Angel Investing within the Company – Insights from an Internal Corporate Venture Capitalist

Breaking through the crust

One of my favorite and most successful approaches to building a powerful intrapreneuring ecosystem is internal corporate venturing!

It is an exquisite tool to cut through the crust of ‘red tape’ that bureaucracy builds up over time. Internal corporate venturing or “Angel investing” allows for nimble decision-making with a lean process to give disruptive innovation ideas a chance again in a large company.

Seed-funding promising ideas

How does it work?  Think of becoming a venture capitalist within the company: You invest in ventures within the organization and help building ‘intraprises’ in contrast to funding start-up enterprises outside the company. The difference is a you don’t venture for your own profit but for the better of your organization.

The idea here is to seed-fund promising disruptive ideas that otherwise would not be implemented or even seriously considered. These opportunities –typically‑ were rejected by the ‘corporate immune system’ previously, when an employee with an idea approached their line manager or a governance committee of sorts requesting approval to ‘try something out.’

POC over ROI

Often enough, there is no clear return-of-investment (ROI) predictable for these early ideas.  What you may be looking for is rather risky and experimental, a proof-of-concept (POC).  The metrics for payoff and ROI of disruptive ideas does not follow the same approach we are used to measure the more predictable returns of common cost reduction and incremental improvement projects. Disruptive POC projects often don’t have an ROI projection when you explore technology of sorts or its application that may become a game-changer for our future business.

In my experience, communicating the POC nature of the project over focusing on ROI can actually help!  It prevents the ‘organizational immune system’ from kicking in early on, since there is little threat to established practices.  Why?  It does not come across as competing with ‘big elephant’ projects over significant amounts of governed resources following the conventional processes of the company’s machinery.  Instead, we just try something out!  It’s a little experiment that doesn’t change anything, so it poses no threat to established practices, investments or the power-base of individuals defending their fiefdoms.

Aspired returns

Having said this, there is of course a commercial end to all projects. After all, we have no resources to waste and will have to demonstrate down the road that our ‘experiments’ pay off somehow. Our working assumption is that the disruption should lead to a ten-fold (10X) payoff – at least.

Personally, I prefer aiming at a bold 100X ROI target; two orders of magnitude, that is. It sets an ambitious target and -if things work out- a great success story. It’s a powerful point to make for disruptive innovation as part of our innovation ecosystem and shifting the mindset within an organization.  Sharing these success stories with executive stakeholders is crucial (for future support) as well as with employees (for future ideas).

Governance and authorization

Interestingly, what employees are looking for more than funds is authorization to do what is right and worthwhile for the company. Often, the obstacles are perceived and only exist in peoples’ minds. These barriers are formed by many factors over time, such as the management style they experienced and organizational silos that mold a company’s culture as well as the employees’ mindset.

In this particular company, a lean oversight board makes funding decisions. It is composed of a diverse team of more forward-thinking executives and a very lean decision process. The team acts as enabling ‘go-keeper’ for accelerated innovations instead of pushing the breaks as ‘gate-keeper.’

The little monies offered for trying something new only help smoothen the path for innovators in the company. The most important part is them feeling empowered and “authorized” to take action that overcomes complacency, inertia and organizational paralysis. On the spectrum of strategic innovation roles, the board serves as a “sponsor” and sometimes as a “coach,” when an idea aims to overcome internal barriers to increase efficiency, for example.

Dealing with Risk

The purpose of this governance board is to enable the exploration of disruptive ideas by giving internal innovators a chance. The focus is on projects that can be characterized as early stage experiments to explore transformative enabling technologies and value-adding services of higher risk or less predictable outcomes than conventional project portfolios in the mature organization would feel comfortable with.

Naturally, this approach comes with an elevated risk of failure when projects do not produce profitable outcomes or simply prove infeasible or poorly timed.  This ‘price’ is accepted as long as it generates learning.

The potential damage is low, since we are talking about swift and low-cost experimentation: try often and fail fast. Thus, these risky projects complement regular and more conservative project portfolios in the various businesses of the organization. In addition, the innovation project portfolio is somewhat risk-balanced, which avoids having too many high risk projects that may jeopardize the likelihood of profitability across the portfolio.  Reality is that also the disruptive innovation project portfolio has to demonstrate tangible returns over time, so the mature organization sees the economic benefit of experimenting and not shut down this ‘playground.’

Branding the projects as experiments with a proof-of-concept (POC) endpoint helps to calm the ‘organizational immune system’ and to argue that these risky ‘small elephant’ projects complement the other ‘big elephant’ project portfolios across the organization.

