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Nothing Ventured, Nothing Gained

Nothing Ventured, Nothing Gained

While only a small number of CIOs can invest directly in start-ups, most can learn from the processes and approaches used by venture capitalists

Time to be bold and break the mould

You may have thought that delivering acceptable results for today's enterprise was enough of a challenge without having to continually worry about developing the capabilities required for tomorrow's enterprise. The problem is that without careful preparation, tomorrow will not be as bright as it might otherwise be.

Creating bright tomorrows is a hard task. It's easy to spend lots of effort and money on what appear to be good ideas when they start out, only to have them add to the growing history of failed initiatives as time goes by. What's needed is a more reliable way for a CIO to build a pipeline to the future. Fortunately, one industry - the venture capital industry - may show the way.

The venture capital industry thrives on its ability to spot good ideas, like new technologies or new marketing concepts, when they are little more than a gleam in the eye of their inventors. Venture capitalists then invest in these ideas - sometimes taking a significant stake and often participating in the management of their investment - exiting once the idea has turned into a fully-fledged enterprise ripe for floatation.

While only a small number of CIOs can invest directly in start-ups, most can learn from the processes and approaches used by venture capitalists. And in some cases, share risks directly with them. All organizations have brakes on the future - a perceived lack of experience, risk aversion and institutionalized processes that prevent enterprises from pursuing innovation, new business creation and venture investing. Using the right ideas and processes may help to ease these.

Invent, partner, invest, co-invest and acquire. Historically, an effective way of creating the future has been to think of opportunities and ideas as a series of ventures - discrete things with definable outcomes that can be managed, and sometimes sold, separately. Thinking of these opportunities as ventures allows initiatives to be carved up into programs with quantifiable risk, which if successful can yield an appropriate rate of return.

There are five board strategies for setting up and managing ventures: invent (do it all yourself); partner (share the risk of doing it with someone that's done it before); invest (buy into someone else's ability to do it); co-invest (share your financial exposure with a fellow backer, perhaps one experienced in making successful high-risk investments); and acquire - buy in an already successful idea from the outside.

Choosing which of these five approaches to use depends on the nature of your potential venture and your appetite for risk and reward. The more you control, the bigger your payoff if it works, but the bigger the hole if it does not. On the other hand, starting small or sharing the risk may reduce your exposure, but is likely to limit the payoff too.

The least risky place to start a venture is to base it on something that's been invented in-house. CIOs can carve ventures from existing intellectual property. Corporate approaches toward investing in the "new great business" range from informal and all too often under-funded "pet projects" within a business unit, which run the risk of never reaching critical mass, to disciplined processes that are well funded and managed by business investment committees. Combining a number of different ventures into a portfolio ranging in scale is a prudent approach to this type of venture investing.

A little more risky, but by its nature more likely to reach critical mass, is partnering with other companies. A partnership can be used to create a new business or spin-off of an existing one where both partners bring different skills to the venture. The challenge with partnering is that it needs to be done effectively. Unless potential partners can harmonize expectations, they run the risk of simply wasting time on a deal that will never be consummated. The lesson learned from enterprises that have managed to pull off successful partnerships is to close the deal within three weeks of starting negotiations. If it takes longer, the impending problems assume a life of their own and the deal will be doomed.

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