Extracting Value from Corporate Venturing

Executives wax and wane in their enthusiasm for launching new ventures outside an organization’s core business. In their more enthusiastic moments, leaders often see corporate venturing initiatives as sources of organic growth and vitally important engines of renewal. However, in their more disenchanted periods executives may see new ventures as high-risk, foolhardy distractions from effectively running the core business. What’s more, such pessimism isn’t wrong. Corporate ventures are risky and they usually do not produce hoped-for results.1

Executives thus face a dilemma. Creating vital innovation and organic growth generally requires investing in new ventures. The venturing process, however, is unpredictable and failure-prone. Is it possible to invest sensibly in corporate ventures, despite their risky nature? And how do new ventures contribute to the overall renewal of organizations? These questions stimulated us to consider how managers can extract value from venturing while recognizing its risky nature. To research these questions, we launched an in-depth investigation of the venturing process at Nokia Corp. of Finland, the world’s leading mobile phone supplier and a company respected for its innovative capabilities. (See “About the Research.”) Our research yielded eight key lessons relevant to executives grappling with the challenge of corporate venturing. One overarching conclusion of our research is that to extract value from the ambiguous and uncertain world of venturing, companies need to apply different management practices than they use in their mainstream businesses.

The New Ventures Division at Nokia

Nokia is familiar to many business readers worldwide for its well-known brand and its leadership in the telecommunications industry. Between 1998 and 2002, the period covered in our research, Nokia experienced substantial growth but also, in 2001–2002, weathered a generally difficult time for the global telecommunications industry. (See “Nokia’s Sales and Number of Employees — 1998–2002.”)

As some of its key business areas, such as mobile phones, began to show signs of maturation, Nokia’s leaders sought to discover new areas with the potential to help the company achieve its ambitions for future growth. In 1997, the company established a Venture Board to provide senior-level sponsorship for growth initiatives. Then, in 1998, Nokia created a new division focused exclusively on venturing called theNokia Ventures Organization. The stated mission of the NVO was to “look for growth opportunities that are beyond the remit [scope] of the existing businesses but within Nokia’s overall vision.” Ventures that were based on a different business model than the established divisions, targeted a different market or used radically different technology were placed within the NVO. Ventures with a mandate closer to the existing businesses were incubated within established divisions.

Between 1998 and 2002, 37 corporate ventures were managed within the NVO. In our research, we were given complete access to personnel involved with those ventures, to venture documents and to executives responsible for making key decisions about them. From 2000 to 2002, we conducted more than 200 interviews and sifted through hundreds of documents; one of the authors dedicated two full-time years of dissertation research to this project.2 Because we were studying most of the ventures as they progressed, we were able to capture information about them in real time and not after memories had faded.

In the boom years of 1998 to 2000, one could argue that Nokia’s decision to create a ventures group was consistent with what many other corporations were doing at the time. Following historical precedents set by initiatives such as Lockheed Martin Corp.’s famous Skunk Works, companies such as Lucent Technologies, Kodak, Intel, SAS, Siemens, Procter & Gamble and others flirted with various forms of new venture divisions during this period. Many of these venturing programs came to an abrupt halt after the bursting of the Internet bubble. Interestingly, Nokia didn’t pull back from its venturing initiatives at that time. Instead, Nokia management sustained its commitment to the NVO concept well into a difficult period in 2003–2004, and is continuing corporate venturing at the time of the publication of this article.

What were the results of Nokia’s investments during the 1998–2002 time period? It turned out to be normal for a venture to end in disappointment. Seventy percent of Nokia’s new ventures were either discontinued or entirely divested. Another 21% were absorbed into existing business units and ceased to exist as independent ventures. Yet, despite the seemingly high failure rates, 25% of the ventures were evaluated by knowledgeable insiders as having created vital new organizational capabilities, such as the ability to serve a new customer segment. Sixteen percent led to the introduction of new products. Most created potentially important intellectual property or inventions. In short, even though failure was common, management practices within Nokia permitted the firm to extract substantial value from its portfolio of new ventures.

