Fund management for carve-out start-ups: A scheme to lead innovations outside the business scope of large corporations

Amidst the revolutionary change of today's business environment due to progress of semiconductor technologies and the Internet, existing corporations as well as their R&D groups find it increasingly challenging to realize technology-based innovations; these innovations require disruptive business models with substantial risk. It seems particularly true in new fields, such as social innovations, where traditional businesses lack the necessary skills and vision for success. The authors successfully raised the Technology Carve-out Fund to offer opportunities to “carve out” technologies and key personnel from traditional corporations or research institutes, and enable pursuit of innovative business models in start-ups, outside the existing business scope of large organizations. The concept was reported at PICMET 2005, and the ongoing efforts at PICMET 2014. Since the fund duration ended on December 31, 2015, the authors would like to summarize their work and highlight lessons for future “carve-out” efforts as follows: 1. Strong and sustained commitment of the parent organization is essential. In addition to unwavering commitment from the parent corporation, the open discussion of challenges and risks associated with new business models and how they would affect the strategy of the parent organization is important. A set of fair and agreeable terms for the “carve out” balanced between all stakeholders is an urgent need. 2. Overcoming the time constraint for early stage start-ups needed to achieve positive ROI. The start-ups founded were mostly at an early stage, and the typical fund duration of ten years has been found to be too short. Solutions to overcome this constraint are necessary. 3. Bolstering the limited business management skills of “carved-out” personnel. Although the key personnel carved-out are experts in their respective fields, their skills are not broad enough to manage a company, even for very small entities. The management team needs additional bench strength. 4. Flexible fund terms to enable a variety of deals with unpredictable new challenges. Each “carve-out” has unique circumstances, conditions, and challenges. The fund must not be overly constrained, or else it cannot create investment deals for the wide variety of “carve-out” cases that are otherwise good opportunities.