Corporate Venture Capital Is Doing It Wrong
It's no secret that corporations are struggling to keep up with the innovation pace of the market. They've been trying different approaches for the past decade, some more successful than others. Corporate Venture Capital (CVC) is becoming one of the usuals. According to CBInsights 2017 report, CVC activity is growing rapidly.
Most of this activity is being driven by new funds being open. An interesting fact is that the region that's pushing the growth isn't the US or Europe, but Asia.
And while the share of CVC deals is still small compared to their VC counterparts, the average deal size is considerably higher for CVC than VCs.
The word that comes to mind when I read these charts is panic. Corporations are panicking and pushing hard on their innovation efforts.
The striking thing is that while CVC activity is increasing, it's still an outlier when it comes to corporate investment. Most organizations are ramping up their investments, but they are funneling it through their corporate structures.
The increased activity and frenzy is good news for startups. With a fairly slowed IPO market, Corporate acquisitions are the next desirable thing. The fact that many organizations are investing in their venture branches will increase liquidity and accelerate potential acquisitions.
And why do I bring all this? Because my experience during these past few years is that Corporate Venture Capital and corporate innovation strategies are failing miserably. Yes, there are brilliant examples of CVC like Intel Capital or Qualcomm Ventures. But for every good example, hundreds are falling short.
I am a believer of the CVC model as one side of the Open Innovation approach. However, I think the implementations of most CVC are utterly flawed.
Open Innovation and the Bose case
A fascinating and illustrative example of how much need there is for innovation strategies is Bose, the high-end speaker maker.
The Bose Corporation is a fascinating company. Founded in 1964 by Amar Bose, it became one of the leading speakers and headphones company in the world. With estimated revenues of 3.8 billion dollars in 2017, it's considered one of the most innovative companies in the US. The fact that it's still a privately held company and a secretive one at that has always been a source of fascination.
Nonetheless, the last five years haven't been easy for the company. Their market decline, accelerated by new entrants like Beats/Apple, is showing significant problems with their innovation process.
"I think we can all agree that the pace of change is greater than it's ever been," Maresca says, "and it requires all companies to be faster andBob Maresca – Former Bose CEO (2013 – 2017)
The surprising fact is that Bose is a corporation that has innovation in their DNA. The company's motto "better products through research" says it all. How is it possible that they've been outmaneuvered by a bunch of hipster rappers?
This beautiful example shows how closed innovation paradigms are failing at a rapid rate. Dr. Bose's edge when he started the company resided on the company's research capabilities. Dr. Bose, an M.I.T professor for more than 46 years, had access to top research and talent.
At the time, finding sound research and talented individuals beyond corporations was impossible. Most of the investigation was funded by large corporations like Intel, Xerox, HP, Bell Labs or GE. Dr. Bose, being born to the boon of Corporate Labs, created an organization that closely mimicked the work of such labs. And they won. They won big.
Nevertheless, the confluence of a series of factors ignited the decline of Corporate labs. Increased academic research funding, changes in patent law and increased workforce mobility began eroding the closed innovation model. With increased mobility, employees would leave to other organizations and take their knowledge with them. With time, the US academic system started producing as much research as Corporate labs democratizing the access to innovative ideas.
Before, competing with Bose required a fully-fledged corporate research lab. The democratization of knowledge, increased mobility and the rise of Venture Capital, enabled competition by new entrants. New players were capable of competing, not only on innovations but also on costs. Meanwhile, Bose Corporation has been stuck with massive R&D costs that drag their price competitiveness.
Internet and the rise of mobile have drastically altered this market. Audio consumption has shifted from the home to portable devices. Wireless, miniaturization, battery life and vertical product integration have become keys to the market.
And guess who the king of mobile entertainment devices is? Yes, Apple. The same Apple that bought Beats in 2014. The same Apple that released the AirPods and HomePod and has taken the Wireless Headphone market by storm.
"It's all about entertainment now, the firms creating their new ads say. That's not something the engineering mind understands, Maresca says."Bose's new beat
The consequences of all this are that the market is forcing Bose Corporation to find ways to innovate faster and cheaper. 20-year research isn't acceptable anymore.
Bose is reacting. They've been scouting, investing and acquiring startups in the audio technology, wearables, health and wellness spaces.