Lessons from Nokia’s Experience

What we learned at Nokia is consistent with something that a number of other innovative companies are also recognizing: The logic for extracting value from corporate ventures is different from what a company might use to maximize gains from its established business units.3 Here are eight key lessons from Nokia’s experience.

1. New ventures can benefit the core business — if those new ventures are structured in a way that protects them from short-term pressures.

In Nokia, we observed how seemingly unrelated investments beyond the core business eventually led to discoveries that later proved vital to the core operations. For instance, several NVO ventures were targeted at the development of software. Examples include certain software intended to support corporate customers and software to utilize the new Wireless Application Protocol standard. Although neither of these software innovations became stand-alone businesses, some of the technologies these ventures developed proved vital to protect Nokia’s core business from the attack of a new competitor; they were accordingly integrated into the core business. The major lesson for Nokia was that a key benefit of new ventures often lay in enhancing the competitiveness of the core businesses.

Two practices were vital to achieving a corporate-level benefit from new ventures: First, Nokia was prepared to make exploratory investments; and second, in its Nokia Ventures Organization, the company set up new ventures in such a way that they were not under pressure to deliver immediate results. Nokia’s management recognized that when a business is under financial pressure, its leaders may tend to cut off new ventures too soon, persist with them too long or resist changes in the ventures’ original business plans. Such issues are exacerbated by quarter-by-quarter thinking and annual budget-planning cycles. Indeed, it has been shown that there is a strong link between pressure to produce short-term results and the tendency to inappropriately escalate commitment to new ventures.4

IBM Corp. has made similar discoveries in pursuing its Emerging Business Opportunity program in which an attractive area for growth, such as life sciences, is identified, but the approach to pursuing it is heavily experimental and learning-oriented rather than driven by immediate results. As IBM’s vice president of emerging businesses put it, “Every EBO is managed by a different set of milestones, but in the early stages, profitability is rarely one of them.”5

Because Nokia’s core business was not counting on the new ventures to deliver immediate results, the ventures could remain small and easily change direction. Both factors helped Nokia explore new territories while minimizing losses if those explorations proved fruitless. In this respect, Nokia operated with principles similar to those of Amazon.com Inc., whose CEO Jeff Bezos is committed to the concept of small teams with the ability to fail inexpensively. As Bezos says, “To the degree that you can get people in teams small enough that they can be fed on two pizzas, you’ll get a lot more productivity.”6

At the same time Nokia’s NVO was, as some observers have noted, set up like a service business within the corporation. The division was not structured to enable it to create its own products, services or lines of business. When a project looked sufficiently robust to be scaled up or launched, it was moved out of the NVO, often with the team of people who had nurtured it. Promising projects at that stage were typically moved back into one of the core divisions, where the growth of the new venture supported the health of the core. Thus, the NVO was positioned as complementary to the core businesses, doing things that the preoccupied management team of a core business could not do at all or could only do slowly.

2. Volunteers are not automatically competent.

Enthusiasm is great, but the demands of venturing require more than enthusiasm. When Nokia’s NVO was first established, an obvious question was how people would be chosen to work on these risky, uncertain initiatives. Like many other companies, Nokia initially staffed the NVO mostly with employees who volunteered to join the venturing division. This did not turn out to be a good idea.

Although enthusiasm is valuable, depending on it to create the right capabilities in the venture division had significant drawbacks. Some people signed up for roles in the NVO because they were unhappy in their previous jobs or performing poorly in them. Their presence in the NVO was a signal to other employees that the NVO was not a place for top performers. Others volunteered because they harbored a passion for a particular technology and saw the NVO as a place to pursue their dreams. Unfortunately, those employees’ single-mindedness often undermined their ability to work with others and conflicted with the NVO’s service-oriented mission. When it came time to spin off or transfer the technology, such individuals frequently resisted. Finally, some staff volunteered without understanding how confusing and ambiguous their new roles would be. Uncomfortable, they became increasingly dissatisfied and transferred back to where they came from. And because most of the original staff were Nokia insiders, they tended to bring with them a similar mindset at a time when the NVO’s goals as an organization were to spark new thinking.

