Encouraging Internal Risk Taking for Future Growth

Article by Ashish Rajadhyaksha at  Entreprenuership Central


I was invited back this week as a guest speaker at William Paterson University, New Jersey’s College of Business to talk about another aspect of Entrepreneurship; Corporate Intrapreneurship.  As the title suggests, corporate intrapreneurship is about cultivating and replicating the entrepreneurial spirit inside a large corporation to consistently deliver new business ideas, products & services that could be leveraged to create both synergies and diversify the core mission of that organization.  So now what distinguishes entrepreneurship from intrapreneurship?  Other than the vast resources available to Corporations, through my presentation, we discussed essentials of intrapreneurship; investment rationale and criteria; how the process works; and finally analyzed three companies to get a flavor of how different industries view business incubation that falls outside the core business.

Essentials of Intrapreneurship: Intrapreneurship or entrepreneurship for corporations may take many forms such as in-house incubation, early stage venture investments, brand acquisitions, private equity and/or small M&A transactions.  The key binding force, however, for all these strategies is diversification for risk management and participation in new business ideas to capture future growth.  There are four related questions that organizations need to ask themselves:

1.       How can a mature business successfully build new growth models?  Microsoft a case in point.

2.       Is organic growth ever possible within a large organization? With clear strategy and resources.

3.       Should you focus on core competency or seek diversification to hedge bets? Google with its You-Tube and Android businesses had to decide whether to stay with search or other areas. 

4.       Why do small projects have low success rates at some firms? Google succeeded in “outside the core” business areas, but Microsoft didn’t.

Investment Rationale and Criteria: Corporate investment departments have similar financial criteria as VC’s in terms of investing or incubating new concepts, except VC’s aren’t too concerned about fitting one parent company’s strategic goals (Delivery of new or complementary services, enhancement of an existing product, or entry into an emerging market).  Following are the typical rationale and criteria for Corporate Sponsors:

1.       Clear strategic fit with an existing parent company business with CEO& board level buy-in.

2.       Corporate expects to be an active and prominent investor with full governance rights;

3.       Leverage existing corporate assets (Management, Supply Chain, IT Infrastructure, etc.)

4.       Create long term shareholder value plus build innovation culture.

5.       IRR expectations generally of 15-20% per year with a 5-10 year investment horizon.

6.       Separate budgets to each investment, but funds provided upon hitting financial targets.

7.       Generally loser projects are terminated; successful ones are rolled up in existing businesses or sold to a strategic partner.

How Does the Process Work?

Case Studies:

1.       Intel Capital: To reduce dependence on its core microprocessor business, Intel Capital leverages its strengths and resources to tap emerging technologies and markets using different channels of distribution to reach new customers. They classify all investments into New Businesses, Adjacencies and T-Ups, and then make large investments in few ventures.

2.       Time Warner Investments: Time Warner Investments invests up to $25MM to acquire minority equity stakes in small, private companies that can demonstrate near-term partnership potential or a unique product/service to at least one of Time Warner’s divisions.

3.       Iconix Brands: Rather than investing or incubating startups, Iconix has a different take on Intrapreneurship.  It generally buys established brands, and then licenses them to leading retailers and manufacturers worldwide for a licensing fee. Brands operate distinctly in separate teams, but senior management tightly controls promotion and elevation of brands in the marketplace through traditional and new media platforms and distribution.

Conclusion: Intrapreneurship function and related innovation needs to be a Profit & Loss Center, unlike R&D which is usually a cost function. During these difficult times, innovation has become a major thrust for most large corporations and even non-profit organizations as cost cutting can go only so far. From the case studies above, it appeared that intrapreneurial teams were separate from established divisions, but with inter-linkages to strategy, marketing, finance, HR, operations, etc.  Many of these ambidextrous organizations now have stated goals of % of revenues coming from new business and products, thereby providing for both defensive and offensive game plans.