Dominic M. Palmer
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Help Minority equity alliances have grown substantially in
number and value over the last decade, and are now a major component of
strategy within many high-technology companies. Intel, for example, has a
portfolio of more than 200 minority equity alliances, approximately 100 of
which have been formed in the last 18 months. Microsoft has put more than $2
billion into minority equity investments, and many of these firms are alliance
partners. America Online, Intuit, and Yahoo! have all entered the alliance
investment game.
As alliances become integral to a company's way of doing
business, companies are striving to formalize the process of finding and
developing corporate investments, and many are establishing corporate
investment units. But what should be the scope of those units'
responsibilities? How should they be organized? Where should they be located
within the organization, and how should they interact with others inside and
outside the organization?
Interviews conducted by Accenture with executives in the
high tech sector suggest a consensus emerging around certain factors that
contribute to corporate investment unit success.
Consolidate Strategic Responsibilities With
Corporate Investment Unit The internal division of roles and responsibilities is
situation specific, but our work offers the following guidelines:
Open deal finding to all. Consistent success in minority
equity alliances—like that in acquisitions and venture investing—depends on
creating and maintaining a rich flow of opportunities. To make this happen,
companies should actively enlist ideas from all corners of the organization and
beyond.
Leave tactical management to the operating units. The
operating units should manage the day-to-day relationship—they are the only
ones with the resources and expertise to make an alliance function.
Centralize the rest. Companies can gain real advantages by
consolidating the remaining responsibilities of the minority investment
process. Accenture work shows that deal making, investment management, and
corporate advocacy are best performed under the same roof. Such consolidation
promotes expertise, consistency, and speed, as well as strong incentives for
individual performance.
Establish a High-Performance Corporate Investment Unit
Corporate investment units seem to perform best when they are:
- Kept small and focused. The corporate investment unit should
be filled with full-time employees and, for companies with 10 to 30 investments
in their portfolio, led by a vice president with a staff of two to five
managers (the level and number of staff may increase somewhat for portfolios
that are larger in number, value, and complexity).
- Empowered to take initiative. The investment unit needs to
be flexible and quick in decision making. This suggests, among other things,
that the firm preapprove an investment fund, and allow the unit to make venture
decisions as it sees fit, rather than waiting for the corporate budget cycle.
- Placed near acquisition and alliance units. The corporate
investment unit should be a peer to units overseeing alliances and
acquisitions. By placing these three units in close organizational proximity, a
company is better positioned to handle two essential tasks—deal evaluation and
deal evolution.
- Given strategic and operational incentives. Most computer
companies today compensate the members of the corporate investment unit
according to the standard corporate formula—salary, bonus (with a maximum
upside based on a defined percent of salary), and stock options. In most cases,
individual bonuses are heavily weighted toward the financial performance of the
investment portfolio. Clearly, if companies want to capture more strategic and
operational value from these alliances, they will need to link individual
compensation to actions that support the non-financial goals. Several companies
are now developing scoring systems that rigorously track performance such as
the average number of operating units working with each investee.
Adopt a Flexible Approach to Managing the
Portfolio Like Intel, many companies are now dealing with robust
portfolios of different minority equity alliances. One approach does not fit
all situations. Key principles for success include:
Engage venture capitalists according to deal type.
Investors need to understand the type of minority investments within their
portfolios and engage the venture capitalist community accordingly. Minority
equity alliances generally are made for one of three reasons:
- To place a strategic bet on a possible industry direction.
- To create platform links that the company cannot or does not
wish to create internally.
- To secure a relationship with an innovative research
partner.
Firms with a portfolio of platform links and innovation
partners are better off using an informal approach to venture capitalists—using
them to stir up opportunities and as lead-or co-investors. Not so with a
portfolio of strategic bets—in these cases, an outside firm often will have the
better skills, including deal generation, financial analysis, and the vision to
see connections to other firms and networks. Despite laudable efforts to make
internal venture groups more nimble, an outside venture capitalist is better
suited temperamentally to weed out underperformers from the portfolio and focus
on the 5 to 15 percent that will prove to be winners.
Mix and match. As portfolios of minority equity alliances
and investments become more diverse, companies will need to mix and match
different structures. One company already doing this is Sun Microsystems. Sun
is an instrumental member of the Java Fund, a $100 million investment pool
managed by venture capitalist Kleiner Perkins that places strategic bets on new
ventures using Java technology. At the same time, Sun uses its corporate
development unit to assist its operating units in making other minority
investments, working to ensure strong operational links.
At least two models for the corporate investment unit are
in use and show promise. One is the Corporate Hub Model used by Intel and
Novel, in which a corporate investment unit reports to corporate business
development and operates like other staff functions, in parallel with units
focused on alliances and acquisitions. Another is the Venture Capitalist
Alliance Model used by Adobe Systems, in which the internal corporate
investment unit splits responsibilities with outside venture capitalists.
Whichever model a company chooses—Corporate Hub, Venture Capitalist Alliance,
or some variation—the principles outlined in this article will help that unit
operate more successfully for the advantage of the company.
Dominic Palmer is an associate partner in the Accenture
Strategy practice. He is based in Boston.
For more information, please
contact us.
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