Around 2000, after two years of experience with the primarily volunteer approach, the NVO head working closely with Nokia’s central human resources group made some changes. He began to recruit people into the NVO who had been involved with innovative programs before, who had been good at building entire businesses (rather than isolated technologies) and who were skillful team players with good networking skills. A significant number of new people also came in through NVO acquisitions, bringing with them new perspectives.

In 2000, the NVO head also initiated a high-profile training program designed to help Nokia’s future leaders cope better with the challenges of working in ambiguous and constantly changing situations. He set a tough standard: Nominees had to be affiliated with the NVO, and they also had to rank in the top category of Nokia’s performance-evaluation system. They would be connected to the training program for nine months, with three three-to-five day residential modules and team-oriented project work on one of the NVO projects in between. At the conclusion of the program, each team would make a formal recommendation about an opportunity area to Nokia’s CEO and executive team. Program participants were guaranteed an open door to the most senior levels of management, provided with project coaches and given personal coaches to foster their own self-development.

Not surprisingly, given their talent, access to senior-level executives and opportunity to shine, many training program attendees were rapidly promoted. After the first year, being invited to join this training program became a signal within all of Nokia that you were being groomed for greater responsibility. An invitation became something to strive for; and since you had to be associated with the NVO to join, this also had the effect of enhancing the attractiveness of the NVO as a career destination. More subtly, high performers were associated with NVO ventures most of which failed. In many companies, such individuals would have suffered a career setback. At Nokia, by contrast, observing the failure of a venture firsthand started to be viewed as an essential management-development exercise. By talking openly about failures and promoting people who had been involved with a failure, Nokia created an environment in which the lessons taught by failure could be discussed and those lessons could thus be transferred to other projects.

3. New corporate ventures cannot deliver the same results as the company’s core business.

Venturing calls for very different metrics. Dating at least as far back as the work of Frederick Taylor,7 consistent, reliable performance of common practices has been a supposed hallmark of the well-managed firm. Indeed, such practices as Total Quality Management and the Six Sigma process for analyzing and eliminating defects aim to stamp out variability within a company’s management practices. One could hardly be blamed for believing that consistency in management practices, such as performance measures, is a good thing. Nokia was no exception.

Indeed, Nokia’s management team prided itself on having developed world-class processes that contributed to the company’s reputation for operational excellence. Thus, in the early days of the NVO, Nokia’s executives reasoned that its fledgling venture initiatives would benefit by taking advantage of the larger company’s rigorous review, networking and high-level engineering practices to deliver on their numbers. However, this didn’t prove to be a reliable assumption.

The management team discovered that the focus on growth, revenue and margins that made perfect sense in the company’s core businesses was undermining the exploratory work the NVO was supposed to do. Consider a venture code-named “Boston.” This venture was formed from a combination of in-house and acquired technologies, with the express intention of opening a window of opportunity for Nokia in a major corporate market. Its initial offerings had to do with a business model that was different from Nokia’s existing lines of business for a target customer Nokia had not previously served.

Eager to show that Nokia could make rapid progress in this new market area, Boston’s leadership team was keen to demonstrate success by the metrics Nokia commonly used to measure performance. Margins, growth rates, shipment quality and volumes were among them. However, in order to show good results by those metrics, Boston’s managers were inadvertently managing the new venture as though it were an existing line of business. This led to a short-term focus on maximizing returns from one line of products that solved a fairly narrow set of problems, typically under the purview of the customer’s information technology department. But Boston’s strategic goal was instead to interest senior executives in a range of solutions that would jump-start Nokia’s ability to serve a new type of customer. The operational activities of the venture, however, were pushing it ever more narrowly into an existing business model.

Things came to a head in late autumn of 2002. Some of the graduates of the NVO training program were on Boston’s leadership team. They invited one of the authors of this article, who had served as a faculty member in the training program, to examine the scenarios the leadership team was developing for Boston’s future. Collectively, the members of the leadership team realized that they had been unintentionally undermining the venture’s strategic objectives. This was a result, they concluded, of applying the standard measures for success used in other parts of Nokia.

