Corporate Venturing – Boom or Bust

Hardly a month goes by when you do not hear of an announcement of another large corporate jumping the venturing bandwagon. Like all things, this seems definitely the ‘in’ thing at present. No CEO would want to be caught dead on the ‘what are you doing for innovation’ question – a corporate venturing, whether as a incubator or an accelerator program seems to be the way to go. Depending upon the amount of spare cash they have – fancy offices are opened in Silicon Valley; if you have smaller budgets – then you need to make sure you at least have a prominent location in your home turf.

Although I readily admit I have no statistics to determine whether we have seen any real ‘successes’ from these endeavors, but from the murmurs I hear from insiders, and from some startups who have gone through the process – there seems to be a ton of hot air. There are several reasons for this – but I want to put some thought on the basic structural issues.

For most if not all – this is not a management priority. Sure, you definitely see the entire management with all smiles for the inauguration event, but dig deeper and one realizes that this is perhaps only of peripheral interest. Whenever such a situation occurs, this is a disaster waiting to happen. At every downturn, or ‘consolidation’ in management speak the incubator runs the risk of having its funding severed – cutting the very lifeblood it needs to survive.They are typically managed like the large parent. Many corporate incubators, although starting with the promise of being independent  in the end are closely managed – and in many times staffed by personnel from the parent. While in theory this is not such a bad thing, reality is that a startup, seed business is very, very different from the life at a corporation. What you hence end up receiving is either too many processes or procedures, or some cut & paste lean copy of existing corporate structures (this is what the management is comfortable with remember!). This to a large extent, serves to burden the startup – at worse, frighten away good ones.

What it does do however -seems to boost the rating of the company, in particular its management in front of its share-holders. Who doesn’t like an ‘innovative firm’

The result is that many of these firms literally spend a good deal of money publicizing themselves. Maybe this is a strategy which does help the company’s share price!

The management at these corporate incubators receive a salary…. why is that important you ask? well – i call it the ‘getting wet’ problem. Managers are made just too comfortable in the venture. This makes them less likely to take risks – since well, they don’t have anything to loose. Behavioral science teaches us just that, people fear losing a lot more than they enjoy winning. Try asking a corporate venturing manager to take a Euro 10K salary per annum – with the possibility of an endless upside (and downside) … you get the story

If these hypothesis are right, it does lead to the credible possibility that many of these ventures are on life-support, rather than thriving. And worse still – at the sight of the next roller-coaster ride in the economy – many will simply be left to rot. Pity – given independence, a strong (and incentive driven) management and the freedom to fly (even at the cost of cannibalizing the parent) – we may yet see a jewel emerging from this.

Have to admit – I do not want to be a naysayer here, but if things do not change, and soon…. it may only be a matter of time….

Berlin – from humble beginnings to the innovation hub of Europe?

If the number of startup’s can be used as a proxy, then one could contend that Berlin is the place to be. Walk down Linienstraβe or any of the ‘start-up’ pockets and you will find the streets and cafes bustling with young entrepreneurs, computer programmers and the likes. There is this air of youthful exuberance and unbridled optimism that each small start-up is on to something big. Same goes with their youthful sponsors – many of whom have successfully launched and sold their first startup for millions of Euros and are eager to make this newly found wealth work for them by investing into new and hopefully promising enterprises.

However, if I look towards the type of start-ups then one does see a discernible pattern, one which I would like to ponder on a bit. Most of these firms, I daresay a significant majority are geared towards e-commerce, and among these a good number are those that imitate successful firms abroad. Nothing intrinsically wrong in this as well – if you read entrepreneurial literature it is full of statistics indicating that being able to copy (with modifications) a proven model overcomes many of the barriers to succeed. So you have everything from a Taxi app, to an e-Tailor and the likes.

That brings me to the multi-million dollar question – what about the high tech startup, has Germany lost its mojo here? Now for those who are in the unawares, Germany has one of the best and most respected small to mid size industry, the venerable ‘mittelstand’ which continues to be a major contributor to its economic success, not to forget also a significant employment avenue. Most of these are privately owned, operate in niche high-tech segments and are undisputed masters in this space. No wonder they are referred to as the hidden champions. These do not seek mass market, but high margins within a niche that they have carved. Rather than being followers – they seek out new avenues to dominate. In addition, Germany has a large number of well funded research institutes – the Max Planck institute, Heinrich Hertz institute among others, who continue to do pioneering work, pushing the boundaries on the lines of the peers in the US and abroad.

What is sadly lacking is a concerted attempt to be able to develop a strong competence into this type of startup, one that would take the mittelstand model and develop global powerhouses. Why should Berlin only be considered as the lesser brother of its Silicon Valley cousin, treated contemptuously for the fact that many of its successes have their origins in businesses abroad? Couldn’t it leverage the knowledge that is being developed at its universities, the high-tech skills learned at its mittelstand to foster and grow new business – which one day could be the next Siemens? If you talk with those who try – you commonly get the sorry headshake – it is easier to raise money for the next app then for a high tech product offering.

This would also be beneficial to these small businesses themselves which are now at the cross-roads of globalization. Some have adapted, but others struggle to adapt their technologies to a changing world. From this would emerge the second generation of the mittelstand, one that is not averse to the VC (many today operate solely with banks, wary – perhaps rightfully so at Venture Capital), can gainfully utilize the business savvy in Berlin to move abroad, with a product and service with a clear differentiation – and lead to a strategic advantage. On the other hand, it does require a different kind of VC – one that isn’t in the ‘get rich quick’ business, but recognizes the inherent long term value and is ready to invest.

Is this possible, can Berlin emerge from the shadows to stand on its own. For both, I think the answer is yes – it needs will, it does need vision – and it definitely does need all parties to recognize and respect the capability of the other. Then, Berlin (and well – Germany itself), could truly become the Innovation 2.0 capital of Europe.