Venturing from the Core: Risky, Hard, and Necessary

By William Kilmer

In 1998 Eastman Kodak was still a powerhouse in the photography market, holding 85 percent market share for photo paper.  Nascent digital camera technology was already 13 years old, developed internally by a Kodak engineer.  Fast forward four short years to 2002, and Kodak’s paper and film processing business was undermined by low-cost digital technology, which had become mature enough that a two-megapixel camera was priced below $100.  One year later, in 2003, digital cameras outsold their film-loaded predecessors and Kodak started its downward spiral to bankruptcy in 2012.

Meanwhile, in 2004, Blockbuster Video was at the peak of its market share, with 9,000 retail stores and 60,000 employees.  Just two years earlier Redbox, a fledgling video store in a box concept, had just 15 kiosks in place.  By 2006, Redbox’s strategy of placing their small kiosks in other stores enabled the company to outpace Blockbuster in the number of retail locations.  Later, in September 2010, Blockbuster filed for bankruptcy at the same time that once-fledgling Redbox had reached a milestone of more than one billion videos rented.  From the peak of 9,000 Blockbuster stores, only 51 remain open today.

These two examples illustrate how easily companies can fall when they and their industries are threatened by new competitors, technological change, performance disruption, new business models, micro markets, and changing societal or economic trends.  In 1958, the average tenure for companies in the S&P 500 index was 61 years.  Now, as companies and industries are under high alert from Schumpeterian creative destruction, the average is time on the index is just 18 years.

While it is acknowledged that virtually all companies are under attack, the relevant question is how does a company keep an eye on these new threats when company management needs to focus on the hyper-competition in their existing markets?

The recent example from the auto industry shows how every company is now on notice.  Taking the cue from AirBnB’s assault on the hospitality industry, it seems that every auto manufacturer focuses on intense competition in the industry while keeping watchful eye on a software industry that could either help innovate or eat their business.  The result is a recent investment wave by auto manufacturers including General Motor’s recent investment in Lyft, followed by Toyota’s investment in Uber, Volkswagon funding Jett, as well as BMW’s small investment in Silicon Valley ridesharing company Scoop.  These investments are examples of corporate venture capital (CVC) organizations’ obligation to invest away from their corporation’s core capabilities to identify both competitive threats and new opportunities.

Venturing From the Core: Staving off disruption, and more

Most corporations are concerned about the threat of disruption and some expect their CVC organization may help them spot the next disruptive company on the horizon.  But venturing away from the core, or explorative investing, is about helping the corporation stretch beyond its core assets and resources and see not only potential disruptions, but new opportunities.  A smart CVC organization helps their corporation see how combining what they do well with new business models, technologies, or taking advantage of new trends developed by startups, can create new markets, resulting in a more agile organization.

Management professor Henk Volberda of the Rotterdam School of Management described this type of agile organization as “the flexible firm,” one that could handle the friction between preserving their business and anticipating and embracing disruptive change.  CVC organizations can aid in that mission by making investments that help preserve corporate advantages as well as help it prepare for change that require new skills, assets, knowledge and technologies.  Nowadays, as software, artificial intelligence, robotics, 3D printing, virtual reality, and many more technologies begin to enter into other mainstream industries, there has never been a greater need for agile CVC units.

At Intel Capital, where I was previously a managing director, we often made exploratory investments to be the “Eyes and Ears” of the corporation, a term coined by Intel Capital founder Les Vadasz for those investments that lacked a defined business relationship.  They were generally smaller investments made in companies for Intel to learn from them and they vital to keeping Intel nimble and aware of the market.

Exploratory Venturing: How Hard can it Be?

Exploratory investing is not an easy practice.  CVC units often feel most comfortable close to the corporate strategy. Supporting existing business units is easier than trying to convince the parent corporation it is under threat.  In addition, it’s much easier to use corporate resources to evaluate a technology that is aligned with corporate expertise than it is to venture off into new territory.

Several years ago, I conducted extensive research to investigate what worked and didn’t work in exploratory investments.  By identifying and reviewing in detailed information about more than 100 CVC investments that were made for exploratory purposes I was able to compare the characteristics of the companies including the amount of funding they had received, how much was invested by the CVC unit and when, how many failed, or exited and how, and much more.  I also studied many attributes about how the CVC unit conducted the investment and to what extent the business unit was involved.  I ended up with some interesting insights, only some of which I can share in this short article.