This insight provoked significant rethinking of the nature and purpose of the Boston venture. Rather than running the venture by typical business metrics, the team concluded, their purpose would be better served by viewing projects within the venture as “real options.”8 A real option is a limited-size commitment made in the present that provides the right, but not the obligation, to make more substantial investments in the future when more information is available. Such an option has the effect of limiting losses in the event of bad outcomes, while providing access to an upside in the event of success.

The primary practical insight that stemmed from this new conceptualization of the venture’s goals was that different management processes would be necessary to manage real options than make sense in Nokia’s core businesses. This approach required that Nokia’s executives take two very different approaches: buttoned-down operational excellence when working in the company’s core businesses, yet more free-form and learning-oriented evaluations when managing new ventures. This combination of skills has sometimes been called learning to manage an “ambidextrous” organization.9

4. Manage with a portfolio mindset, not a project mindset, to maximize the company’s benefits from venturing.

It isn’t unusual for those evaluating new venture outcomes to focus on one venture at a time. Success rates are established based on the degree to which individual projects meet their targets and goals.10 However, Nokia learned that the progress of individual ventures was the wrong basis for analyzing the effectiveness of its venturing program. The contribution of the venturing program to the company came from enhancements to intellectual property, development of superior human capital and innovations that could improve the competitiveness of Nokia’s core businesses. None of these correlated directly with the formation of an ongoing business from a new venture.

Nokia management decided instead to assess ventures in terms of the different roles they could play within its project portfolio. Some ventures (called positioning options) were intended to be the equivalent of a hedge — holding a position in a market or technology space open or providing the raw material for learning. Others (called scouting options) were essentially marketplace experiments, intended to educate Nokia people about customer needs. Some were longer-term plays intended to preserve for Nokia the right to compete in a potential future market (called steppingstone options). Some, during the course of our study, became high-commitment launches of new platforms (which Nokia called platform launches).

The benefits of the portfolio approach caused Nokia to redefine the concept of failure. Because different types of ventures had a different strategic role to play, the ventures’ outcomes might be valuable even if they didn’t lead directly to new lines of business. Because Nokia frequently funded alternative ventures focused on the same opportunities, the company avoided the trap of having only one approach to an opportunity space. This increased the chances that one of Nokia’s ventures would end up in an industry sweet spot.

Nokia’s human capital strategy reflected the portfolio concept. The company has always reinforced a collaborative, networked culture. In its venturing process, it sought to reward teams and structured the teams’ rewards to reflect learning goals and outcomes rather than business results. Moreover, the teams were fairly fluid. It was not unusual for people to spend a relatively short period in the NVO before moving on. This fluidity gave Nokia advantages because individuals did not feel that if their project failed, their usefulness to the organization was exhausted.

5. New markets are seldom like existing ones; be prepared to learn your way in and approach learning as an activity that may require several phases and changes in direction.

Nokia shares with other huge multinational firms a disadvantage that stems from the size and scope of its main businesses. Compared to the millions of unit sales generated weekly in the core businesses, most of Nokia’s new ventures are tiny, and there is a significant temptation to try to scale up ventures rapidly to match the size of core businesses. Consider the case of one of Nokia’s ventures that aimed at creating wireless software solutions for corporate customers.

Impatient for growth, the company’s leaders in this case decided to make a significant move to compete with new technology in what for them was an entirely new area. Rather than run the initiative in the exploratory way NVO ventures were run, its managers instead elected to pursue the opportunity aggressively and grow the venture rapidly to several hundred employees.

Such a combination is often lethal. Witness, for instance, Samsung Group’s splashy but ultimately failed entry into the automotive area in 1994. By the time Samsung decided to exit the automotive business, by some accounts more than $5 billion had been lost and the enterprise was $3.7 billion in debt.11 This outcome is illustrative of the dangers of applying conventional thinking to uncertain investments.

