Strengthening the Climate

For Corporate Venturing

Kenneth P. Morse, Senior Lecturer

and Managing Director
MIT Entrepreneurship Center

55 Hayward Street, Room E39-115 Cambridge, MA 02142 USA

phone: +1-617-253-8653 fax: +1-617-253-8633
e-mail: kenmorse@mit.edu http://entrepreneurship.mit.edu
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 Desired Outcomes of this Meeting
1. Discuss the critical role that corporate venturing can play in
technological innovation and increasing competitiveness.
2. Examine the corporate venturing and venture capital
funding practices of selected firms.
3. Exchange views openly and actively.
4. Review and discuss typical first steps:
• Establish objectives and team
• Create Board of outsiders
• Setup education programs
• Meet leading VCs
• Establish $100 - 200M fund
• Invest in VCs and startups (strategic focus)
• Send managers to MIT EDP (Jan 2003) and other courses

5. Finish on time.
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 “It is not the strongest of the species
that survives,

nor the most intelligent …

… but the one most responsive to

change.”
- Charles Darwin

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 Rates of Adoption…it takes time
 Definition = “The relative speed with which an innovation is
adopted by members of a social system.”
 Main Factors affecting rates of adoption for innovations:
1. Perceived attributes of innovations,
• Relative Advantage
• Compatibility
• Complexity
• Trialability
• Observability
2. Type of innovation-decision,
3. Communication channels,
4. Nature of the social system, and
5. Extent of the change agent's promotion efforts.

Rogers, E. M. (1995). Diffusion of Innovation, Fourth Edition. New York: The Free Press.

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 Technology Rate of Adoption (1/2)
Electricity
(1873) Telephone 100
Television (1876)
(1926)
Radio 90
(1905)
Automobile
VCR
(1886) 80
(1952)
70
Microwave

Percentage of Ownership
(1953) 60

50
PC
(1975) 40

Cell Phone 30
(1983)
20
Internet
(1975)
10

0
1 10 20 30 40 50 60 70 80 90 100 110
No. of Years Since Invention 5
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2002 Massachusetts Institute of Technology
Source: Rich Kaplan, Microsoft
 Technology Rate of Adoption (2/2)
 Most new technologies typically require many years to become
a new standard.
 As shown in the previous graph, the number of years it took for
the following technologies to reach 25% of U.S. households are
as follows:
Automobile = 56 years

Electricity = 45 years

Telephone = 36 years

Microwave = 31 years

Television = 26 years

Internet = 23 years
Cell phone = 14 years
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 Marketing Principles for New High
Technology Products
 Get close to the customer. The adoption of new technology is a social learning
process. Consider adoption characteristics of the customers and the significance of
word of mouth.  
 Innovation is a paradox. It is not necessarily market driven or technology driven,
but somewhere in between.
 The Market
 “Early adopters”
• The small, early market for a new technology.
 “Early majority” • Visionaries who seek the dramatic strategic changes that a
new technology can provide.
• The large, more pragmatic group that is risk averse.
 Initially, focus fully on a small
• Needbutreference
significant market
of trusted segment.
and respectedThis provides
market players
entry into the market and success stories
before to impress
accepting the newpotential customers who prefer
technology. 
to follow rather than to lead. 
 It is important to be market focused as well as sales focused.
 Speed to market is also important; product life cycles are shorter.

J.D. Pieters. “The Marketing of High Technology Production in the Technological Environment,”
Southern African Business Review Special Issue on Information Technology 2000 4(2): 50-56
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 Late-Comer Startups
When an industry’s growth slows, and the shakeout
begins furiously, do new startups still have a chance?
Main Search Engines PC Manufacturers
• Yahoo • Acer
• Altavista • Apple
• Excite • Compaq
• AOL Search • Digital
• Ask Jeeves • Gateway
• Direct Hit • IBM
• Lycos • Packard Bell
• MSN Search • Toshiba
• Netscape Search

• Google (late comer, but…) • Dell – late comer, with new

business model:
• Build to order;
• Inventory = -1 day. 8
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2002 Massachusetts Institute of Technology
 How Can Innovation and
Intrapreneurship be Strengthened?
Let’s consider the Preston article:
“Regulation is the enemy of innovation.”
“Innovation rarely comes from the
market leader.”
Attitudes, Passion, and Share
Ownership.

