Shark-fin Innovation – Part II

A recent post on our innovation series discussed how the low cost of technology innovation is impacting incumbent industries. We also highlighted the acquisition of Simple, an online only bank by Spain’s BBVA.

Its not only BBVA that is worried about new entrants dis-intermediating traditional banking roles. Now J.P. Morgan’s CEO, Jamie Dimon has joined the chorus: “When I go to Silicon Valley… they all want to eat our lunch. Every single one of them is going to try.” (WSJ)

J.P. Morgan, the biggest Kahuna in the most tightly regulated industry is worried about Silicon Valley. That says a lot.

Prakash brought out an interesting point in our comments thread on our shark-fin post:


Shouldn’t individual investors diversify for themselves? Isn’t it beyond the mandate of the firm’s management and board to invest in startups?

This article on Techcrunch sums up the argument for corporate VC investments:

“Over the last few decades one of the things that has definitely been happening with corporations is that they’ve moved to an open innovation model or outsourced R&D. They’re doing less basic research in house and essentially looking to bring that in through acquisitions,” Hochberg said.

With the cost of developing new technologies coming down so dramatically, it makes sense for corporations to take smaller bets on new technology offerings, according to Hochberg and her peers.

“A lot of what startups are about is experimentation. [Now] you can experiment at a cost of about a tenth of what it was a decade ago,” Hochberg said. “[Businesses] can actually go out and get a sense of whether these things are going to be successful a lot more quickly and at a much lower cost.”

It kills a lot of birds with one stone:

  1. Attracting quality talent into a large organization is always a challenge.
  2. Most startup-founder remuneration is back-ended – bonus only if the experiment succeeds.
  3. #2 lowers the total cost of R&D for large organizations. They lose lesser amounts on things that don’t pan out – of which there are many.
  4. Most companies may not have R&D in their DNA and are better off outsourcing it.
  5. Making seed/early-stage investments is an insurance against “big bang” disruption.

#4 should make readers reflect on the recent experience of Infosys. Their turn-around strategy is to refocus on services and hive off products into a separate company. They tried version 3.0 but decided to stick with version 2.0. (ET)

#5, along with the fact that ten-year VC returns have trailed S&P-500 (WSJ) could mean that corporate VCs might be modeling these investments as an insurance policy.

The jury is still out there on whether individual investors derive economic benefit from the VC activity of a corporation. But it is prudent risk-management in the face of “big bang” disruption.

[stockquote]INFY[/stockquote] [stockquote]NAUKRI[/stockquote]

Comments are closed, but trackbacks and pingbacks are open.