The Corporate Venture Client Shift With Wharton’s Senior Vice Dean Serguei Netessine

Fred Schonenberg
Hello, everyone, and welcome to the VentureFuel Visionaries. I'm your host, Fred Schonenberg, and I am so excited today to be joined by Professor Serguei Netessine. Serguei is the Senior Vice Dean for Innovation and Global Initiatives at The Wharton School, and he's spent his career at the intersection of innovation, entrepreneurship, operations, and business strategy, advising Fortune 500 companies around the world. He's invested in startups. He's authored multiple books on business innovation and has become one of the leading voices on how large organizations can innovate more effectively. 

I was forwarded an article that sparked me reaching out to Serguei, and I'm really excited to dive into it. At a high level, it argued instead of investing in startups, corporations should become their customers, something we've talked about on the show before, the idea of venture clienting, as it's called in Europe, or venture partnering. And it's a provocative shift in thinking that challenges a lot of the assumptions behind corporate venture capital, accelerators, and innovation programs. 

So really excited to explore with Serguei what that means for corporate leaders, why so many startup pilots fail to scale, and how enterprises can build stronger, more productive relationships with startups, especially now in the age of AI. Serguei, welcome to the show. It's nice to have you.

Serguei Netessine
Thank you for having me, Fred. Very excited to be here.

Fred Schonenberg
So you've spent your career studying innovation from nearly every angle, research advisor, investor, educator. For listeners that are maybe just being introduced to your work, maybe can you tell us a little about your role at Wharton and what brought you to this point?

Serguei Netessine
Certainly. So as professors, we are fortunate to have multiple jobs, and my main job is, of course, to study how technology, and especially AI, changes business models and creates competitive advantage. So I wrote a book on business model innovation, and I've been teaching classes to senior executives on business model innovation in the age of AI. 

And then I have administrative duty at Wharton. So for many years, I've been a Senior Vice Dean for Global Initiatives and Innovation, which basically means I'm building global partnerships for Wharton, launching new initiatives, and basically trying to rethink business model of Wharton itself or a business school, how it's going to look like in the future when AI takes over. Plus, in addition to that, I have had some other hats. I spent six years working part-time at Amazon, for example, and I do spend a significant amount of time as a limited partner and venture partner in venture capital funds.

Fred Schonenberg
I love it. Well, maybe let's dive right into the Fortune article and the research behind it. One of the things that you argued was that corporations should stop thinking entirely like venture capitalists or the CVC side and think more like customers of the startups. Can you talk about how you came to that conclusion and maybe what that means for what's called traditional corporate venture capital?

Serguei Netessine
Certainly. So I first produced a report on collaborations between startups and big companies 10 years ago, and at the time, this was still sort of a novelty. Most activities were around corporate venture capital, investing in startups, but there were other forms of relationships with startups that were evolving. And then we reproduced this report with new data just this past year, and we saw that there were a couple of major changes, and one was venture clienting. So this just did not exist 10 years ago. Maybe it existed, but people didn't talk about it that much. But suddenly, it became a kind of a major approach.

And another one is corporate venturing, venture building inside the corporation. So that was another new approach that we observed. And as we kind of talked with corporations and talked with startups, we saw that this makes a lot of sense because most corporate venture investments don't really create meaningful strategic value.

Corporations are usually terrible venture capitalists, honestly, because they don't have VC incentives, they don't have the capabilities, they don't have speed, they require 20 signatures to make every approval of an investment, and they require calculation of return on invested capital using net present value, which is completely ridiculous for a startup. Nobody does it in a startup world. So their advantage as a big corporation isn't with writing checks, it's being one of the world's largest potential customers for a startup.

Fred Schonenberg
On the flip side, then, what is the value for the large organization? Because when I first started this work immediately, I was like, oh, the value to the startup is super clear. Like, A, just go work with the big company, that's your client, that increases your valuation, you don't have to give up equity, you need customers eventually. But flip it around for me, as you dove into this, what is the value to the corporate if they don't retain that equity interest? 

