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Partnering With The Powerful

Author Don Laurie Advises Netpreneurs On Working 
With Corporate Venturers.

(Reston, VA -- November 14, 2001) According to Donald Laurie, Managing Director of Oyster International and author of the new book Venture Catalyst, corporate executives have two sets of mission-critical activities they have to perform. One is to deliver quarterly results in the annual operating plan, the second is to create a pipeline to the future that will generate revenue and growth. As Laurie explained at this morning’s Netpreneur Coffee & DoughNets meeting, the latter is why large corporations invest in and partner with entrepreneurs.  

Don Laurie

There are four ways companies can grow, according to Laurie:

  • organically, such as through product line extensions

  • geographically, by entering new markets

  • through acquisition, although many of them fail, and

  • through venturing into the world of startups.

While both enterprises and entrepreneurs are looking for growth, their needs, cultures, and values cause them to seek it in different ways. It’s an opportunity for entrepreneurs, though you need to be careful in how you pursue it. At this morning’s session Laurie offered entrepreneurs pointers and a roadmap for partnering with corporate venturers, and he was joined on stage by veteran entrepreneur Mario Morino with tips from the field.

One reason why big corporations need entrepreneurs to bring innovation and growth is that those two mission-critical goals Laurie cited are, to some degree, at odds with each other. When corporate executives talk to their R&D departments, the first goal, quarterly numbers, causes them to ask, “What can you do in 12-18 months?”  

The crowd at eventThere’s a lot that smart people can do in 12-18 months, but building a ground-breaking, market-making, disruptive product like the Web browser or Viagra isn’t one of them. In the past, corporations split long- and short-term development efforts roughly 50/50, but, today, that ratio has shifted to about 90/10 in favor of short term returns. Whether through partnership, investing, or acquisition, balancing that equation is an open door for entrepreneurs.

Take, for example, Intel “the mother of all corporate venture capital activity,” according to Laurie. Through this year, Intel invested approximately $1 billion in startups at between $2 million and $10 million per investment. The company has some 200 people in their venture group, all organized by industry and with a strategy and technology map for each. So far, Intel has benefited from 59 IPOs that brought some $4 billion into the company coffers. Those returns notwithstanding, the driving force behind Intel’s aggressiveness is that the company is trying to discover -- and to become a part of -- the next big thing after microprocessors. It’s where they see their long term growth coming from.

What are the benefits of these deals to entrepreneurs? Corporate partners can be a source of capital, and they can provide distribution channels. They can offer technology alliances and beta testing. They can become customers, and they can offer learning and support once the deal is done. For example, while entrepreneurs may pride themselves on being trend setters, corporations have implemented a lot of processes in areas like QA and marketing that startups can adopt without reinventing the wheel.

Just be sure not to adopt the wrong habits, of course. As both Laurie and Morino pointed out, the management needs and goals of large companies are often in opposition to those of entrepreneurs. It’s not that one set is better or worse, it’s that organizations of different sizes and with different stakeholders have different priorities. Corporations, for example, value responsibility while entrepreneurs value independence. Where startups embrace risk, corporations seek to minimize it. And while entrepreneurs are built for speed, enterprises want thoroughness.  

Mario MorinoAs Morino said, “Be careful dancing with an 800 pound gorilla. It knows it’s the gorilla.”

While there are dangers in partnering with or taking investments from strategic partners, it doesn’t mean you shouldn’t do the deals, just that you should be careful. Both Laurie and Morino offered pointers in what to look for, including:

-     What is their venture strategy? Where do you fit in with their interests? Morino suggests that you make sure to understand how they map your sector and its competitors, not just the way you do it. Then make sure that there’s a fit.

-     Make sure that the CEO “gets it,” especially if you’re dealing with someone else in the organization. Top management has to buy into the deal or you’re likely to be lost in the corporate sea.

-     Analyze the corporate culture and make sure you want to be part of it. Is it welcoming or arrogant? Are they in it to help build a business? Make sure that you’re important to the organization and get proof, such as lucrative compensation packages for salespeople representing your product.

-     Make sure that you understand the value they bring to the arrangement explicitly. Unless you’re just about broke, look for something more than just money.

-     Does the corporate venture group partner with institutional VCs or seek to manage things themselves? One thing about corporations, by the way, is that most will not lead an investment round, they’ll only participate. That’s because they want someone else to do the heavy due diligence and they usually want to be regarded as the strategic partner, not the financial one.

Given the recent challenges in the current economy, will corporate venturers remain an active player for startups? According to Laurie, in 1994, VC levels were on the order of $5.5 billion, with about 1% from corporate ventures. In 2000, that had grown to $102 billion, of which 18% came from corporations. In just the first six months of 2001, however, investors already had written off some $9 billion.

Despite the change, Laurie expects corporate venturing to continue, if more modestly. He says that some companies will get out, while others that have solid venture models integrated into their corporate visions, like Intel and GE, will continue leveraging entrepreneurs as a source for growth and innovation. In between, other companies will try to figure it out for themselves, hopefully avoiding the mismanagement of recent years while developing a coherent strategy that makes sense for their businesses.

According to Morino, there may even be an upside in these uncertain economic times for entrepreneurs who think boldly. As some companies pull in their horns, they’ll be looking to unload products, service or operations that they no longer consider strategic. They may even pay enterprising entrepreneurs to take them over. It could be a chance to pick up assets and market share, and, if nothing else, it certainly highlights the differences between entrepreneurs and enterprises.

Copyright 2001, Morino Institute. All rights reserved.

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