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In the gestation of mammals, a semipermeable membrane lets the mother’s blood nourish her unborn while preventing her antibodies from reaching, and attacking, them. This amazing mechanism is an apt model for how large corporations should create and nurture ventures in their earliest stages. Conventional wisdom is that big companies should act like Silicon Valley venture capitalists. In other words, big companies are told that all they have to do is act like sea turtles—if they lay enough eggs in the sand, a few will avoid predators long enough to crawl into the ocean and grow into powerful giants. But that is the wrong analogy. Unlike start-up concerns backed by venture capital, big companies’ new business ventures rarely even get to test their luck in a Darwinian marketplace. Corporate antibodies usually kill new ventures before they are even born. The first thing big companies must do to create innovative businesses and keep up in today’s fast-changing marketplace is to find a way to block those antibodies. In my experience, that means establishing a Corporate Venturing Office. The office must report directly to the chief executive, so it can protect the ventures it nurtures. To give it credibility, the office should have its own profit-and-loss statement. To make sure its ideas are fresh and to help validate them, the office should be run by someone brought in from outside the company. The office also should vet ideas through an investment committee that includes outsiders experienced in the ways of start-up ventures. Although few companies have established offices that resemble what I am recommending, Eastman Chemical shows how well they can work. The chemical company, which set up an office that is sponsored by the chief executive and uses a board of outside advisers, has established several online exchanges that hold real promise, according to securities analysts. Other companies have begun considering venture offices. In February, Boeing announced a New Ventures organization that is being run by an outsider and that is designed to create a safe harbor for audacious ideas. To succeed, it isn’t, of course, enough just to establish the office. The office must follow five principles the antibodies would prevent elsewhere in the corporation: ONLY PURSUE BIG IDEAS. For fear of failure, businesses typically attempt incremental improvements to old ideas rather than pursue truly novel ones. But the only way to get a significant financial return is through breakthroughs. Venture offices should try to invent the next Amazon.com, rather than emulate Barnes & Noble, which, at the time of Amazon’s launch, was improving its bookstores moderately by turning them into "superstores." Businesses usually try just one or two new ventures at a time, but portfolios are a better idea. Investing small amounts in lots of risky ideas can generate some steady, spectacular returns even if individual investments don’t. (Silicon Valley does have something to teach big corporations about start-up businesses.) LOOK OUTSIDE FOR EMPLOYEES. Most companies have a hard time letting their best people work on new ventures; they are too highly valued by their current bosses. Even fewer recruit senior managers from the outside—yet that is where the real talent is. Venture capitalists say that the best predictor of future success is past success. The second best predictor is past failure. The reason: People learn to play the game once they are in it. Few inside big corporations have played the start-up game. Attracting outside talent is hard—but not impossible. People aren’t looking only for so much money that they would make a mockery of corporate compensation schemes; they also are looking for an interesting working environment. One client, a huge bank not known as a magnet for entrepreneurial talent, took a novel tack with six top business school students. It gave them summer internships during which they drafted new-venture plans that they got to present to the chief executive. Three plans got financed, and five of the students work for the bank. LOOK OUTSIDE FOR DIRECTORS AND ADVISERS, TOO. Corporations typically assume they can provide sage advice to their start-up ventures—yet very few senior executives at big businesses have ever run a start-up. Corporations need to swallow their pride and find a healthy mix of outsiders to serve as investors, directors, and advisers to the internal venture. Accel Partners, the venture-capital firm, and Wal-Mart Stores, the giant retailer, have done this right. Their joint venture, Wal-Mart.com, has a separate board of directors and a separate management team and has recruited a chief executive officer and senior management from outside both organizations. [For more on Accel and Wal-Mart, see the interview with Accel’s managing partner, James Breyer, "2nd and Foremost."] FOCUS ON MILESTONES. Corporations typically run on annual budget cycles, but new ventures can’t. They need money when they need money—typically, a commitment of funding should come every few months. Those commitments should come only after the venture has reached clearly defined milestones. Poker players will tell you that, in seven-card stud, most of the money is lost on the fourth and fifth cards, as players indulge the unreasonable hope that an uninspiring hand might turn into something good. The same is true of corporate ventures: Companies should place new bets on them only if, at each stage, they are able to show real prospects for success. Boo.com, the online retailer based in England, is the classic case of a start-up venture flaming out in a pyre of money, when its supply of funding should have been cut off early on. SHARE THE EQUITY. This is tough for big companies, where egos and longstanding corporate practices get in the way. Senior executives resent having to give the managers of start-up ventures enough equity in them that the managers could become wealthy. But top talent demands equity. Businesses also are reluctant to share equity with other companies. But it is better to have a small piece of a big pie than a big piece of a tiny one. Metalsite.com, an online exchange that Weirton Steel launched in 1996, let so many other companies invest that Weirton now owns less than 25%. But Weirton’s $5 million investment has now ballooned to more than $300 million, according to published reports. Without other companies’ support, it is very likely that metalsite.com would have gone nowhere. I realize that launching a venturing office is, in its own way, just like launching a start-up. You wind up with a recursive problem. You need a start-up business to launch start-up ventures—a baby within a baby. Still, Eastman and others have shown that it can be done, and it must be. In business these days, there is one certainty: If you don’t create your own future, someone else is bound to.
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