firms rely heavily on their reputation and networks of personal contacts.These are invaluable assets in identifying and gaining access to promisingventures, and in finding skilled management to help lead them. Once a VCfirm has established itself as a successful incubator, it will be among the first togain access to the best new ventures and the hottest management talent.Most corporate managers, by contrast, lack strong networks of contacts inthe startup community. Worse, corporations have a poor reputation as startupinvestors; one entrepreneur describes them as investors of last resort. Theyare notorious for imposing their bureaucracy on the companies in which theyinvest, distracting busy entrepreneurs from getting their products to market.Designing a tailored programThese diƒferences between VC firms and the typical corporation suggest thatmost big companies face an uphill struggle in applying the VC model. Thekey to success lies in tailoring a VC program to their particular circumstancesand capabilities, while keeping in mind the essentials just discussed.Why are we doing this?Clarifying and setting priorities for the objectives of a venture program is adiƒficult but essential first step. When conflicts over goals remain unresolved,unintended consequences may ensue.54 THE McKINSEY QUARTERLY 1998 NUMBER 2
    • CAN BIG COMPANIES BECOME SUCCESSFUL VENTURE CAPITALISTS?Consider Apple Computer, which established a venture program in 1986 withthe dual objectives of earning a high financial return and supporting third-party development of Macintosh soƒtware.*Determined to avoid the mistakes of other corporate venture programs,Apple modeled its compensation mechanisms, decision criteria, and operatingprocedures on those of top VC firms. Thus, while the venture groupconsidered Macintosh support an initial screening factor, its funding decisionsand day-to-day management were aimed at optimizing financial returns.The result was an internal rate of return of approximately 90 percent over fiveyears, but little success in improving the position of the Macintosh. Theprogram’s managers later admitted that the strategic potential of theirinvestments had not been realized. Moreover, the financial returns, thoughattractive, had minimal impact on the company’s overall performance.Seen in context, a venture program is simply one instrument for pursuing acompany’s business mission. As such, its primary objective should clearlyreflect the company’s overall strategy. In our experience, only four objectivescan legitimately claim to do so:Improve the capture of value from strategic assets. Improving assetutilization is most appropriate for companies able to exploit traditional assetssuch as world-class manufacturing skills, extensive distribution networks, orstrong brand equity. If such a company lacks enough good product ideas tocapture full value from its assets, a venture program can provide a morerobust flow of ideas and the champions needed to turn them into marketableproducts. Large pharmaceutical companies such as Merck and new productproliferators like 3M have pursued venture programs for this reason.Improve the capture of value from good ideas. Deriving more value fromideas is most appropriate for companies that compete in a knowledge-intensive industry and are good at generating ideas, but struggle to bringmany of them to market. Their diƒficulty could be, simply, such an abundanceof ideas that none gets adequate attention, or, more seriously, an inability tomatch the speed to market of entrepreneurial rivals. (Xerox PARC in the1970s is an oƒten-cited example of the latter.) A well-tailored venture programcan provide an avenue for pursuing a greater number of ideas, or inject amuch-needed dose of market focus and entrepreneurial spirit.Respond more competitively in a rapidly evolving industry. Timelyresponse can mean survival. Incumbents in fast-moving industries may beunable to innovate quickly or broadly enough to defend themselves against≠ “Apple Computer – Strategic investment group,” case study, Stanford Graduate School of Business, 1995. THE McKINSEY QUARTERLY 1998 NUMBER 2 55
    • CAN BIG COMPANIES BECOME SUCCESSFUL VENTURE CAPITALISTS?new competitors. They may fear cannibalizing leading products, be uncertainas to which way the industry will evolve, or simply have too conservative aculture. No matter which, a venture program can provide a platform to boostsuccessful product innovation. Moreover, strategic bets can be used as adefence mechanism to keep competitors from accessing key evolving tech-nologies. Cisco Systems is one company that has successfully pursued aventure program to gain control of important technologies.Support demand for core products. This objective applies when thedemand for a company’s core products is aƒfected by the evolution of aseparate industry niche. A well-structured venture program can be useful inshaping the direction of this evolution. Adobe Systems and Intel have bothpursued venture programs to support new technologies that drive demand fortheir own core products.Some might claim that earning superior financial returns is a legitimateprimary objective for a venture program. However, since a company’sshareholders can decide for themselves to invest their money in a venturefund, either directly or through institutional investments, there is no obviousreason why they would wish the managers of their corporate capital to dothe same.Internal or external programs?Once a company has defined the objective of its venture program, it mustdecide whether an internal or external program best serves its purpose.Internal venture programs replicate all the characteristics of the VC modelwithin the company itself (although some involve a partial spinoƒf). Aventure board of company managers is set up to act as an internal VC firm,and employees submit business plans to this board for funding. Externalventure programs, on the other hand, involve establishing a company fundfor making investments in the wider startup community, either directly orvia established VC firms.Although both approaches can help companies acquire new business lines, theydiƒfer in the other objectives they support and in the capabilities required forsuccessful execution. Choosing between them calls for careful consideration.Internal programsInternal programs are most appropriate for companies seeking to increasethe volume of ideas they generate, to capture greater value from their ideas,or to increase internal entrepreneurialism. Such programs can help a com-pany gradually transform its skills and culture as employees are oƒferedentrepreneurial opportunities and see the rewards that accompany success-ful innovation.56 THE McKINSEY QUARTERLY 1998 NUMBER 2