Getting Funds

Here are my experiences as an internal corporate venturer or ‘angel investor’ from the past years: First of all, I don’t have much money to spend. The budget I have for this kind of ventures is pathetically meager – and I overcommit it all the time! Nonetheless, I came in under budget once again by 46% last year. It sounds like an oxymoron, and since I don’t have a money tree growing in the backyard, how does this work?

The secret is in the psychology of acting as the “first investor.” Think of this way: when someone wants you to invest into their idea first with nobody else having made an investment before you, you are skeptical and most hesitant to put down your money, right?

All I do is to commit paying for an idea in full to overcome this initial threshold and get things started.  What typically happens next is that an executive from the business affected by or potentially benefiting from the project hears of my investment, reconsiders and wants to get on board too – as a second investor. Once the ‘innovation guys’ have put money down first, the investment in the idea appears less risky to the business executive, so either we split the bill or the business takes on the cost completely!

I’ve seen it happen many times with managers turning around 180 degrees after they had rejected the idea previously. This is how to deal with them: to save (their) face, don’t point out their earlier resistance but rather thank and recognize them for their support and foresight as valued contributors to change and success for the organization.  Celebrate them as enablers, win them over as allies and keep the connection for future collaborations!

Alignment and validation

Don’t be mistaken, funding by the business is not only crucial given the fact that my funds are few.  It is even more important because it validates that the idea makes sense to the business.  It aligns with strategy and goals of the organization but also helps implementing it once the business has ‘skin’ in the game! Otherwise, even if I funded a project alone, the intrapreneur running it would have a hard time getting it implemented without the support of a business sponsor.

So all it takes is making it easy for business executives to invest in a good ideas by making them feel comfortable not to invest first, which reduces their perceived risk and lowers their threshold to act.

Key Learnings

  • The lean innovation governance board is an instrument for reasonable oversight that benefits from diverse perspectives.
  • The “Go keeper” instead of “Gate keeper” process is crucial as is the willingness to accept risk of failure for disruptive projects.
  • The model proves highly effective to get around a convoluted “red-tape” bureaucracy as well as generating a surprisingly high return-of-investment (ROI) – even without the latter being the primary focus.
  • The “first investor” psychology validates the alignment of ideas with business needs and strategy while opening the flow of funds from the businesses and facilitating the implementation.
  • This internal corporate venturing or “angel investing” approach became a beacon of hope for employees and a very profitable innovation engine for the organization that starts to change the organizational culture to the better.

 

Author: Stephan Klaschka

Stephan Klaschka is an awarded innovation executive, C-level consultant, Intrapreneur, and serial entrepreneur with over 25 years of international work experience. He held various senior business operations, strategy, regulatory compliance and innovation roles with Boehringer Ingelheim, leaving as Director of Global Innovation Management and Strategy. In this first-of-its-kind position, Stephan's work was central to the new growth rejuvenation strategy as a catalyst to initiate and drive pivotal innovations, leadership development, and disruptive and digital transformation across the Boehringer Ingelheim group worldwide. He has recently served as CEO interim of the "German Institute for Telemedicine and Health Promotion" (DITG). Stephan holds Masters Degrees in Computer Science, Management, and Business Administration as well as advanced degrees in Strategy, Innovation, and Leadership from leading schools in Europe and the United States. PMP certified. He has published extensively and created award-winning workshops on topics including intrapreneurship, healthcare, pharma, and new technologies. Stephan currently consults independently out of New York.

13 thoughts on “Angel Investing within the Company – Insights from an Internal Corporate Venture Capitalist”

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  4. Any example where corporate venturing didn’t received an experimental, failure tolerant mind set and therefore failed?

  5. Good question, thanks. The concept of internal corporate venturing seems quite new, so I am not aware of many organizations that have institutionalized it, so time will tell.
    From my own experience, the model itself was highly successful though several individual projects did not reach the aspired results. That is why risk-balancing the innovation project portfolio is so important in order for highly successful projects paying also for under-performing and discontinued projects. In the end, the ROI across the portfolio was approx. 100X (=10,000%) – I am not aware of many other parts of the company that were able to realized so high return margins… 🙂
    External ventures are a different story and offer many examples for failures for many reasons. Among them is one I wrote about earlier: “Shut down! Why Successful Innovations Die” (https://orgchanger.com/2014/07/12/shut-down-why-successful-innovations-die/)

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