There are many reasons why corporations find it difficult to commercialize technology that is outside their normal course of activities. Either they do not have the right management structure, they do not have the expertise to evaluate the technology, or they are reluctant to commit the appropriate resources without a clear understanding of the opportunity. An effective way of pursuing such opportunities is to establish a venture capital subsidiary (Vencorp) that would apply the same sort of due diligence and post-investment management to each opportunity as is applied in the venture capital industry. Vencorp would assemble an entrepreneurial team to manage a spin-off company (Newco) whose ownership might be split between Vencorp, the entrepreneurial team, and possibly outside investors.
To illustrate a possible structure, let us assume that a corporation (Mothercorp) has developed a technique for continuously measuring the level of contaminants in lubricants used in some of its machinery. The process is superior to those on the market and Mothercorp would like to exploit it more aggressively than is possible through a straight licensing arrangement. Vencorp would estimate the size of the opportunity and if significant, its management would prepare a new venture business plan for presentation to its board of directors.
The Vencorp may not be wholly owned by Mothercorp; other equity partners may be brought in and they would likely have board representation. The diagram illustrates a situation in which Mothercorp owns 80% of Vencorp and the initial ownership of a Newco is as follows:
- Mothercorp at 30% for the technology being transferred;
- Vencorp at 30% for a financial investment;
- Other Investors at 20% for a financial investment;
- Newco Management at 20%, possibly in the form of performance-based options.
We can advise Mothercorp on the overall corporate structure, the assessment of the opportunity, the preparation of a business plan, and the monitoring of Newco’s performance. The initial step should be a document explaining the rationale for Vencorp and the options for its corporate structure, particularly its capitalization structure.
Neil Knudsen is Doyletech’s Entrepreneur-in-Residence (EIR) and plays a major role in our Entrepreneurial Services & Board Development (ES) practice area.