Question

By some accounts, only about 50 percent of corporate ventures reach profitability after six years. Is corporate venturing worth it? Discuss the advantages and disadvantages of internal venturing in relation to the extent of its financial success.

Answer 1

According to the data given in the question, only about 50% of corporate ventures reach profitability after six years. This statement throws light on how successful/unseccessful corporate ventures can turn out to be. Corporate ventures are those funding that are given by well establishes companies who want to invest in new start-ups that may be focused on innovation. The main reason why big companies go for corporate ventures to fund start-ups is the hunger for new innovations and technologies which otherwise they won't be able to develop.

Now considering the successfull 50% of the corporate ventures, there are startups that do flourish with the help of funds from investors. These companies would have a definite business plan which they implement perfectly and make profits out of it, of course with few hickups. Most companies take more than 6 years to break even and further make profits, hence a 50% success rate at reaching profitability iafter 6 years is not a bad figure. Corporate ventures are thus worth it since though with a few failures, there are ideas that get to be implemented and made accessible to the world because of the corporate funds.

Internal venturing is one where a company uses internal ideas and resources to establish a new business. This is often in an effort to penetrate new markets and encourage growth.

Advantages:

• Parent companies provide support in the new business venture that startups bring.
• Internal venturing can reduce the dependane on foreign companies, and hence avoid unnecessary dealings.
• Financial success of the startups can have a ripple effect on the parent and subsidiary companies. This will in turn improve the brand name of the parent company.

Disadvantages:

• The main challenge is making the busniess plans successful. The reason for this can be long maturity periods, indeterminateness, high start-up costs and staffing difficulties.
• There can be a reluctance to sponsor the new venture by shareholders since the start-up costs are high and these costs may diminish shareholder’s immediate wealth.
• Companies can hence incur huge losses in a very short time. Since a huge lumpsum of money is borrowed at once, the incapability of new business ventures can be a shortcome in terms of finance management.
• If the startups incur financial losses and fail to reap profits or reach breakeven soon, it can have a ripple effect on the parent and subsidiary companies. This will in turn affect the brand name of the parent company negatively.