Big companies' new flings with fledglings. They still go after high-tech, but now they don't smother the nest
Boston — ``Corporate partnering,'' a business fad that flopped in the '60s, is seeing a rebirth in the '80s -- but with a new twist. Instead of simply acquiring small, fast-moving companies, big corporations are trying to mimic venture capitalists by buying a minority stake and acting as a low-key business partner instead of a boss.
Eager to gain the proverbial ``window on technology,'' many companies got burned in the '60s trying to ``partner'' by snapping up small companies for big prices, getting few results.
Perhaps partly because of that experience, corporate America has been a bit tentative about getting involved in the high-flying venture-capital game.
But venture investment has become so hot that many companies in the United States are afraid to stay away, lest they miss some big opportunities. A few corporations, armed with some fairly sophisticated ideas about how to get what they want from young, quick-growing firms, are at the table and ready to play.
By the end of last year, some 50 companies had formed venture-capital divisions within their corporate structures, compared with just 22 in 1980. The number is expected to increase to about 60 this year, according to Venture Economics, a Boston-based venture-capital research firm.
``It's almost a structural change in how many people are thinking about extending corporate development,'' says Stanley E. Pratt, chairman of Venture Economics.
``Looking back to the '60s and '70s, the history of those acquisitions is dismal. What corporations are realizing now is that you don't have to own a company to get something out of it.''
In the rush to bring a fledgling company into the fold, the giant organization often squashed it with corporate bureaucracy and heavy-handed reorganization. Even the switch to a different accounting system can throw a small enterprise for a loop. Now, however, the theme of many corporate venture efforts is to buy a 10 to 20 percent stake in a company -- and keep the big corporate paws off them.
Corporate venture operations are also increasing because conglomerates are starting to take a hard look at themselves to assess what they do well and not so well. The expertise for many lies in marketing and distribution. But just as many have difficulty with innovating and going after market niches -- exactly the thing that many small companies have squarely in their sights.
Venture firms have for years offered small companies management and expertise beyond mere infusions of cash. But according to Mr. Pratt, corporations are saying: ``We can bring a lot more than money, too. We understand and own the marketing and distribution channels. The great thing we can do is build up that little fellow.''
Partly responsible for this shift in corporate thinking has been the influx of venture capital and expansion of entrepreneurship which have come from 1978 changes in federal tax law. Available development funds have shot up from $2.5 billion in 1977 to an estimated $19 billion this year.
Venture Economics estimates that 1,300 companies used venture capital to fund their operations in 1980. The number grew to more than 6,000 US companies and about 1,000 overseas companies with US subsidiaries last year. About 1,000 new ones are being added every year.
``What you try to do, in many ways, is to find a way of having a valuable relationship with a young company without in any way damaging the very things that cause it to be successful,'' says David Steadman, president of Raytheon Ventures.
Mr. Steadman's venture investment company is less than a year old and is actually just a speck in the operations of $6.4 billion Raytheon Company, a Lexington, Mass., conglomerate that makes everything from microwave ovens to missiles.
Raytheon's venture investments of $10 million in four companies, with $4 million more in commitments, are just a start, Steadman says. He predicts that within the next year, the company may hold a minority share in as many as a dozen.
``We look for a mutual strategic relationship, not a one-way strategic relationship,'' Steadman says. ``We expect to make money, as a result of the investing. . . . But we look for more than making money, to have a mutual business relationship where both parties value the other.''
Unlike many organizations that have set up venture divisions only recently, General Electric's venture division, Gevenco, began operation back in 1969. It had planned to funnel technology sitting in its laboratories into companies it invested in. The plan failed.
Rather than get out, GE rethought its positions and for the last 14 years Gevenco has focused on making money -- not strategic alliances. With $200 million invested in more than 60 companies, Gevenco's current performance would put it within the top one-fourth of all venture companies, says Harry T. Rein, its president and chief executive officer.
``Within the economy, this [venture investment] is something that's starting to look like a mini-industry to a lot of companies,'' Mr. Rein says.
First of two articles on ``corporate partnering.''