One of the biggest challenges for today’s companies is the need to continually evolve to keep up with the market. Nothing attests to this need more than the ever-growing list of former industry leaders that have gone down the bankruptcy route in the past couple of years. This list includes such formidable brands as American Airlines, GM, Chrysler, Blockbuster, Borders, Circuit City, and Eastman Kodak. I don’t want to be a pessimist, but it’s not hard to see others waiting in the wings. It sounds odd to say, but in many ways, it was these companies’ success that led their demise. When companies become successful and capture dominant market share, they can become so captive to their core business that they cannot envision another way of doing things. Or if they can envision it (and for the record Kodak DID invent the digital camera in the 1970s), they have trouble implementing a new strategy.
Successful companies have always recognized the need to innovate. Typically they will deploy such strategies as innovation groups, employee idea programs, R&D labs, and business intelligence teams. All of these types of programs are healthy activities to promote and do generate ideas. However, at times, they cannot be enough to enable established companies to compete on the innovation front with their smaller, nimbler competitors. Why is this?
One of the biggest difficulties companies have with implementing innovative strategies is the reality of the corporate budgeting cycle. In a typical company, the annual budget is the imperfect result of a long series of negotiations between individual department heads and senior management. Once it is ‘locked down’ for a given year, it is virtually impossible to change and it will drive all behavior in the business during the next year – both good and bad. Some of the most notable bad behavior revolves around ‘using it or losing it’, hoarding of extra available funds, and abandoning worthwhile projects because they are not ‘in the budget’. However, the biggest way the annual budgeting process affects corporate innovation – innovation groups, employee ideas schemes, etc – is by failing to allow for flexible funding that can be tapped outside of the normal budget cycle.
One strategy for sparking innovation in the corporate culture is through the formation of an internal venture fund. Many would say that it is simply a budgetary trick – which it is – but the name itself implies many other things and it should be run just as a real world venture fund. Here is how it would work:
In the annual budgeting cycle, a small amount of funding is ‘ring-fenced’ for the venture fund. A senior leader on the executive committee of the company should be designated as the administrator for the fund. Ideally, this would be someone that is relatively neutral in the interplay between marketing, product development, and sales. They should select a cross-functional committee of high potential managers from across the business to serve as the funds ‘partners’ and to be responsible for administering the fund.
The concept works best when the executive committee designates a focus or charter for the fund that is aligned to a key strategic objective. Examples could be accelerating annual revenue, cutting edge technology, customer service innovation or operations excellence. Once the charter is selected, the executive committee should stay out of inner workings of the fund other than to serve as an appellate forum and to get a report of its activities once per quarter.
Employees or departments should be encouraged to apply for funding for projects or ideas that fit within the strategic objective of the fund. The application should be sufficiently rigorous to make them prove that if funded, they have a well-formulated strategy to carry the project through to fruition.
There is no need to allocate a lot of capital towards it - it works best around the edges (about 5% of your normal investment spend or 1% of expenses). In fact, it can be hard to effectively deploy a lot of money which directly parallels what many growing venture funds experience. As such, it should never take the place of normal capital change and investment spending.
Here is an example of the many positive results it can drive:
- It’s a great reward and cross-functional experience for mid-level managers that are selected to manage the fund
- It taps creativity and motivates employees
- It can serve as a mechanism to spread best practice across silos
- It drives results without large-scale incremental investment
- It builds up an annuity effect that can change the growth curve in its focus area
Aside from granting money for innovative ideas, the venture fund is most successful when it mimics a traditional venture fund in several other important respects:
- Similar to what happens in a typical start-up company, the entrepreneur’s money is spent first and they have ‘skin in the game’. In this instance, managers with ideas are asked how much they can free up money within their own budgets towards the funding of the project.
- Funding is allocated over time based on agreed performance criteria. Just as with a seed, series A, B, and C round, the ‘partners’ can decide to stop funding and end the activity. This contrasts with typical budgetary allocations which are generally treated as a right to spend vs. a privilege based on demonstrated performance towards a goal.
- Format of the presentation and return criteria should not be dictated. No one told Mark Zuckerberg what his pitch should like be for backing FaceBook in the early years and, although corporate managers love form and certainty, they should not do this.
- Employees that serve as the funds management should have a small portion of their performance grade determined by the fund’s performance. This will ensure they take it seriously and look for the best ideas in the company. This also forces disciplined tracking of results which is something frequently lacking in investment programs.
- The fund is run on a calendar year basis to coincide with the budget cycle. Money cannot be carried over into the next budget so it is important to understand how much money can be effectively deployed over the year. Returns are grouped and tracked by calendar year vintage for the fund and include returns that that come in future years. Just as large venture groups have investments in one company via successive funds, support for a multi-year project can be undertaken over multiple years, although each decision is dependent on its fit with that year’s fund.
- Communicate successes throughout the company. Many times one or two initiatives will generate a large portion of the value generated by the fund. However, some of that money can be used to fund customer or community initiatives which may be harder to justify on a hard dollar basis but are the right things to do.
At CameoWorks, we can help you set up an internal venture fund and assist in determining the size, focus, and right people to be involved.
© CameoWorks, LLC 2012