Some industries - such as electronics, pharmaceutical and telecommunications - have historically been driven by innovation, and see R&D expenditure as a must for long-term survival. And within these industries there are many companies with both a strong internal R&D function and a strong corporate venture arm.
As a monopoly in ideas does not yet exist, even the heaviest investor in R&D knows that the next disruptive idea may not come from their internal R&D function. So corporate venture arms have been traditionally developed by those companies that thrived on innovation (examples include Intel Capital, Samsung Ventures and Pfizer Venture) and more recently by businesses that would once have made zero expenditure on R&D, such as banks and insurers.
While the function of corporate venturing is obviously not restricted to R&D, it does perform a function of external R&D: to complement existing internal R&D, and for those firms that don't have an internal R&D function, to hedge against that absence. There are advantages and disadvantages of carrying out external R&D through corporate venture arms.
The main advantages of corporate venture from an R&D point of view are:
- sharing the cost of R&D with other investors in portfolio companies;
- access to ideas at different stages of development;
- access to ideas that are so disruptive they would never be considered by the internal R&D function;
- freedom from the shackles of big corporates; and
- almost instantaneous access to R&D without having to build an internal R&D function.
There are some disadvantages with R&D through corporate ventures, though:
- potentially sharing the financial upside with other investors;
- the loss of secrecy on inventions and disruptive ideas; and
- the inability to fully control the development of the research/idea.
Furthermore, any corporate venture arm that does not have an internal R&D function will lack an internal expert vetting the proposed investment in new technology, and such expert vetting then has to be outsourced at increased cost.
This is not an insurmountable problem, as traditional pure venture capitalists manage to invest in technology-heavy businesses without having the benefit of in-house R&D function. They do so by developing a book of experts who are called upon on an ad-hoc basis to give their views on the technology - it is a skill in itself to be able to identify the right expert to review a certain technology.
So there are many ways in which internal R&D and corporate venture arms can be deployed, and each individual company will have to assess which approach works for them. But it is clear that, as being at the forefront of disruptive technology becomes ever more critical across a wider range of industries, getting the right combination will be vital for commercial success.
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