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 Some Comments about
Entrepreneurship Education at MIT
Commitment from the top.
Absolutely NOT centralized.
Run mainly by students and practitioners.
Strong component of community involvement:
Alumni and friends
Startups, hot spots
Global partnerships

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 Mission Statement of the MIT
Entrepreneurship Center:
To train and develop leaders who will make
high tech ventures successful
“I want you to be the premier
global center for entrepreneurship,
and to be recognized as such.”

“We must not only be the best. We

must also serve as a model for
others and ensure that, together,
we all make a significant global
impact in this vital field.”

MIT President Charles M. Vest,

July 1996
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 Why Focus on High Tech?
 Continuous creation of new, technology-
based enterprises enables great leaps
forward.
 Rising living standards underpin democracy.
 At MIT, we believe our distinctive competence
is forging innovations in Science,
Engineering, & Management to achieve
revolutions, not evolution.

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 To Compete Successfully…
“MIT startups must attack global markets.”
To teach global high tech entrepreneurship
effectively, we need a network of partners:
University of Cambridge (UK)
 The Cambridge Network

 University of Cambridge
Entrepreneurship Center
Ireland
Taiwan
A few others

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The Problem We are Working to Solve:
 There is a shortage of excellent entrepreneurs who can make start
up ventures very successful.
 MIT Engineers and Scientists are generally aware that teamwork is
essential:
 80-95% of “purely technical” spin-offs fail, while,
 80-95% of MIT teams which combine marketing, business, and
technical skills succeed.
 Talented Managers need both training and real world experience so
they know markets, know people in those markets, and are well
known/respected:
 undergraduate science/engineering combined with practical
experience in successful companies, and,
 management training, including entrepreneurship, followed by,
repeated sales and marketing successes in substantial companies.

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Working Definitions of Entrepreneurship
“Participation in the formation, development, and
growth of a new enterprise.”
Ed Roberts

“The pursuit of opportunity beyond the resources

currently controlled.”
Howard Stevenson

“The only problems worth solving are the impossible

ones.”
Ed Land
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 Can Entrepreneurship Be Taught?
 Doing vs. Teaching:
Babe Ruth and Pélé each had a coach.

 Mental Framework to Carry Into Entrepreneurial Situations:

“You CAN do it, too.”

 Mistakes to be Avoided:
e.g. Running out of Cash.

 Change of Social Compact:

Bankruptcies, and the end of lifelong employment, can
stimulate new ventures.

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 Examples of what CAN be taught (1)
(especially valuable for engineers, scientists, and business
people)
 Teamwork creates value and success:
Lone wolves build perpetually small companies.

 Appreciation and mutual respect for different types of

people guarantees better company performance:
Excellent sales people are essential (not lower life
forms).

 Customers need to feel they have a relationship

before they will buy from you.

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 Examples of what CAN be taught (2)
 Business Basics: CFIMITYM
Profit vs. cash flow
Risk is higher when you’re growing

 How to Write a Business Plan

Need to know how, but...
Recognize that angels and VCs don’t read them

 Selling Products vs. Creating Businesses

The difference between cash and wealth

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 Examples of what CAN be taught (3)
 Creative Thinking:
Generate alternatives
Challenge assumptions
Sacred cows = hamburger
 Failure is Acceptable in North America
No such thing as winners and losers
More like: winners and learners
This positive attitude is a U.S. national asset; Germany & Japan
may be different.
 Academicians and Engineers:
Successful commercialization of your invention is the most
effective way to diffuse your innovation.
Don’t be embarrassed to make money.