    • CAN BIG COMPANIES BECOME SUCCESSFUL VENTURE CAPITALISTS?But internal programs can run into trouble if few of the required capabilitiesexist in house. Whereas a company with distinctive skills in product engi-neering, say, can use a venture program to improve the market orientationof product development teams, a world-class manufacturer with littleexperience of product innovation may struggle to generate an adequatevolume of new product ideas.To implement an internal venture program successfully, companies mustadopt best practices at each of the four phases of investment:1. Gathering ideas. Just as VC firms use industry expertise to narrow thefield of the ideas they consider, venture boards should set boundaries for ideageneration. This helps focus employees’ eƒforts on opportunities that willmake the most of the company’s strengths and knowledge and further theventure program’s primary objective. Venture boards should also clearlydefine and communicate their criteria for evaluation.When idea generation needs priming, venture boards should resist shortcuts;brainstorming alone seldom unleashes enough great ideas. Instead, theyshould adopt a systematic process involving three steps: breaking traditionalpatterns of thinking through creativity exercises or immersion in newcultures; increasing knowledge through prolonged exposure to customerneeds; and generating ideas through structured exercises alternating withunrelated diversionary activity. Lastly, they should be sure to get thecompany’s most innovative employees involved, even if it means taking themaway from other priorities.2. Evaluating ideas. Two important ingredients are oƒten missing in thisphase: experience and impartiality. VC professionals gain their experiencethrough years of apprenticeship, and have a strong incentive to makeimpartial decisions. Corporate managers, on the other hand, rarely bring suchrelevant experience to bear, and may find it diƒficult to ignore the broaderpolitical context of their decisions.The best way to inject experience and impartiality into the evaluation processis also the hardest: finding a seasoned VC professional to take part. Anotherapproach to boost impartiality is to establish powerful incentive systems forthe venture board: for instance, tying members’ compensation to the long-term performance of the ventures they support. Unfortunately, this too can bediƒficult to implement, requiring complicated schemes for assessing ventureperformance and accommodating changes in a board member’s position oremployment status over time.3. Building business value. Venture boards, like VC firms, can improve theirperformance by weeding out likely losers and throwing their weight behind THE McKINSEY QUARTERLY 1998 NUMBER 2 57
    • CAN BIG COMPANIES BECOME SUCCESSFUL VENTURE CAPITALISTS?likely winners. To ensure that losers are spotted early, they should set up asystem of multiple funding “gates,” making only incremental investments andencouraging venture teams to resolve key uncertainties between decisions.Even then, venture boards may find it diƒficult to deny additional funding toan existing program. Not only can political considerations get in the way, butboard members may be reluctant to cancel funding for a highly motivatedand skilled team. For this reason, it is important to find ways to reward “goodfailures” generously, and to develop a clear set of post-venture career options.This will encourage risk taking in an environment where many ventures fail,and make it easier for board members to terminate projects pursued byenthusiastic teams. Since many breakthrough innovations occur only aƒterrepeated failures have refined an entrepreneur’s understanding of a problem,a venture program that does not reward learning through failure has littlechance of success.To support likely winners, venture boards need to play a diƒficult double role:supplier of resources and protector of the venture environment. The supplierrole can be vital. Rarely will a newly formed venture team have all the skillsit needs. Sometimes the missing capabilities can be found in house; if so, theventure board must use its influence to free a star performer from otherduties. Or perhaps the necessary skills can be acquired only throughcooperation with a competitor; in that case, the venture board must facilitateeƒforts to work with the rival, despite opposition from other managers.The protector role is equally important. The venture board must establish aculture that is truly entrepreneurial, perhaps much more so than elsewhere inthe company; it may feature new decision-making rules, work norms (dresscodes, working hours, hierarchy), and incentives. In such cases, success willdepend on a healthy separation from the parent company, as too frequentcontact can inhibit the formation of a new culture.The board will also need to design an incentive system that motivates theventure team to behave like entrepreneurs – probably working longer hoursand taking bigger risks, almost certainly becoming passionately involved inthe success of the venture. An appropriate system will include non-financialelements, such as opportunities for advancement, prestige, and greater freedomat work, as well as financial rewards. These systems can be diƒficult to design:the earnings of a new company in its early years are a poor indication of valuecreation. Moreover, the venture board may have to defend the incentive systemagainst resentment from employees outside the program who are not oƒferedthe same benefits.Lastly, there are times when a venture poses a threat to an existing productline. It is at such times that the venture is of greatest strategic value, and the58 THE McKINSEY QUARTERLY 1998 NUMBER 2