Serguei Netessine
The biggest value I see is fast innovation. Imagine a big company, you want to innovate with AI, how do you do that? Do you go and write your own LLM? Do you hire people first? Are you even able to pay the kind of salaries that these people command? And you can hire them, you can produce something, probably not going to be nearly as good as what startups can produce, who get the best of the best people, who don't work for salaries, they work for equity. And let's be honest, the most innovative, the most creative people don't want to work for a big company, they want to work for a creative startup. 

So instead of kind of building this capability internally, which again is going to require lots of planning, lots of approval, signatures, and so on, you can have it tomorrow, and you can open, for example, your customers to a startup, add through an API. Let's say you're a bank, you want to offer some exciting new product or service, a startup connects to you through an API, offers this product or service, and you can turn it off immediately. And if it's working, great, then you just keep supplying it. If it doesn't work, you turn it off and you disconnect it. So I think that's the biggest value proposition for a big corporation.

Fred Schonenberg
It's really interesting. I mean, you mentioned 10 years ago, I would say that I sort of stumbled into this space, in that I was working with very large companies, and they kept saying to me, what's next? Is there new technology? Is there a new way to connect with our consumers? And I ran into a friend who had a startup, and he complained he couldn't get a meeting with these same big companies. And I was like, there's a better way to fuel your venture than just raising money. You should go work with these guys. And that's what VentureFuel became. 

We started on the startup side, representing the startups, and eventually got to essentially the venture clienting side, working for the large companies. But I still feel this friction when we're talking to large companies saying, well, why don't we just, I'll use your AI example, why don't we just work with Google or OpenAI? Let's take the biggest player and go work with them, rather than these, in a lot of big companies' minds, the startups in a garage, and they're all risk-averse. Have you thought about that part of it? How does this work in the realities versus maybe some bigger tech players?

Serguei Netessine
Absolutely. So you can certainly go and work with a big tech player, but of course, big tech players have their own kind of business models. They might be selling this kind of large LLM capabilities, for example, to many, many companies, and this is kind of mostly how they make money. But in your industry, you are going to have very specific pain points that they may not understand. And you might need a very, very specific solution.

So let's say, again, let's take a banking example. In banking, there are lots of concerns about data security and all kinds of protocols that you use for exchange of information. It's all highly regulated. You're not going to be able to get this kind of off-the-shelf quick solution with some of the big players. So if you want something very, very specific, I bet you there's going to be a startup out there that figured out that this is a pain point for banks and trying to offer a solution, be it the business process outsourcing or customer marketing or maybe customer support or things of that nature, which are very, very specifically targeting your particular industry, not kind of one solution that is meant to solve all problems.

Fred Schonenberg
Why do you think this has risen so much in terms of relevance? Do you think the rise of AI is changing maybe the economics of urgency here or forcing larger organizations to think outside of their traditional approaches?

Serguei Netessine
Absolutely. AI startups are improving every month. If your procurement process takes 12 months, the technology has changed before you've signed the contract. So speed is now a competitive advantage. And so companies that can't adopt AI quickly won't lose to AI. They will lose to competitors that are already using AI. And so for you to kind of keep updating these capabilities internally, it's just very, very difficult.

Big companies are slow by their nature. They have processes, they have approvals, they have organizational designs that do not kind of support very quick operation. So a startup can do all of that for you. They can iterate, they can change as AI models change. And you can always have kind of an up-to-date product that keeps improving without you necessarily doing anything.

Fred Schonenberg
One of the things we've seen as we've done this work is a large company gets excited either by a technology, a shiny new toy, or they have a business problem with their internal R&D team, maybe it's not as high up on the urgency or the priority scale. So they say, yeah, let's do a pilot with a startup. And it works. But from there, it tends to stall in terms of adoption into the big ecosystem. We've been calling it pilot purgatory. First to try, last to scale, one of our clients said. I'm curious, why do you think that is? And if that came up at all in any of the research?

Serguei Netessine
I think it's because corporations celebrate launching pilots instead of scaling solutions. A pilot is an experiment. It shouldn't be kind of an outcome. But the biggest problem with converting pilots into scalable outcomes is incentives. Nobody owns scaling. Innovation teams are rewarded for finding startups. Business units are rewarded for avoiding risks. Procurement is rewarded for reducing supplier risk. Everyone optimizes locally. 

