Reinventing Corporate Research

Research organizations in established enterprises need to take advantage of, and optimally leverage, venture-funded companies and their associated management practices. OVERVIEW: Internal research and development organizations can become more effective by learning to leverage products and learnings from venture-funded companies, and by adopting some of the management practices of venture managers and of start-ups run by venture capitalists. These include identifying ideas with the potential to replace existing businesses, demanding performance to specific milestones, applying pre-IPO valuation techniques, and searching out high-growth industries and markets. Even so, corporate research continues to play an important role in the creation of value, a role that is different from that of companies funded by venture funds. Venture capital funding for new companies has increased dramatically during the past five years, returning on average about 40 percent/year despite negative returns from June 2000 through June 2001 (1). The large number of new start-ups provides a new set of options for established enterprises to grow. As a result, acquisitions and minority equity investments in start-ups have become important elements in the strategies of some companies, while diverting some resources that were previously spent on internal R&D. Cisco, for example, has reported that up to 30 percent of its new products come from external investments rather than internal product development (2). Some observers might conclude that the future of corporate research in innovation and new business creation is threatened by this trend. In this article, I examine how research and development organizations in established enterprises can become more effective by leveraging products and learnings from venture-funded companies, and by adopting some of the management practices of venture fund managers and start-ups (referred to as the "venture community" throughout). I will argue that corporate research continues to play an important role, one that is different from the portfolio of start-ups managed by a venture capitalist. This article specifically addresses possible interactions that established companies could have with venture-- funded companies and venture fund managers. Although there are a number of well-known interactions that established companies have with other established companies, such as technology licensing, partnerships and joint ventures, these management practices are well described in the literature and are not my primary focus here. Nor will I directly address the broader question of how an established enterprise should expand into new businesses. Options would include the creation of new ventures internally, externally, by acquisition, by investment, or by some combination. They have also been thoroughly covered in the literature (3-6). The Investor Value Proposition For an investor or shareowner, the value proposition provided by an established company is different from a start-up. An established company has an ongoing business with a set of strengths and competencies that can be leveraged to make the company grow. Important factors influencing market capitalization for an ongoing business are earnings and the anticipated future growth in revenue and earnings. The goal of an established company's management team is to leverage the strengths and competencies of the current businesses to increase revenues and earnings, and thus increase shareowner value. If an established company consists of component businesses with little synergy, then a divestiture may create more shareowner value. An investor in a start-up is looking to achieve a high rate of return on his investment with a higher level of risk compared to an equity investment in an established firm. The venture fund manager identifies industries with rapid growth potential and funds business plans to address these opportunities (7). …