They recently announced the creation of a 50 million dollar fund to push their new Augmented Reality platform centered around their new AR-audio glasses. They'll use that money to invest in companies that develop applications for their platform. It reminds me of the fbFund, with a big exception, Bose's AR glasses isn't Facebook.
Building the right Disruptive Innovation strategy
And this is the problem with most Corporate Venture Capital funds. The theory is sound. Invest in external innovation, mix it with our internal resources and come out with disruptive products. Execution though is way harder.
For starters, most CVC only invest in products or services that enable or improve their core offerings. There are two reasons for this. On the one hand, it makes strategic sense to invest in sustaining innovation. If the organization can get a slight edge and surpass their competitors, they can rip hansom profits. The problem with this though is the speed of innovation. A decade ago a sustained innovation would give the organization a five or six years lead. Nowadays competitors will erode that lead in one and a half years tops.
Bose developed their first commercial Noise Canceling Headphones prototype in 1986. While Sennheiser, the German company, produced their own Noise Canceling Headphones two years later, Bose has maintained their lead in the space for a decade. Fast forward to 2018, and you have a comprehensive set of options ranging from Bose's top line to Sony, Sennheiser or Audio-Technica.
Therefore, while sustaining innovations can help maintain an innovation lead, their impact is becoming increasingly reduced.
The second reason why organizations focus on improving their core is that of their corporate culture. Innovating beyond the corporate narrative is tough. Individuals will see new innovative options, but will always tend to apply the existing business models to these new ideas. It happened to Xerox PARC, HP, Microsoft, IBM and many others. It's happening with Blockchain technology and Augmented Reality too.
Building disruptive innovation requires agility, open innovation, autonomy and alternative business models. Most CVC look for sustained innovation. They perceive the viability of the projects through their existing business model lens. Worst of all, most of these CVC aren't entirely independent of the organization. The receiving political pressures to innovate and fast. If the investments don't have a meaningful and immediate impact on the revenue line, they'll be ditched.
Bose Corporation is doing many things right. They're an innovative company at heart. They've recognized the need to move faster. To open their innovation to the outside employing startup acquisition and investment. They're investing beyond their core and trying new things. They're testing the market through customer-centric approaches like crowdfunding projects.
Their newest Augmented Reality (AR) platform is a bold move. They're betting on a disruptive technology which gives them a higher chance to disrupt the market. They're also betting on a change of model. They're moving away from a transaction-based model to a platform one.
What Bose is getting wrong about Augmented Reality
That said, I think they're also making some strategic mistakes. Bose Ventures should be an independent organization and not a department within the organization. Ensuring autonomy is the best way for disruptive innovation to thrive.
Their new bet, AR glasses as a platform can only work if there are two preexisting elements. On one side you need a community to drive the growth of the platform. Bose has, historically, been a transaction-based company. There is no community or ecosystem behind Bose. Kickstarting one around AR will be tough. The second element is the need for vertical integration.
As a rule of thumb, when a market is nascent, the best strategy is always one of vertical integration. Clients want one size fits all solution. They want the technology to work. To achieve this, it requires tight integration of the platform and the experiences. That is only delivered through ferrous control of the ecosystem.
Bose has no such vertical integration of the space, nor the ecosystem. Bose should learn a page from Apple's playbook instead of Google. The former always approaches a horizontal integration. One that is paying off (now), with Android, but has failed with Google Glasses or their AR approach through Tango.
Apple, which always takes a vertical path, is leading the AR market with their tight integration between hardware (iPhone X TrueDepth), software (iOS + ARKit) and community (App Store).
Final words on Corporate Innovation
Open Innovation isn't optional for most industries. That said, theory is easier than practice. While Corporate Venture funds are on the rise, there is a lack of an accompanying strategy.
Creating a fund isn't just raising money. It's about focusing on the right goals, on the right metrics, and on the appropriate strategy. Most CVCs are investing but follow what seems to be murky strategies and misplaced incentives.
Bose Corporation is doing a great job, but despite their best efforts, they're still trying to enforce their corporate narrative on their innovation efforts: sell a physical product and profit.
"Exactly," Maresca says. "Because we had that direct marketing engine for so many years, we didn't need celebrities.”Bose's new beat
Escaping the corporate narratives of valid business models is essential. To accomplish this, it's not enough to shift the revenue model, but also about building the right strategy that sustains the new model. It implies new cost structures, different organizational structures, and innovative marketing approaches. This is rarely achieved within a department in the organization, but with independent innovation units.