Although Nokia’s wireless software solution venture developed considerable intellectual property and launched several products, its potential as a stand-alone business was judged in 2000 to be insufficient to warrant continued investment. Instead, Nokia’s management team decided to combine it with a venture from the NVO to form a new business area. Several years later, the resulting business unit has grown to be one of Nokia’s new main business units. However, the new suite of products has produced substantial losses so far, and Nokia’s leaders could have simply retreated and discontinued the offering. Instead, management has persisted in redesigning the venture focus and developing compelling solutions for this market.

The lessons here are several. First by ignoring principles that applied to new ventures in the NVO, Nokia incurred a great deal more cost than necessary. Second, by rushing into the market, the company made a number of important decisions out of expediency without checking vital assumptions about their viability. Persisting in the market, however, has actually given the company a credible new platform from which it can potentially develop a strong position in a booming opportunity space. Nokia can thus take advantage of its size and success to remain patiently in the new space, creating a platform for potentially significant future growth.

6. Manage new ventures in stages, with stage-specific reviews by a committee of stakeholders.

Corporate ventures do best when managed with structures and processes that accommodate their unpredictable, hard-to-plan nature. Nonetheless, business plans for such ventures often imply an orderly progression from concept to business. Nokia’s leadership, in contrast, designed its management system to take the unpredictable into account.

When establishing the NVO, Nokia’s management team consciously created a different management system than the company’s conventional one, which is driven by a quarterly business rhythm. In contrast to the rapid scale-up of the wireless software venture described above, most of the company’s ventures were managed with a disciplined, staged planning approach that, at each stage, ensured that success at the next stage looked plausible before additional investments were made. Nokia management set up a system similar to a venture capital model, with four decision points for ventures. In doing so, they adopted an approach that has often been calledmilestone ordiscovery oriented; it is an approach that has proven successful for many other venturing programs.12

For each venture in the NVO, decision points were chosen and, at those times, formal project reviews took place. Ventures were also frequently reviewed between the times of choosing decision points. During each review, a group called the venturing board discussed the project’s progress with the managers leading it and made decisions regarding the venture’s future path. At each consecutive stage in the venture’s development, resource commitments could grow.

By explicitly managing the commitment to the ventures at different stages, Nokia’s leaders accomplished several things. First, they limited downside exposure to losses. Second, through this structure, many individuals on the venturing board were exposed to the ventures, thereby helping to ensure that many people were gaining the insights that could be learned from the venture experience. Nokia’s leaders also set common expectations for the type of investments of time and money that venture leaders could expect, and this made the venturing process less ambiguous. Finally, the staged review process created the opportunity to redirect the ventures at important junctures.

7. You can gain a lot from a losing venture if you cut your losses.

Stop ventures early and cheaply — and harvest the rich sources of knowledge they create. A well-known dilemma for corporate venturing is often called escalation of commitment, in which stakeholder support and funding processes contribute to the continuation of venture initiatives, even when a more objective view might suggest that they should be stopped.13 A major driver for destructive escalation is that stopping a venture is sometimes seen as indicative that there was poor leadership in the first place. A common theme among major corporate flops is often that few practices are in place to stop ventures before they become hugely expensive, and that the executives who lead a given venture tie their personal reputations to its continuation. Further, senior executives can tend to be overconfident, leading to excessive optimism about their ability to turn around a struggling venture.14

In contrast, Nokia’s venture management structure emphasized rapid decision making about venture discontinuation. Because a network of people were involved in important decisions about venture initiation and change, Nokia was generally able to avoid having a manager’s career and personal credibility associated with the decision to continue a particular venture. For instance, one executive summarized the venture board’s considerations when faced with one discontinuation decision: “The venture had been driven by two people who really have pioneered and developed it and have done a great job. It has worked to the point where there is a product that could be introduced to the market soon. And at that stage we had to make the decision whether to continue or not. It was a very difficult decision, but in the end we felt that it was not for us and therefore decided to spin it off.”