    • CAN BIG COMPANIES BECOME SUCCESSFUL VENTURE CAPITALISTS?board’s protector role most essential. As one executive commented, “If I don’tcannibalize my own products, someone else eventually will.”One proven way to help venture boards succeed in their double role is toappoint a respected senior executive to lead the program – one who has thepolitical weight both to obtain internal resources and to fend oƒf opposition.It is critical that this executive have deep insight into the features of the VCmodel and a passion for the culture of a startup. Otherwise, it is all too likelythat the venture’s culture and processes will come to resemble those of theparent, sharply reducing the chance of success.4. Exiting. As mentioned earlier, VC firms usually sell their interest before aventure’s initial success has run out of steam. Large companies, on the otherhand, may have just the expertise needed to counter strategic challenges or tooptimize the business system as the market matures. They should determinetheir long-term strategy – absorption, spinoƒf, or sale – only aƒter carefulconsideration of a few key questions:• How much value can be created by leveraging the parent’s capabilities(for example, procurement and manufacturing scale, strategic planningstrength, distribution channels) more eƒfectively?• How important to the venture’s long-term success is preservation of itsentrepreneurial culture?• Would the venture be more valuable to a company with a diƒferent set ofskills, assets, or relationships?• Can the venture be broken up into diƒferent businesses – for instance, aproduct development business, a licensing business, and a marketingbusiness? If so, what type of organization would be the most natural ownerof each?External programsCompared with internal programs, external programs can provide access toa wider variety of new products and technologies and generate betteropportunities for technology and skill transfer. They also oƒfer a chance toblock competitors from these very benefits. Finally, they represent a saferfinancial bet, allowing a company both to spread its investments across amore diversified portfolio and to leverage more easily the skills of professionalVC firms. External programs are thus the better solution for companiesseeking to import good ideas, play catch-up in a rapidly evolving industry,hedge their bets across a broad array of nascent technologies, or shape thedevelopment of a strategically important adjacent industry.The companies most likely to succeed at external investment programs arethose that already have distinctive skills in forming partnerships and alliances THE McKINSEY QUARTERLY 1998 NUMBER 2 59
    • CAN BIG COMPANIES BECOME SUCCESSFUL VENTURE CAPITALISTS?or strong relationships in the VC or startup community. Companies undercapital constraints, on the other hand, may prefer to avoid investing throughmultiple VC firms, since bargaining leverage can be attained only by meansof a large-scale capital commitment.The first step in an external program is to establish the role that VC firmsare going to play in the process. Companies have four options:• Going it alone: setting up their own VC firm in competition with others.• Co-venturing: forming a partnership with a VC firm on a specific invest-ment. This is usually done when the company can bring a strategic asset to thetable to increase the value of the venture.• Launching a “dedicated fund”: hiring a VC firm to manage a fund in whichthe company is the sole investor.• Investing in a “pooled fund”: investing in a standard VC fund along withother investors.The best way to understand the advantages and disadvantages of each is torevisit the four phases of venture investment:1. Gathering ideas. Gaining access to good venture ideas will be tough forcompanies that decide to go it alone. Most companies lack good reputationsas startup investors and have few relevant relationships. Those entering thebusiness on their own may well get access only to those deals already turneddown by top VC firms.Co-venturing can give a company better access to great ideas, while ensuringthat its own investment criteria play a role in selection. However, the numberof opportunities the company sees may be insuƒficient to meet programobjectives, since it will be asked to co-venture only when a VC firm believesit has a unique contribution to make.Dedicated funds provide a company with many benefits: the option of lever-aging professional VC capabilities, exposure to a wide range of relevant busi-ness ideas, and full access to portfolio company management. Their biggestdisadvantage is that since the company is the only investor in the fund, it mustprovide all the capital. The scale of the commitment (typically $10 to $50million) may impair the company’s ability to invest in a large number ofventures or other programs (for example, co-venturing or pooled funds).Pooled funds also make it possible to leverage professional VC capabilities,while oƒfering exposure to the greatest number of deals. A common downsideis severely restricted access to portfolio company management. To protectthe entrepreneurial environment, VC firms usually exclude direct access as an60 THE McKINSEY QUARTERLY 1998 NUMBER 2
