Internal Venture Funds
Published on Nov 19, 2015
The tyranny of the annual budget cycle can squash innovation inside a large company. An internal venture fund is a practical mechanism to help innovation survive corporate timelines, metrics, silos, turf wars, and politics.
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Incubators, accelerators, R&D groups, subsidiaries, and M&A all are required for corporate innovation
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There is not a shortage of good ideas in Big companies
The challenge lies in getting them to market
1. Employees have passions and interests
2. They frequently arrive at what 'should be done' on a time line that has nothing to do with the annual budget cycle.
2. They frequently arrive at what 'should be done' on a time line that has nothing to do with the annual budget cycle.
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A mechanism for funding innovation outside of the annual budget cycle is a key missing ingredient
1. In most companies, the budget cycle is an arduous process over 3-4 months where the end product reflects thoughts/ideas from many months prior to that. Basically, what goes in the budget may or may not be what really needs to happen.
2. By the time the next budget comes around, things have changed.
2. By the time the next budget comes around, things have changed.
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How
- Designate a theme
- Keep it focused
- Not too much money - 5% of normal investment spend
- Provides funding authority only
- Does not bypass existing risk and execution governance
1. The theme should be:
- Executable in a reasonable time frame
- Broad enough to capture large numbers of employees
- Tie to key strategy pivot points
- Examples: Driving revenue growth, Permanently lowering cost structure, etc.
2. 1% of total expenses or 5% of normal investment spend
3. As with venture capital, when a fund has to deploy too much money in a short period of time, the model doesn't work.
- Executable in a reasonable time frame
- Broad enough to capture large numbers of employees
- Tie to key strategy pivot points
- Examples: Driving revenue growth, Permanently lowering cost structure, etc.
2. 1% of total expenses or 5% of normal investment spend
3. As with venture capital, when a fund has to deploy too much money in a short period of time, the model doesn't work.
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Who
- Led by an accountable ExCo member
- Form a committee of high potential mid-level managers
- 'Get to' mentality vs. 'Have to'
- Give them incentives and define success
- Requires the right type of person
1. Fund managers are accountable to their limited partners for performance and communicate with them quarterly.
2. The accountable executive is responsible to his or her peer on the executive committee for the results of the fund and should send them a letter detailing what has been done.
3. Appeals can always be made to the executive committee if someone doesn't like how the money was allocated. In practice, this doesn't happen very frequently.
4. The fund will 'feel' much more commercial and hard nosed than other corporate committees. Its important that people participating feel some skin in the game - both upside and downside. (at least nominally - this should never ruin someone's career)
2. The accountable executive is responsible to his or her peer on the executive committee for the results of the fund and should send them a letter detailing what has been done.
3. Appeals can always be made to the executive committee if someone doesn't like how the money was allocated. In practice, this doesn't happen very frequently.
4. The fund will 'feel' much more commercial and hard nosed than other corporate committees. Its important that people participating feel some skin in the game - both upside and downside. (at least nominally - this should never ruin someone's career)
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Employ Venture concepts
- 'Skin in the game' - petitioning employees offer up extra budget first
- Fund in stages with clear success metrics for each round
- Never give anyone a blank check/pull the plug if metrics aren't there
- Don't dictate format; let people's creativity and drive become evident
- Fund over a calendar year; monitor performance over many years
1. Spend the entrepreneurs money first. It is amazing how much 'extra' budget exists that can be 'found' when there is passion for a new initiative.
2. Traditionally, it takes forever to get something approved for investment. However, once its approved bad ideas never die. This approach is different.
3. Each calendar year is funded from the budget as a vintage...e.g. the 2014 Fund, etc.
4. As with venture funds, prior year venture investments can be supported out of the next years fund (but don't have to be)
5. Performance is tracked by the fund vintage.
2. Traditionally, it takes forever to get something approved for investment. However, once its approved bad ideas never die. This approach is different.
3. Each calendar year is funded from the budget as a vintage...e.g. the 2014 Fund, etc.
4. As with venture funds, prior year venture investments can be supported out of the next years fund (but don't have to be)
5. Performance is tracked by the fund vintage.
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Don't:
- Have it take the place of your normal investment spend
- Over-engineer
- Pull the plug too early; normal venture metrics apply
- Force initiatives through long approval cycles (at least for funding)
- Measure returns in only one calendar year
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Do
- Recognize and communicate successes frequently
- Look for key internal management teams that 'get it'
- Pull the plug on projects
- Reward the fund's 'management'
- Uncover best practices - spread them to other silos
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The Internal venture fund:
- Uncovers the good ideas within your company
- Taps creativity and motivates employees
- Spreads best practice across silos
- Drives incremental results for a relatively small investment
- Low risk relative to the opportunity cost of not doing it
1. It uncovers the good ideas within your company in a more meaningful way that 'employee feedback boxes'
2. Your risk lies in hoping that good ideas will happen right when its time to put the annual budget together.
2. Your risk lies in hoping that good ideas will happen right when its time to put the annual budget together.
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