Exploratory Companies: More and Longer

Of the companies I reviewed, two things stood out.  First was that companies that received exploratory investments required more funding over their lifetime.  A lot more funding.  In fact, these companies taken in, on average, about $11M more venture capital funding than other investments the CVC units had made.  At least part of the explanation for this was that these more adventurous companies were attacking new opportunities that required more capital to bring their offerings to market.

The second characteristic of these investments that stood out was that the CVC investors had, on average, invested in the companies much earlier in the company’s lifespan than they had in other types of investments they had made.  The average age of the companies when they took an investment from the CVC unit was just under three and a half years, while the average company age for other investments was almost two years older.

Recognizing these two characteristics alone indicated one thing: CVC organizations who are venturing further from the business were getting in earlier and were potentially investing more money than they were in other investments.  Both lead to more risk for the CVC organization.

Successful Exploratory Venturing: Keeping the Business Unit at Arms Length

In addition, to the company characteristics, I also explored whether the corporate venture capital unit and the corporate business unit worked with the startup, and whether the unit working with the startup had any bearing on whether the investment was considered strategically successful.  Two interesting attributes stuck out: the more the business unit was involved in sourcing the investment, rather than the CVC unit.  In addition, the more involved the business unit was in supporting due diligence for the investment, the less strategically successful the investment was.

Both of these insights are logical.  Sourcing investments is a product of networks.  If the business unit is sourcing an investment, it is probably based on its existing network, market insight, and supporting ecosystem of companies.

Likewise, if the CVC unit relies too heavily (or at all) on the business unit to provide input on how successful the company may be, when the company’s assets, intellectual property, methods, technology, business model, target market, etc., may be far from what is expected in its model, it will be subject to filtering by business unit’s own view of the world.  Would Blockbuster have approved of Redbox’s small rental fees, or lack of retail stores, or the appearance of red kiosks at McDonalds?  Would Kodak have thought that sharing low megapixel cameras were a match for a quality printed photo on their paper?

These two facts don’t mean that the corporation should always be kept at arms length, only that the corporation is not as good at finding and investigating companies as the CVC organization is.  Once an investment is made, the CVC organization is obligated to make sure the corporation can learn from it.

Here are some guidelines from my research and investment experience that can help any CVC organization better take on the challenge of exploratory investments:

  • Cast a wide net. Be open to diverse investments, not just looking for disruption, but for creating new opportunities to innovate and enhance what the corporation is doing.
  • Create some CVC independence. Bring in the business unit to your investments, but don’t be beholden to it. If they expect to have a CVC organization that validates everything they are doing, they don’t know how to use a CVC unit properly.
  • Broaden your personal network. Look for personal associations beyond those of the business unit. Create a network with academics, find those attacking a problem who have no industry experience.  Going to a trade show?  Find groups that are meeting on the fringe.  Creating a larger network will not only expose you to more potential investments, but also those people who can help you diligence interesting deals.
  • Prepare to be in for the long haul. Exploratory investments take more time and more money to make them success.  Be ready for investing more capita and look to bring in expertise that can help the company find its way on the long journey to success.
  • Don’t be afraid of failure. Exploratory investments may be subject to higher business failure and higher strategic failure. You have to accept and try to mitigate it.

While at Intel I found an interesting company that had created a solution that was getting some interest in the market.  After some investigation, I invited the business unit who we thought might be impacted to help me look at it.  After a short investigation in a couple of meetings, the business unit told us in no uncertain terms to not make the investment.  In fact, they told us that they had a similar project underway that was superior in many ways to the prospective investment, so there was no need.

Undeterred, I introduced the company to Intel’s corporate research group to have them look at the technology and provide an unbiased opinion.  One intrepid technology expert told me the startup understood things we didn’t and had technology that was far superior to what Intel was capable of doing.  He also insisted that we would eventually need to understand what they were doing.

After further validation we invested in the company, despite the business unit’s opposition and put a senior company research on the board as a board observer.  We also set up exploratory meetings every six months to keep them close to the company. Only 18 months later the business unit understood the company better, saw that they were getting market traction, and acquired the company for the very technology it had earlier dismissed.

With all the challenges and hazards of exploratory investing, it might be tempting for a CVC organization to keep its head down and focus on less risky ventures.  However, venturing away from the core in more exploratory investments can bring even greater strategic gains to the corporation creating a more flexible, viable organization if the CVC organization and the business unit invest and manage them properly.

William Kilmer is a former managing director at Intel Capital as well as a start up CEO, author, and consultant.  You can connect with him on Linkedin at

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