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 The MIT EDP
MIT Entrepreneurship Development Program
27 - 31 January 2003

A one-week program tailored to the needs of future

entrepreneurs, university entrepreneurship faculty and staff,
and economic development professionals

 Participants learn from:

“Live case studies” of successful MIT entrepreneurs;
Our faculty and the MIT entrepreneurial spirit; and
Route 128 venture capitalists, lawyers, and institutional
investors.
 In 1999, 25 participants came from Taiwan, Ireland,
Cambridge (UK), Germany, Thailand, France, US.
 In 2000, 65+ people came from 10+ countries.
 In 2001, 95+ people came from 16+ countries
 In 2002: 70 people from 13 countries
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 The US Venture Industry Has Grown
Year # Venture Capital Under Mgt
Firms
1980 87 $3B

1990 375 $32B

2000 693 $210B

Source: 2000 NVCA Yearbook

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 Corporate Venture Capital Groups
Have Become Very Involved
$20.00

$15.00

$10.00

$5.00

$0.00
1995 1996 1997 1998 1999 2000 1H2001
$ Billion $0.28 $0.53 $1.00 $1.90 $10.62 $17.12 $3.19

Source: VentureXpert™ Database by VE & NVCA

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 Corporate VC Groups are Involved
in more than ¼ of all Deals
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
1995 1996 1997 1998 1999 2000 1H2001
% of $ 4.80% 4.50% 5.80% 8.40% 18.10% 16.60% 14.00%
% of Deals 7.50% 7.70% 11.90% 16.20% 28.40% 33.10% 25.60%

Source: VentureXpert™ Database by VE & NVCA

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 Traditional vs.
Entrepreneurial Career Paths
High School
High School
University

University
Practical Experience

Big Company Management Training

Well Managed, High Growth Firm

Startup Venture

Another Startup?

Retire Venture Capital or Angel Investor

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2002 Massachusetts Institute of Technology Never really retire
 Some Critical Success Factors in
Entrepreneurship
1. Believe that Startup Ventures can Succeed:
 Parent(s) who are entrepreneurs.
 Early contact with successful entrepreneurs.
 Exposure to success stories and case studies.
2. Gain practical, real world experience before, during and after
university studies.
3. Be willing to be Unusual/Unconventional.
4. Agree to Embrace Risk, and possibly failure.
5. Want to leave a large Company.
6. Live in a society that sees the above as normal, not a strange
exception.
7. Focus on speed, execution, and results. Be willing to “break the
harmony.”

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 Our Message to Entrepreneurs:
Building Your Company
 Need an “A” Team – “3K” experience
 Serious Technology – sustainable advantage
Solve an important, valuable problem…
For clients who have money …
Who want to pay well…
With a short sales cycle…
And will buy more, soon …

YOUR VALUE PROPOSITION MUST BE COMPELLING,

QUANTIFIABLE, PROVEABLE, REFERENCEABLE, AND
EASILY EXPLAINABLE…
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 Our Message to Entrepreneurs:
Selecting Your Financial Partners
 Seek True Value Added – “Blue” Money
Operating Experience
Rolodex/Network
Awesome Portfolio (in your space)
Cool Limiteds (in your space)
Deep pockets / courage to stay the course
 Keep Realistic Expectations
Time to Market
Revenue growth
Valuations

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 Entrepreneurs’ Funding: Many Options
 Your Personal Funds  Mezzanine Financing
 “3F” – Friends, Family,  Merger and Acquisition
and Fools
 Initial Public Offering
 Personal Credit Cards
and Other Borrowings  Secondary/Follow-on
Public Offering
 Business Angels
 Venture Capital  Private Placements –
Debt & Equity
 Corporate Direct
Investment  Buyout/Acquisition
Financing
 Venture Leasing
 Corporate Debt 28
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2002 Massachusetts Institute of Technology
 Business Plan Suggestions (1/2)
 Executive Summary:
 Name your first ten customers.
 Be brief.
 Business Plan:
 Be optimistic, but realistic.
 Know your competition’s numbers.
 Be brief.
 Advisors:
 Get good people with gray hair (or no hair) involved early.
 Understand that investors will call them.
 Focus on how and why prospective customers will buy from
you, and pay you money.
 Focus on milestones (more than calendar dates).

