In recent years, many companies have rediscovered a broad variety of models for external innovation, taking a page from the success of venture-backed startups that have disrupted multiple industries, including not just technology but also financial services, media and entertainment, travel and tourism, and marketing in general. Corporate venture capital (CVC), accelerators and incubators, and innovation labs are again becoming more common, especially among large companies. BCG’s analysis of 210 top firms—the 30 largest companies in each of seven industries (automotive, chemicals, consumer goods, financial services, media and publishing, technology, and telecommunications)—found significant increases in the use of all three mechanisms between 2010 and 2015. (See Corporate Venturing Shifts Gears, BCG Focus, April 2016.) (See the exhibit.) The rapidly increasing pace of change and the proliferation of new technologies are making these new models competitive necessities, not optional activities.
CVC and incubation have come and gone over the years, but past efforts often lacked a strong link to the sponsoring company’s strategy. This wave of alternative innovation vehicles is much more tightly focused on responding to disruptive trends and enabling new business models or extending companies’ current capabilities. The new models are more closely and thoughtfully linked to the sponsoring companies’ corporate and innovation strategies and existing innovation systems.
Industry context often determines which approach is best. The speed of innovation, for example, varies from one industry to the next. Where innovation momentum is high and the need for innovation is great, such as in technology and apparel, companies predominantly use accelerators and incubators. In contrast, where the pace of innovation is somewhat slower, such as in chemicals, companies turn mainly to CVC.
Each vehicle serves a different kind of function, so companies need to decide which to deploy and their specific role in the innovation development chain. So far, there is no empirical validation that one model is better than another. In an analysis of the impact of six external innovation avenues on R&D productivity in biopharma, for example, we found that all had so far yielded equivalent returns. While the evidence is still emerging on what model is best in a given situation, we can glean some lessons from what companies are currently doing.
Corporate Venture Capital. Among the 30 largest companies in BCG’s seven sample industries, the use of CVC increased from 27% in 2010 to 40% in 2015. Among the top ten companies in each sector, it has jumped from 41% to 57%. Companies use venture investments to gain minority positions in startups and an early understanding of new markets, trends, and technologies. Some companies pursue CVC primarily for financial gain, but for many, the investments are strategically focused on furthering innovation. Companies pursuing CVC are split between those that control their investments from the center and those that empower business units to direct them.
In the past three years, both strategically and financially oriented CVC units have focused on the software industry, reflecting the increasing value of data as the trends toward digitization and virtualization gather speed, furthering the transformation of hardware to software. The value of CVC investments in software by the top 30 companies now surpasses the value of their investments in all other target industries combined.
Accelerators and Incubators. The use of accelerators and incubators has increased from 2% to 44% among the 30 largest companies in the seven industries and from 4% to 66% among the ten largest. Successful accelerators and incubators typically do not operate in a vacuum; they form partnerships with venturing operations from other corporations or team up with independent accelerators or incubators. The partners often have a common interest in specific fields. Accelerators and incubators typically focus on early stages of the innovation process.
Innovation Labs. The use of innovation labs has increased from 5% to 19% among the top 30 companies and from 16% to 41% among the top ten. Corporations tend to employ these labs further along the development chain to accelerate time to market. They are in-house units designed to complement—not supplant—conventional R&D and often interact closely with external entrepreneurs. In effect, such labs try to operate as startups, with all the speed and agility that characterize the breed. The main focus of innovation labs tends to be on advancing products or services that are close or adjacent to the core business.