    • CAN BIG COMPANIES BECOME SUCCESSFUL VENTURE CAPITALISTS?investor privilege. Indeed, a company may find that the returns from itsinvestment in a pooled fund are purely financial, with no access to portfoliocompanies or information about other deals seen by the VC firm.2. Evaluating ideas. When pursuing a go it alone strategy, managers shouldreplicate the best practices of top VC firms: develop deep expertise in thetarget area, form strong relationships in the startup community, and establishclear evaluation criteria based on program objectives. Hiring top VC talent ishighly recommended, though diƒficult.If a company chooses to invest with the assistance of established VC firms, itmust also identify target firms and develop an eƒfective negotiating platform.Although there are a great many VC firms in the market, only a few willbe attractive as investment partners. Most European and Asian firms, forinstance, provide funding to larger companies, acting more like merchantbanks or buyout firms than providers of early-stage capital. Moreover, mostfirms specialize by industry and region. And notably, there are only a few topVC firms that consistently implement the practices we have discussed.Having identified the firms with which it wants to invest, a company facesan even bigger challenge: developing a negotiating platform that will attracta top VC firm while still promoting its own objectives. Working with VC firmshas recently become popular, and hordes of companies are now vying to workwith the few top firms. Amid such fierce competition, an eƒfective negotiatingplatform has become vital.Discussions with VC firms have identified three characteristics that make acompany an attractive investment partner:• The willingness to invest a large capital sum ($5 million or more)• The ability to bring value to portfolio companies through, for example,market access, manufacturing expertise, or proprietary technology• The qualities of a good VC investor: able to make quick investmentdecisions, oƒten within a few weeks; tolerant of the natural ups and downsof startup investing; consistent in investment goals and strategy over time;respectful of the environment of the entrepreneur.Just as important, companies should be aware that the interests of a VC firmcan easily conflict with their own. A company may be seeking technologytransfer opportunities, for instance, while the last thing the VC firm may wantis for a portfolio company to give away a valuable technology.Companies must therefore make clear at the outset what they expect in returnfor their participation. They can then safeguard their interests contractually, THE McKINSEY QUARTERLY 1998 NUMBER 2 61
    • CAN BIG COMPANIES BECOME SUCCESSFUL VENTURE CAPITALISTS?or at least avoid investing in a losing proposition. They may want to addresssuch issues as access to business plans seen by the VC firm, contact withportfolio companies, access to financing at preferred rates in later rounds,and the blocking of direct competitors from similar privileges.3. Building business value. To build value through an external program,managers must develop mechanisms for pursuing their own investmentobjectives without damaging the interests of their ventures. If a companyimposes too heavily on a venture in which it has invested, it may soon seevaluable entrepreneurial talent walking out the door. Conversely, if itsapproach is too hands-oƒf, it may find that its objectives are not being met.Companies should pursue a middle road, securing their objectives withoutimposing undue hardship on their ventures.Many companies will also need to overcome the “not invented here”syndrome, a common barrier to successful technology transfer. One reasonwhy Apple’s venture program did not succeed in its strategic objectives wasthat internal business divisions refused to adopt venture companytechnologies, preferring to develop similar technologies for themselves, oƒtenfrom scratch. As a result, leading-edge products from some venturecompanies focused on the more popular PC platform, never including aMacintosh-compatible version. In this way, both Apple and its venturecompanies were robbed of an important market opportunity.Apple subsequently established a scheme more clearly focused on supportingthe Macintosh. In this strategic loan program, Apple’s line managers wereencouraged to sponsor loans to companies developing products for the Mac.Although the program’s financial returns did not match those of the originalventure program, managers considered it far more successful in meetingstrategic objectives.4. Exiting. Managers of an external program should develop a set of exitcriteria based on the program’s objectives. If these are primarily financial,managers should adopt the same philosophy as VC firms. When a companyhas invested through a VC firm, this decision is implicit.If the objectives are not financial, managers should predetermine conditionsfor terminating, continuing, or even increasing their investment. A financialloss can be tolerated for quite a long time if important strategic objectivesare being met. But too oƒten a company holds on to an investment long aƒterit should quit, simply because of inertia and undefined exit criteria.The venture capital industry has attracted much attention thanks both to itshigh financial returns and to its visible successes in spawning innovative new62 THE McKINSEY QUARTERLY 1998 NUMBER 2
    • CAN BIG COMPANIES BECOME SUCCESSFUL VENTURE CAPITALISTS?businesses. Many corporations have taken note, and are understandablymaking eƒforts to apply the VC model to their own business developmenteƒforts. But the model can be more diƒficult to apply than it may seem at firstglance. For the best results, companies must truly understand what makes itwork, what benefits can be achieved, and how it might be tailored to theirspecific circumstances. THE McKINSEY QUARTERLY 1998 NUMBER 2 63