Big companies start venture capital, or VC, units to help keep their competitive edge. Perhaps the most notable example is Intel Corp., whose VC unit has invested in entrepreneurial success stories such as Red Hat, Inc., the North Carolina software distributor, and WebMD, Llc., the online medical information company. But others have launched corporate venture capital units as well, including Comcast, Johnson and Johnson Services, Inc. and United Parcel Service of America, Inc., or UPS.
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Corporate VC units aim to help their parent companies find highly profitable new projects, spot promising technologies before competitors do and collaborate with the best new thinkers in their field. But to score these kinds of wins, companies must organize their VC efforts with an eye to the delicate balance between entrepreneurial finance and organizational reality.
Some companies may not be doing that, says Wharton management professor Gary Dushnitsky, who studies entrepreneurship. Specifically, they may be undercutting themselves by ignoring the effects of the compensation schemes awarded to their in-house VC units.
Companies often assign internal VC staff salaries the same way they do for other corporate staffers. Instead, these firms should consider compensating their internal VC units as independent VC units, giving them a stake in the future returns of the ventures they invest in, Dushnitsky says. If a corporation wants its internal VC units to pursue investment practices similar to those used by their independent counterparts, it should match their pay packages.
In a paper titled, Entrepreneurial Finance Meets Organizational Reality: Comparing Investment Practices by Corporate and Independent Venture Capitalists, Dushnitsky and co-author Zur Shapira at New York University hypothesize that given the typical compensation arrangement, corporate VC units would shy away from risk. That is, irrespective of their strategic or financial orientation, corporate VC units would invest in more mature companies than independent VC units do and would invest through larger syndicates or groups of VC firms that team up to make an investment (an investor who takes part in a larger syndicate stands to lose less money if the venture fails).
When Dushnitsky and Shapira examined data from at least 13,000 venture capital rounds during the 1990s, that is exactly what they found. “Corporations invest in mature and potentially less risky ventures” than independent VC units, they write. On top of that, the two researchers observed that deals involving a corporate VC unit “are associated with a syndicate size that is 49% larger” than those with independent VC participation alone. These patterns persist even after controlling for units’ objectives (financial or strategic) and other corporate characteristics.
Dushnitsky and Shapira also separated out deals financed by corporate VC units which received more performance-based pay than the average. They discovered that those deals looked a lot more like the ones done by independent VC units. These corporate VC units invested in less mature companies and made their investments through smaller syndicates.
Do more conservative investment practices impact performance? The two researchers’ analysis of investors’ ultimate performance suggests this. Corporate venture capitalists, or CVCs, experience successful portfolio exits at a higher rate than independent venture capitalists, or IVCs, likely due to CVCs’ ability to leverage parent firm resources, industry foresight and customer and supplier networks. However, the performance gap is sensitive to CVCs’ compensation scheme: It is large when CVC staffers are privy to performance pay and diminishes substantially when they receive little or no incentives.
“You cannot disconnect corporate VCs from independent VCs,” Dushnitsky states. “They invest in the same kinds of ventures and often do so together. They are dependent on each other for deal flow. Corporations need to be aware of the implications of what they are doing. They may be hindering their corporate VC units from fulfilling their full potential.”
Luxury brands: mulling strategies in a downturn
As 2009 shapes up to be the most challenging year in more than a generation for luxury items such as high-end apparel and fragrances, marketers’ plans for targeting aspirational 16-year-olds and expanding rapidly into the new money hubs of Russia or the United Arab Emirates, or UAE, are suddenly “out”, according to a panel at the recent Wharton Marketing Conference. What is now “in” for marketing luxury in this difficult era is pampering the wealthiest and most loyal customers with everything from monogrammed shirts to personal in-home visits.
“I really think the foundation of luxury is customer service—that is what we are hearing,” said panelist Cori Galpern, worldwide marketing and advertising director for Tom Ford International, the designer’s growing chain of fashion houses. “I think what we’ll see because of the economic crisis is that you lose a certain amount of that aspiration customer. Somebody who will buy a couple (of) pairs of shoes over the course of the year is making other choices. The core for a luxury brand is a customer with very considerable wealth.”
The issue of who will remain wealthy over the next two years, and how they might spend their disposable cash, was very much on the minds of the panelists, including top marketers with experience at some of the most storied names in luxury items and apparel—from Gucci and Prada to Tom Ford and L’Oréal.
The panelists agreed that in a recession in which even upscale consumers may find themselves strapped for disposable cash, it is a bad strategy to chase customers too far down the economic ladder. “We don’t want to see huge price cuts that will create a lower priced brand,” said Brad Farrell, skin care brand manager for L’Oréal Paris. “That’s because you don’t want to tarnish your brand. When this is all said and done, you still have your brand reputation to uphold.”
Many experts believe that the economic pain of the deepening recession could fall disproportionally on marketers of high-end perfumes, trendy clothing or sleek fashion accessories. A study by business consulting firm Bain and Co. that released in October found signs of a slowdown already in the personal luxury goods sector that includes shoes, jewellery and fashion; it predicted sales could drop by as much as 3-7% in 2009 if current trends continue.
As a result of the hard times, the panelists suggested that consumers are likely to see some moves aimed at selling high-end products at a slightly lower cost. Farrell suggested that one obvious step would be to sell fragrances in smaller containers as long as the actual product is not diluted. “You can still maintain your brand integrity but you’re selling at a price point that’s more accessible for the consumer in today’s market.” A similar move, Farrell added, is to ensure that some versions of your key products are more widely available in mid-market retailers, because during a recession even upscale consumers are likely to do more shopping at such stores
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