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 Business Plan Suggestions (2/2)
 Plan how to build your company without any outside investment (bootstrap). Then,
maybe, you are ready to speak to VCs.
 Most business plan judges focus on:
 Customer needs
 Value proposition
 Sustainability
 Team
 Your investors should bring you both customers and management talent (Akamai case).
 Realize that this business plan competition is an educational process. It does not
particularly matter if you win.*
*It does not matter “that you won or lost, but how you played the game .” (Grantland Rice)

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 Akamai: Financing Strategy (1/2)*
1. $50K finalist, not winner (1998).
2. “Value-add, not valuation” philosophy of funding.
3. Financing brings:
 Credibility
 Customer/partner introductions
 Management expertise
 Faster growth
 Cash
4. First round: angel investors:
 First customers
 Network deployment
* Special thanks to Jonathan Seelig, Co-founder, and frequent guest lecturer at MIT
Sloan School

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 Akamai: Financing Strategy (2/2)
5. Second round: VCs
 Build operations & management
 Battery Ventures & Polaris
6. Third round:
 Broadband & International
 Baker Communications
7. Fourth round:
 Industry leadership, standards, & cachet
 Apple, Cisco, Microsoft
8. IPO:
 Serious company
 “Currency” for growth + acquisitions

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 New Way of Thinking (1/2)
To create a positive climate for innovation and change
requires sustained top level commitment, openness
about past mistakes, and focus on looking only forward.
Outside pressure helps:
De-regulation
Benchmarking
Transparency
Financial disclosure
Corporate governance
Global competition
New thinking: we’re on a burning platform…

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 New Way of Thinking (2/2)
Entrepreneurial, but not anarchy.
Invite in outsiders (entrepreneurs):
Expose employees to new thinking.
Accelerate employee learning.
Benchmark internal projects.
Advantages of single large investor:
Patient Money
Deep Pockets
Market Knowledge
Market Presence / Distribution
Must have commitment of CEO, CTO, CFO.

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 Teaching the Elephant to Dance?
Mice Living in the Elephant’s Cage?
Can large, slow-growing firms embrace the
high risk venture culture?
Typical High Tech VC portfolios  out of 10
startups:
6 are shut down or go nowhere (living dead)
3 yield 2-4x in 4-7 years
1 (hopefully 2) are tremendous successes
Can a big company accept 60-70% losses?
What happens to the people?

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 Walking Before Running
Siemens, Eastman, and others created highly
successful venture groups.
Both invested first in 6-20 excellent VC funds
as a way to learn the venture business, and
to benchmark their own culture.
Speed: both firms benefited from “outside
pressure” to change their business processes
and move faster.

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 International Association of
Institutional Venturing and
Intrapreneurship (IAIVI)
First meeting was 25-26 July 2002 at MIT
Share Knowledge.
Identify Best Practices.
Build Institutional Processes.
Attract Best People.
Create Training Courses.
Communicate Consistent and Coherent
Messages to Top Management.
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 mFund
(Motorola / iDEN Internal Ventures)
Why an intrapreneurial program?
 Tap huge customer and technical knowledge from staffers.
 Identify low-cost, low-risk entry points into new markets.
 Foster the development of radically different products for
existing as well as new potential markets.
 Capitalize on technology developed in-house.
 Expand the discovery process by listening for new voices and
getting new perspectives from staffers.
 Formalize an innovation process that could serve as a role
model for other Motorola groups, and IAIVI members.
“Bring new revolutionary ideas out of the cubes and into
Motorola’s coffers.”
– Matthew Growney (One Motorola Ventures)
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 mFund
(Motorola / iDEN Internal Ventures)
What is mFund?
“mFund combines Motorola’s best assets (history, size,
tradition of technological innovation, process expertise)
with the entrepreneurial spirit of associates like you.

