Venturing Insights #29 - Incentives are like the wind
And corporate ventures are like sailing boats.
Previously on Open Road Ventures: In the last episode of Venturing Insights, we discovered a better approach to the common 70/20/10 framework for innovation portfolios. If you missed it, you can catch up here!
Incentives are like the wind. And corporate ventures are like sailing boats.
The wind is necessary, invisible, and impossible to move without.
When the wind is there, you don’t even think about it. Ventures (& innovation) sail forward, fueled by momentum and direction. But when the wind is absent—or worse, blowing in the wrong direction—progress stalls. Teams lose their drive, and ventures, like sailing boats, drift aimlessly.
And here’s the thing: incentives aren’t just about money. Sure, financial rewards like equity and bonuses matter. But so do autonomy, recognition, and a culture that rewards bold risks and embraces failure. These motivators—both financial and non-financial—are the gusts that catch the sails of corporate venturing, propelling teams toward success.
Corporate venturing is ambitious, it’s risky, and it’s hard. You can give your venture the best resources, the most talented team, and even a bold mission. But without the right incentives to align everyone’s motivations, it’s like setting sail on a calm, windless sea. Nothing moves.
The Incentive Problem: Why Innovation Stalls
Corporate venturing operates on a different wavelength than the rest of the business. It’s all about long-term thinking, bold risks, and uncertain outcomes. But here’s the catch: most corporate structures aren’t built for this.
Instead, they reward predictability. Safe bets. Results that look good on the next quarterly report. This misalignment—known as the principal-agent problem—creates a culture where risk is avoided, not embraced. The result? Ventures that play it safe, and innovation that fizzles before it even starts.
Take GE Ventures, for example. Despite its potential, it lost talent and momentum because its incentive structures failed to reward risk-taking. Teams felt disconnected from the outcomes they were driving and eventually left the organization. Without aligned incentives, even the most well-funded ventures can feel like they’re running in circles.
Structuring Incentives for Corporate Venturing
For corporate venturing to thrive, it’s critical to design personalized incentives that align the goals of co-founders with those of the organization. These can be grouped into financial and non-financial incentives to ensure motivation and alignment across diverse stakeholders. Here’s a breakdown:
Financial Incentives: Aligning Ownership with Success
1. Base Compensation:
• Standard Employee Contracts: Offer salary and benefits, providing stability for internal co-founders.
• Corporate Perks: Include vacation days, training allowances, or pension contributions to enhance attractiveness.
• Entrepreneur-in-Residence Contracts: Flexible agreements tailored to innovation-focused roles for external co-founders.
2. Deferred Compensation:
• Deferred Salary/Bonuses: Payouts linked to achieving specific performance goals.
• Phantom Stock: Simulates equity-based rewards without issuing shares, tied to valuation growth.
3. Profit Sharing:
• Profit-Based: Distributed once ventures achieve profitability.
• Performance-Based: Linked to reaching key operational or financial metrics.
• Pro-Rata Distribution: Shares rewards proportionally based on roles and contributions.
4. Equity-Based Incentives:
• Stock Options: Grant co-founders the right to purchase shares at a pre-set price.
• Growth Shares: Tied to achieving specific venture milestones.
• Buy-Back Options: Allow the organization to repurchase shares after hitting objectives.
• Share Swaps: Facilitate equity exchanges between the venture and corporate parent.
Non-Financial Incentives: Beyond Money
1. Recognition and Visibility:
• Publicly acknowledge co-founders’ contributions in patents, corporate materials, and announcements.
2. Flexible Work Conditions:
• Include remote work options, flexible hours, and competitive benefits to attract entrepreneurial talent.
3. Autonomy:
• Grant strategic and operational control to co-founders, allowing them to make key decisions like hiring and resource allocation.
4. Roles and Responsibilities:
• Offer meaningful positions in governance, such as board memberships, to enhance involvement and accountability.
5. Social Impact:
• Provide opportunities to work on projects that align with sustainability or social responsibility goals, inspiring mission-driven innovators.
Key Considerations for Designing Incentives
1. Exit Strategy Alignment: Incentives should reflect the venture’s potential exit paths, whether it’s a spin-in, spin-out, or another transition.
2. Attracting Top Talent: Make incentive packages competitive enough to draw high-level entrepreneurial talent.
3. Customization for Founders:
• Internal Founders: Typically value stable contracts and corporate benefits.
• External Founders: Prefer flexible arrangements, often tied to equity or profit-sharing.
4. Equity-Based Offers for External Ventures: Ensure ventures outside the corporate structure receive options like growth shares or stock, fostering ownership.
Lessons from Successes and Failures
The best way to understand the role of incentives is through real-world examples. Here’s what HBR outlined as lessons learned:
The Wins:
• In-Q-Tel: Created as the CIA’s venture arm, In-Q-Tel bridged the gap between government agencies and startups by funding innovative technologies with strategic relevance. The team had the autonomy to identify promising companies and facilitate knowledge transfer back to the CIA. By aligning incentives to focus on both innovation and intelligence gathering, In-Q-Tel became a model for how strategic alignment can drive innovation.
• Intel Capital: Intel Capital invested in startups that complemented Intel’s core business, such as software and hardware innovations that expanded the market for its chips. This approach didn’t just generate financial returns but also created an ecosystem that strengthened Intel’s competitive position. With aligned incentives and a clear mission, Intel Capital was able to foster innovation while boosting its core business.
• GlaxoSmithKline SR One: This venture arm tied compensation to performance metrics, ensuring alignment between the corporate parent and the venture team. By focusing on biotech investments that fit GSK’s strategic priorities, SR One not only delivered financial returns but also brought cutting-edge technologies into GSK’s portfolio, reinforcing the company’s market leadership in pharmaceuticals.
The Fails:
• Analog Devices: This venture program invested in silicon-alternative technologies but delivered limited financial success—only one out of 13 companies went public. However, its real value lay in strategic insights, helping the company recognize silicon’s continued superiority. Misaligned financial incentives overshadowed this critical competitive understanding.
• Exxon Enterprises: This venture arm suffered from unclear goals and shifting priorities. Initially focused on leveraging internal technologies, it later invested across disparate sectors like pollution control and office computing systems. A lack of alignment with Exxon’s broader strategy led to inefficient investments, including $2 billion in computer systems that ultimately failed.
The lesson? Misaligned incentives kill ventures. Aligned incentives fuel them.
Final Thoughts: Breathing Life into Innovation
Incentives are more than just rewards. They’re autonomy. Ownership. A culture that says, “Take the risk—we’re behind you.”
They’re the wind behind corporate venturing, propelling teams toward bold risks and transformative ideas. Without them, even the strongest ships and most capable crews drift aimlessly.
So here’s the question: Are your incentives creating wind in your venture’s sails—or are they leaving it stuck in a dead calm?
As usual, a soundtrack for you: