Building a pipeline to the future

Creating bright tomorrows is a hard task. It’s easy to spend lots of effort and money on what appear to be good ideas when they start out, only to have them add to the growing history of failed initiatives as time goes by. What’s needed is a more reliable way for the CIO to build a pipeline to the future. Fortunately, one industry – the venture capital industry – may show the way.

The venture capital industry thrives on its ability to spot good ideas – like new technologies or new marketing concepts – when they are little more than a gleam in the eye of their inventors. Venture capitalists then invest in these ideas, exiting once they have turned into fully-fledged enterprises.

While only a small number of CIOs can invest directly in startups, most can learn from the processes and approaches used by venture capitalists.

Invent, partner, invest, co-invest and acquire

There are five broad strategies for setting up and managing ventures: invent – do it all yourself; partner – share the risk of doing it with someone that’s done it before; invest – buy into someone else’s ability to do it; co-invest – share your financial exposure with a fellow backer, perhaps one experienced in making successful high-risk investments; and acquire – buy into an already successful idea from the outside.

Choosing which of these five approaches to use depends on the nature of your potential venture and your appetite for risk and reward.

The least risky place to start a venture is to base it on something that’s been invented in-house. CIOs can calve ventures from existing intellectual property. Combining a number of different ventures into a portfolio ranging in scale is a prudent approach to this type of venture investing.

A little more risky, but by its nature more likely to reach critical mass, is partnering with other companies. The learnings from enterprises that have managed to pull off successful partnerships suggest that you should close the deal within three weeks of starting negotiations. If it takes longer, the impending problems assume a life of their own and the deal will be doomed.

If your appetite for risk is big enough to make the two ad hoc forms of venturing we have discussed so far less than satisfying, establishing a corporate venture group might be the route for you. A corporate venture group comprises company employees who work with traditional venture capitalists. While having a professional group of investors on staff means the number of deals you can do will go up rapidly, the downside is that the deal quality tends to lower. It’s also an expensive way of getting access to venturing skills.

A somewhat less expensive way of getting into full-blooded venturing is through a joint venture with a venture capital investor. Assuming that you choose your investing partner wisely, they will bring skills and resources to the party that are lacking in your enterprise. While the rewards from any successful investment will have to be shared with your co-investor, so will the risks.

If after reading this you decide that the risks of investing in start-up businesses is too uncertain, then there is always the fifth strategy: acquisition. Acquiring and integrating capabilities, know-how and technologies has the advantage of a definite payoff – after all, you know what you are acquiring.

Explore your potential for venture-based results

The search for venture opportunists starts by asking some straightforward questions. “Yes, we are operating our infrastructure” but “how can we extract value from our assets?” “Yes, we’ll do this new sales report to segment individual investors,” but “can we exploit this new, neat technology to establish a new business opportunity?”

Strangely enough, when CIOs hear other wealth creation examples, they tend to say, “Well that was easy. My challenges are more complex.” My hunch is that many CIOs are already standing in front of some very good, ready-to-be-exploited ideas.

As with all of these things, it starts at the top. Top management needs to be explicit about the goals of their venture strategies. Exploring the hidden potential of a company’s intellectual property and technology requires motivating managers to seek possible solutions through venture strategies.

Andrew Rowsell-Jones is vice president and research director for Gartner’s CIO Executive Programs.

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