Rather than giving venture managers and others in the corporation the opportunity to become too personally attached to a venture, Nokia usually made discontinuation decisions within the first year of the life of a new project. Such early discontinuation allowed Nokia to limit not only the potential downside of venture investments, but also the personal capital their managers could invest. One effect of these decisions was to remove much of the stigma associated with launching a venture that would subsequently be shut down.

8. When designing the venturing division, build in learning-transfer mechanisms.

Although many companies engage in some form of project postmortems or interim project reviews, Nokia decided that a more intensive focus on learning was needed to gain maximum advantage from its new ventures. As already noted, the staged review process helped expose a network of key individuals to the venture concepts. At each stage, the venture board engaged in a thoughtful examination of what had been learned that might add value elsewhere in the corporation.

Nokia’s corporatewide business development board facilitated this learning. The board consisted of business development managers from all core business divisions, as well as managers from the NVO. One task of this board was to systematically identify opportunities to transfer knowledge, intellectual property rights and capabilities across the corporation. Nokia management also sought opportunities to create spin-off businesses from NVO ventures (in which the technology would be sold or licensed to another company) and to use its ventures as part of joint ventures with other organizations.

When a venture’s underlying technology was thought to be valuable, it was not uncommon for the entire venture to be transferred to one of Nokia’s more established businesses. For example, in one case, developers were creating software to transmit data between devices. The basic concept behind the original idea — a data-transfer service — didn’t seem to have much potential in the marketplace.

The software, however, created substantial interest on the part of one of the core business managers and has now become a central selling feature for devices that use the data-transfer technology.

The key to Nokia’s success at moving lessons learned across the firm was linked to its personnel practices. Nokia describes itself as an intensely networked company, with managers who pride themselves on collaboration and coaching skills. The practices associated with such a management style included extensive training and networking events; personnel rotation to different divisions; documentation of codified knowledge; and temporary assignments for skilled, experienced people. The primary reason given for such practices was to create and sustain a culture of collaboration and teamwork. A second-order benefit was to create natural mechanisms within the company culture for knowledge to be widely shared.

A final learning-transfer mechanism employed by Nokia was that of bringing learning from ventures explicitly into the training-and-development programs it ran. Leaders of discontinued ventures, people who had successfully licensed technology and those who had redirected their businesses, were used as faculty in training programs to talk about their experiences. Nokia also placed significant emphasis on venture postmortems, which helped to further derive learning from the ventures.

For instance, early on, some of Nokia’s ventures started to address a new corporate segment that Nokia had not served in the past. Although the first attempts to sell to and to build a distribution channel to these customers had little success, executives realized that this corporate segment would become more important in the future. Rather than dissolving the ventures completely, key personnel were integrated with other ventures to form what has by now become one of Nokia’s new mainstream divisions.

However, capturing insights and capabilities from failed ventures is difficult, even with sound venture management processes. In Nokia, organizational politics could make an objective dialogue about the reasons for failure and about subsequent recouping difficult at times. Nokia’s leaders were also not omniscient. In one ironic case, a venture was spun off completely, only for Nokia to conclude at the end of our study that the opportunity area really was attractive. The organization then was forced to repeat some of the learning that had taken place in the earlier venture.

Implications of Nokia’s Experience

As memories of the dot-com bust and the ensuing economic slump fade, we are again seeing increased business interest in organic growth through corporate venturing. However, the factors that make corporate venturing difficult haven’t changed despite increased enthusiasm. The venturing process will always be unpredictable, prone to failure and difficult to manage using conventional approaches. The good news, we believe, is that companies like Nokia are paving the way for better understanding of the practices associated with gaining value from new ventures. Learning from the experiences of leading companies like Nokia can help other companies with corporate venturing strategies avoid expensive mistakes, enhance their capabilities and skills and provide interesting opportunities for their people. Interestingly, failed ventures turned out to be a lot more important in the job of corporate renewal than we had expected. More often than creating successful new businesses, ventures create important new technologies, capabilities and products that help the core businesses adapt to change.