Here’s a little known fact: small businesses generate approximately 13-times the number of patent- per-employee as larger corporations. If patent awards are a reliable measure of commercial innovation, then small businesses have an advantage over bigger companies in visualizing how home consumers and businesses will operate and communicate in the future.
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But what large corporations have that forward-thinking smaller companies lack is cash, and lots of it. During the last 20 years, many large corporations such as Johnson & Johnson, Disney, Comcast, Intel, Samsung, UPS, Pfizer and Siemens formed venture capital funds to buy an ownership stake in a select number of entrepreneurial companies that represented potential strategic significance to the corporation.
Of course, the problem with traditional venture capital investing is the big hit or big miss results that come from writing multi-million dollar checks to a very small number of growth-oriented companies. It’s true that a big bet on one or two winners can help corporations maximize financial gains; however the nature of highly-concentrated investing doesn’t give corporations much technology diversification in fast-changing, unpredictable markets.
Now there is a new trend in corporate-backed funding called “corporate incubators.” These funds provide smaller amounts of financial support to a larger number of next-generation innovators than traditional corporate venture capital funds.
Rahul Sood, General Manager of Microsoft’s Bing Fund says, “Having a direct hand in cultivating the next big idea, I think is the best way for Microsoft to stay competitive and fresh. It's a two-way street. Startups provide unique insights while we provide unprecedented access to Microsoft’s proprietary technology, data and personnel to help entrepreneurs succeed. We’re excited by what can come out of this.”
The sweet spot for Bing Fund acceptance is “early stage” U.S.-based companies that have progressed beyond the raw concept, “company of one” stage of business development. Qualified candidates also have a working prototype or first customers in place in the Internet or mobile communications industries. And like other corporate incubators, the Bing Fund is looking for entrepreneurs who welcome strategic input from Microsoft’s talent pool, as well as funding.
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Sood emphasizes that all intellectual property developed by Bing Fund participants is 100% owned by the funded company, not Microsoft. Further, Bing Fund applicants are not required to use other Microsoft technologies to qualify for fund acceptance. “Bing is cross-platform and we're going to stand by our pledge to be agnostic,” says Sood.
What’s different about the Bing Fund from traditional corporate venture capital funds is speed of review. Whereas most corporate venture capital funds take months to evaluate business plans and negotiate deal terms, the Bing Fund promises fast answers to qualified applicants.
Another area of difference between corporate venture capital funds and corporate incubators is the nature of the relationship with entrepreneurs. Venture capital funds typically “exit” when they sell their equity stakes in their portfolio companies. With corporate incubators, the nature of equity investment and length of engagements are highly varied. Some incubators offer ongoing, hands-on mentoring while others organize intensive boot camp style training to help entrepreneurs think with greater tactical precision.
Sood describes the Bing Fund as a rolling fund which seeks to nurture 10-to-12 companies at any given time.
My view of incubators and other types of technology “accelerator” services is they can challenge highly-ambitious entrepreneurs to think bigger and smarter about their plans for growth in a relatively safe environment for brainstorming.
However, there is one “gotcha” that often catches incubator participants off guard. Most corporate-backed incubators are not prepared to be a sole source of funding for even the most successful companies, so entrepreneurs can’t get complacent about seeking other sources of growth capital. Corporate incubators can be highly supportive to entrepreneurs…to a point.
Susan Schreter is a 20-year veteran of the venture finance community and entrepreneurship educator. Her work is dedicated to improving startup longevity in rural, urban and suburban America. She is the founder of www.takecommand.org, a community service organization that offers the largest centralized database of startup and small business funding sources in the U.S. Follow Susan on Twitter @TakeCommand.