Corporate Venturing as a Corporate Strategy for Large ICT Companies in the Age of Cloud Computing

Kou Yukawa
Research Fellow

May 20, 2011 (Friday)

According to the Survey of 53 companies making advanced efforts in cloud computing which I conducted tow years ago, it was clear that more than half of those companies were venture companies.

Among those companies, some have already received investments from and made business alliances with large corporations like Amazon and Google, but, in this age of cloud computing, such large corporations must proactively form relationships with venture companies for two essential reasons.

First, competition between companies in the age of cloud computing is, to put it another way, a competition of expanding platforms. It is therefore vital to form networks with those companies on the periphery of the platform that one’s company is developing and thereby create value. Making use of venture companies provides one’s company with opportunity to expand its own platform.

Second, because cloud computing is essentially an internet business and amendments can be made easily, it has a so-called “Perpetual β” concept (i.e. using user feedback to continually improve and evolve) which allows the easy adjustment of business models.(1) Consequently, cloud computing vendors require never-before-seen continuous innovation and quick market launches. Even large corporations will find it difficult to innovate and grow while cleaving to the principle of self-sufficiency. Necessarily, the integration of a company’s in-house services with the products and services obtained from external partners will gain importance, at which point, venture companies will become irreplaceable partners for large corporations.(2)

In such an age, the management of large corporations must consider corporate venturing.

The Meaning of Corporate Venturing

Corporate venturing refers to “making use of external venture companies through alliances and the like.” It can sometimes refer to programs geared toward cultivating internal ventures, but the more important meaning is that of building relationships with external ventures.

To begin with, upon achieving growth, venture companies use various external resources to generate innovation. For example, at start-up they obtain business seed money from universities or initial funds from angel investors, and using this risk money from Venture Capitals (VC) they achieve growth in a very short period of time. In other words, venture companies use diverse ecosystems to grow.

By making effective use of the funds that flow into venture companies through the participants of these ecosystems, large corporations can increase innovation while limiting the risk of relying exclusively on in-house research and development. Making use of external ventures is therefore crucial for large corporations. This fact has been known for some time, but, as mentioned above, in the age of cloud computing its importance increases manifold.

Corporate Venturing and CVC Investment

Thinking of corporate venturing in terms of corporate venture capital (CVC) investment may be common sense among global companies, but in order to understand just how much venturing activity actually goes on, let us look at CVC data as a concrete example of alliances between large corporations and venture companies.

There are many different types of alliance, but when looking at CVC, even if large corporations do not provide funding, they must offer some form of resource in order to secure an alliance, be it joint development or business collaboration, with the venture company. This is also considered a kind of investment.

Figure 1 shows changes in CVC investment amounts and their percentage of overall VC investment in the US. While it is true that investment amounts did take a hit after the Lehman Shock, even at their lowest point in 2009 CVC still provided \120 billion in risk money. When one considers the fact that Japan’s VC investments in 2009 totaled \136.6 billion, one realizes that American corporations are investing on par with the entire country of Japan. Furthermore, a salient feature of CVC investment is that, despite the recession, the percentage of overall VC investment that it comprises has not fallen significantly, and it provides consistent funding to venture companies.

When examining the sector breakdown of the venture companies that received these CVC investments in 2009, the fact that ICT-related venture companies make up 36% of the total allows one infer that large corporations are undertaking CVC actions in industries with rapid rates of innovation and thereby trying to proactively make use of ventures (biotechnology comprises 30.6% and other industries 33.3%).

Figure 2 shows the 10 most active companies in the world from 2008-2009 in terms of CVC investment, according to an Ernst & Young survey. Of the 10 companies, 6 are large ICT corporations, and, among the investment destinations, internet companies and cloud-related technology and service companies stand out. Even the investment destinations of Disney and Holtzbrinck Publishing are internet companies. Large corporations are assiduously undertaking investment in (broadly) ICT-related ventures.

From this we can infer that large ICT corporations which are active on the global level are trying to make effective use of venture companies. Conversely, Japan’s large ICT corporations are lackadaisical in terms in CVC investment, and even when making alliances they tend to take the venture company on as a subcontractor. These Japanese companies must change their way of thinking in the future.

Corporate Venturing as a Strategy

As I mentioned above, large corporations can efficiently drive their own innovation by purposefully using venture companies as partners in innovation. The top management of Japan’s large ICT corporations must think about actively forming relationships with venture companies more than they have to date and making corporate venturing a more focused strategy. Moreover, under management’s leadership, methods such as organizational reform and reforming employees’ thinking about venturing must be undertaken in order to take full advantage of innovations born outside the company.

Most large corporations have yet to overcome Not Invented Here (NIH) Syndrome. However, there is no stopping the changing of the tides towards cloud computing, and therefore making use of the power offered by venture companies is essential.

Notes

(1) O’Reilly proposes “Web as Platform” as one of the “Principles of Web 2.0,” but the world of cloud computing can also be seen as a turf war taking place on the platform of the Web.

(2) This has been pointed out by many experts for a long time, but that does not necessarily mean that large Japanese ICT corporations have actively attacked this issue. For example, Keystone Advantage (Iansiti, Marco, Levien, & Roy 2004), Platform Leadership (Gawer & Cusumano 2002), etc.