It’s hardly surprising that big companies are attracted to the venture capital (VC) model for new business development.1 Its track record is enviable: the industry as a whole outperformed the S&P 500 in five of the past six years, and US venture-backed companies have raised more than $40 billion in initial public offerings since 1990 (exhibit). Moreover, the model tempts management with the prospect of improved access to business innovation, better retention of entrepreneurial talent, and greater growth in demand for core products.
Yet more often than not, big company attempts at applying the VC model produce disappointing results. Most find it difficult to establish the systems, capabilities, and cultures that make good VC firms successful. Corporate managers seldom have the same freedom to fund innovative projects, or to cancel midstream those that clearly won’t live up to promise. Their skills are typically honed for managing mature businesses, not nurturing startup efforts. And they lack vital contacts in the startup community.
Even so, big companies can apply the VC model successfully. Consider software manufacturer Adobe Systems, which launched a $40 million venture fund in 1994 to invest in companies strategic to its core business, such as Cascade Systems...