When investing in new growth businesses, corporate leaders are commonly advised to behave more like
venture capitalists. VCs, they’re told, take more of a long-term approach, have a greater degree of risk tolerance, and parcel out their funds in stages to mitigate risk.
All of this is right, as far as it goes. But having spent the past five years straddling between our consulting business (which advises large companies) and our venture investment arm (which provides seed investment to entrepreneurs), I now believe there is a more fundamental philosophical difference that corporate leaders need to adopt as well, if they’re serious about creating dynamic new growth businesses that stretch the boundaries of their current business models.
The philosophical divide is this: When VCs invest in an early-stage start-up, they recognize that odds are, the company will fail. When large companies invest in a nascent idea, they will only do so if they see convincing proof that they will generate an appropriate return on their investment. But that seemingly safer approach actually pretty much guarantees corporate investors poor returns on their new growth investments.
Why?
It’s not that VCs invest in businesses they think are bad. They just know the odds are stacked against any particular start-up. So when they invest, they look for a business with the potential to hit it big (to cover the inevitable losses), and they take steps to learn quickly whether that possibility is remote or realistic. The operative question for them is, not “How confident am I that this investment will yield a positive return?” but “How much can we afford to lose on a given investment?”
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Scott Anthony is the managing partner of Innosight.