We see mFund as an aircraft carrier: it provides our

intrapreneurs with the support infrastructure to launch
“market reconnaissance” projects. These projects will
scout for business opportunities that could lead Motorola
into new markets, new customers, and even new
industries. mFund will give project teams access to all of
Motorola’s assets and resources.”

– José C. Lacal (iDEN Subscriber Group)

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 BASF Venture Capital GmbH
 Established April 2001.
 €100 to be invested in first 3 years…
 …into startups and funds (chemical-based).

Expectations:
 Good ROI.
 Gain insight into innovative technologies.
 Structure investments as partnerships.
 Create global network (materials science…)
 Build reputation as value-added partner.

– Doyle Robertson, BASF Venture Capital GmbH

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 BTexact Technologies
1. Role: represent and grow BTexact Technologies’ innovation-based
relationships and opportunities in the Eastern US.
2. Focus: build an effective, sustainable and broadly-based engagement
between BTexact Technologies and the innovation community in the
Cambridge area, based on our strategic and valued relationship with MIT.
Eventually, extend into the wider academic and business communities,
particularly the wider MIT family.
3. Three primary pillars:
 Technology: ensure that our technology and venturing pipelines are filled with
the right things.
 Thought leadership: ensure we ask ourselves the right questions, use the right
tools, and engage in the right conversations with our customers, suppliers, and
partners.
 Business development: identify new innovation-based opportunities and
relationships based on complementary skills and assets.

– Steve Whittaker, BTexact Technologies

(based on the MIT campus)
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 The Boeing Company
 The Chairman’s Innovation Initiative
Established by CEO in September 2000.
$200 million “innovation fund.”
Create value, change culture.
New business concepts from these sources:
• Employee-driven
• Value mining (outside VCs)
• Top-down strategy
100 projects under review.
Investments in selected VC firms.
Run by Carter Williams (MIT Sloan MBA 1997, Member of the MIT E-
Center Alumni Advisory Council).

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 Eastman Ventures
1. Learning: investing in high tech seed stage VCs.
2. Benchmarking: inviting outsiders to review our strategy and investments.
3. Projects: spinning off and starting up
 Cendian – chemical logistics
 Ariel – regulatory compliance solutions
 Coal Gasification Services – design, startup, operations
 Others
4. Lessons:
 Need excellent people:
• Business building (vs. parent company focus)
• Energy, passion, recruiting, leadership
 Validate with customers early and often.
 Undertake external reviews early.
 Develop realistic financial projections.
 Face up fast to the employment challenges when a project is killed.
 Our corporate advantages: IP, brand, people, competencies, capital.
 Our corporate disadvantages: liability, speed, perceived threat to existing businesses,
established processes and norms.

– Brenda M. Barnicki, Director, Services Business Development

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 Siemens Venture Capital (SVC)
1. Established mid-1990s. Strong central organization
(reports to CEO) with lines to the business units.
2. Invested in 16-20 VCs (US, Germany, others) in order
to learn startup business and culture.
3. Co-invested with VCs in companies of strategic interest:
Subsequent rounds of funding
Involvement of business units
4. Funds “re-filled” several times.
5. SVC co-founder and general manager was recently
recruited to PolyTechnos Venture-Partners (Munich).

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 The Dow Chemical Company
1. We established a $375 million fund. Our objectives:
IRR
Strategic
2. We are still going strong. We see the current downturn as
an opportunity, not a problem.
3. We believe that corporate VCs who exit now will have little
or no credibility for ten years if they try to return.
4. Recent investments:
Amberwave (near MIT)
Plastic Logic (Cambridge UK, with
. Amadeus and PolyTechnos)

– Nicholas Darby (09/2002, in Cambridge, UK)

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 Discussion and Next Steps
1. Does your company feel the need to change? Slowly?
Urgently?
2. Is your company already committed to the concept of
Corporate Venturing?
3. Are the experiences of other firms partially applicable to
your company’s situation?
4. Is your company ready to take some or all of the next
steps:
Establish objectives, team, fund
Get outside help / training / Board
Meet leading VCs; invest in a few (strategic focus)
Make investments; take losses (usually before gains)?

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