The delicate art of growth

Inside Business: Large companies need clear objectives when they go down the capital venture route or they may well get lost, writes Roger Trapp

WHEN Apple Computer set up a programme to pursue ventures in the mid-1980s, it had the twin objectives of earning high returns and supporting the development by third parties of Macintosh software.

McKinsey & Co, the international management consultancy, says in a study it achieved an internal rate of return of about 90 per cent over five years, but had little success in improving the position of the Macintosh.

Furthermore, Paul Brody and David Ehrlich, the authors, point out that these returns, "though attractive, had minimal impact on the company's overall performance" as will be clear to anybody in the least bit familiar with the company's chequered past.

The point made by Mr Brody, a former McKinsey consultant now working as a specialist in high technology markets with i2 Technologies, and Mr Ehrlich, a consultant in the firm's Kuala Lumpur office, is that a venture programme is just one instrument for implementing a company's business mission. Claiming that the Apple programme's managers later admitted that the strategic potential of their investments had not been realised, they say that the primary objective "should clearly reflect the company's overall strategy".

In the latest issue of The McKinsey Quarterly, they set out how their experience suggests that only four objectives can legitimately claim to do this. The first of these is improving the capture of value from strategic assets. This is most appropriate for companies that are able to exploit traditional assets such as world-class manufacturing skills, extensive distribution networks or strong brands, but lack enough good product ideas to capture the full value.

Merck, the pharmaceutical company, and 3M, the industrial company, have pursued venture programmes for such a reason.

Second, is improving the capture of value from good ideas. This is most suited to companies that are good at generating ideas but struggle to bring many of them to market. Organisations with extensive technical skills but a lack of enterprise suffer from such problems, with Xerox PARC perhaps the most-often-quoted example.

The third objective is responding more competitively in a rapidly evolving industry. Organisations that are battling with energetic upstarts can find themselves aiming in this direction, and a venture programme can provide a platform for boosting successful product innovation, with strategic bets used as a defence mechanism to keep competitors from gaining access to key evolving technologies. The article "Can big companies become successful venture capitalists?" says that Cisco Systems, the fast-growing producer of internet-related products, has pursued this route to gain control of important technologies.

The final objective is supporting demand for core products. This, say Mr Brody and Mr Ehrlich, applies when the demand for a company's core products is affected by the evolution of a separate industry niche, and a well-structured venture programme can be useful in shaping the direction of such an evolution. They point to how both Intel and Adobe Systems have used venture programmes to support technologies that drive demand for their core products.

The objectives and the clear thinking needed to pursue them form a key part of the article's argument that successful venture capital investment is a lot harder than it sometimes looks. With management gurus and consultants urging the boards of large companies to follow the example of the fast- growing companies that are driving the economies of many of the world's leading industrial nations and become more enterprising, executives must feel under pressure to start venture capital funds.

One of the problems is that, while venture capitalists' successes gain publicity, the failures tend not to be noticed. As Messrs Brody and Ehrlich note, venture capitalists are specialists who tend to have a simple goal: "Take a pile of money and make it bigger." Such a steady focus on financial returns makes decision-making easier. But when larger companies go down this route, there is a tendency to confuse this with the desire to gain access to innovation or markets, to retain entrepreneurial talent and to achieve greater growth for core products.

They say that the fact that Adobe Systems, for example, has been so successful with the $40m venture fund launched in 1994 that it has recently set up another demonstrates that big companies can apply the venture capital model effectively. But more often the results are disappointing.

Among the reasons are difficulty in establishing the systems, capabilities and cultures that make good venture capital firms successful, corporate managers' lack of freedom to fund innovative projects or cancel those that will not live up to promise and the fact that managers are typically equipped with the skills for managing mature businesses rather than nurturing start-ups. But at the route of the problem, suggests the McKinsey article, is a lack of understanding of the characteristics of the venture capital model and the need to tailor a programme to an organisation's own circumstances without losing sight of the essentials.

Above all, an organisation needs to be absolutely clear about its reason for launching the programme, which, of course, brings you back to the four key objectives and Apple.

Suggested Topics
Start your day with The Independent, sign up for daily news emails
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

Where the spooks get their coffee fix: The busiest Starbucks in the US is also the most secretive

The secret CIA Starbucks

The coffee shop is deep inside the agency's forested Virginia compound
Revealed: How the Establishment closed ranks over fallout from Loch Ness Monster 'sighting'

How the Establishment closed ranks over fallout from Nessie 'sighting'

The Natural History Museum's chief scientist was dismissed for declaring he had found the monster
One million Britons using food banks, according to Trussell Trust

One million Britons using food banks

Huge surge in number of families dependent on emergency food aid
Excavation at Italian cafe to fix rising damp unearths 2,500 years of history in 3,000 amazing objects

2,500 years of history in 3,000 amazing objects

Excavation at Italian cafe to fix rising damp unearths trove
The Hubble Space Telescope's amazing journey, 25 years on

The Hubble Space Telescope's amazing journey 25 years on

The space telescope was seen as a costly flop on its first release
Did Conservative peer Lord Ashcroft quit the House of Lords to become a non-dom?

Did Lord Ashcroft quit the House of Lords to become a non-dom?

A document seen by The Independent shows that a week after he resigned from the Lords he sold 350,000 shares in an American company - netting him $11.2m
Apple's ethnic emojis are being used to make racist comments on social media

Ethnic emojis used in racist comments

They were intended to promote harmony, but have achieved the opposite
Sir Kenneth Branagh interview: 'My bones are in the theatre'

Sir Kenneth Branagh: 'My bones are in the theatre'

The actor-turned-director’s new company will stage five plays from October – including works by Shakespeare and John Osborne
The sloth is now the face (and furry body) of three big advertising campaigns

The sloth is the face of three ad campaigns

Priya Elan discovers why slow and sleepy wins the race for brands in need of a new image
How to run a restaurant: As two newbies discovered, there's more to it than good food

How to run a restaurant

As two newbies discovered, there's more to it than good food
Record Store Day: Remembering an era when buying and selling discs were labours of love

Record Store Day: The vinyl countdown

For Lois Pryce, working in a record shop was a dream job - until the bean counters ruined it
Usher, Mary J Blige and Will.i.am to give free concert as part of the Global Poverty Project

Mary J Blige and Will.i.am to give free concert

The concert in Washington is part of the Global Citizen project, which aims to encourage young people to donate to charity
10 best tote bags

Accessorise with a stylish shopper this spring: 10 best tote bags

We find carriers with room for all your essentials (and a bit more)
Paul Scholes column: I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England

Paul Scholes column

I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England
Jessica Ennis-Hill: 'I just want to give it my best shot'

Jessica Ennis-Hill: 'I just want to give it my best shot'

The heptathlete has gone from the toast of the nation to being a sleep-deprived mum - but she’s ready to compete again. She just doesn't know how well she'll do...