So innovation kind of dies on a global scale. That I think is very often the problem. Finding the right person with the right incentives within the organization who helps scale this solution. And I think this is also what separates successful companies from not so successful companies. 

Successful companies don't treat innovation as some kind of a side activity. They integrate it into the operating business. So you need things like CEO sponsorship of venture clienting. You need business unit ownership. You need procurement involvement from day one of the pilot. You need fast decision making within the organization. And you need metrics that are tied to business outcomes rather than to the number of pilots that you are launching.

Fred Schonenberg
I could not agree more. And I agree sort of breaking down the silos or including the silos, right? Because the silos are going to exist. I think the incentive is extremely interesting. We had a gentleman on the podcast a while back from TELUS, their global venture team. And they had a venture clienting group. But they essentially had an internal sales team whose job was to drive the adoption throughout the organization. And I thought that was a brilliant move. And we've seen it in a couple of cases. Comcast has something called LIFT Labs that does this as well. But it's a really interesting way to move it from pilot to scale in the organization and then measure, hey, what's the impact we have from this activity?

Serguei Netessine
Absolutely, yeah. And I've seen organizations that are great at that too. Like Microsoft is the one that I like to bring up. They created an amazing ecosystem of startups. You can go to Microsoft website and say, hey, I want a solution in supply chain management. And they have a bunch of startups listed which they collaborate with. They have specific point people who find this connection between business units that can own a relationship with a particular startup and drive adoption. They get engaged from day one. And all of that drives business for Microsoft. For example, selling AI compute or selling cloud, Azure cloud, for example. 

Fred Schonenberg
One of the things I thought was really interesting in your article was this idea of procurement moving into being an engine for innovation versus a purchasing function. And I think this idea is sort of rethinking procurement, and maybe it's not traditional procurement, but thinking of this way of using startup partnerships as a competitive advantage. Can you expand on that a little bit?

Serguei Netessine
Yeah, I think procurement as a way we traditionally think about it in big companies is just about negotiating low prices. And it shouldn't be. It should help the company access technologies that competitors don't yet have. And that, I think, should be the most critical part of it. Because honestly, prices with startups, that's not the most critical point. Many startups will give you a product for free or for a very, very kind of a low price to try it. 

But then scaling is really kind of where a startup is going to make all the money. So initial pricing is not a big focus. But tomorrow's strategic supplier may be a 10-person startup. And so great procurement organizations should become really technology scouts, going around there, figuring out what's possible, what is technologically feasible, and what is kind of ready for a big company to try. 

Fred Schonenberg
You've worked with and studied so many large organizations. You just mentioned Microsoft. Are there any others that kind of stood out to you as embracing this idea of venture clienting and really driving it through? And was there anything consistent about the way those companies did it?

Serguei Netessine
Amazon certainly comes to mind as well. So Amazon has multiple units that are on the AWS side, but also on the Amazon Alexa side, for example. I think what makes some of these organizations great is that they have an entire system of collaborating with startups, which involves venture clienting, also venture capital. They'll invest if needed. Then they'll create some co-working spaces where startups can just come, sit, and be close to the company to try to understand a really big company's pain point, for example. 

And they also provide all kinds of business services for startups, sometimes for free. Come open an account for us. It's going to be free for the first three to five years while you are a startup. Or come use our software. For example, Microsoft offers an entire suite of products to startups for several years for free. So that, I think, is what makes it particularly valuable, kind of a multiplier effect of the entire ecosystem around startups, not necessarily just the venture clienting part of it.

Fred Schonenberg
I think it's really interesting. I think you've given some really good examples of Amazon and Microsoft where you can see what the ROI is for them, whether it's compute or having startups that are early building on their platforms. I'm curious if I'm maybe not a tech player with that direct line where it's not build with Amazon or build with Microsoft, and I'm thinking about this world of corporate venturing or venture capital, what kind of ROI… how do you justify this to the C-suite of a legacy construction company or something along those lines where they think, why would we work with startups? 

Serguei Netessine
It's a great question. So I think as a founder of a startup, you have to have a solution to a really painful problem. I think this could be one indicator. Hey, we have a really painful problem that a particular startup knows how to solve. So that would be kind of a number one indicator. 

The second one I would think is kind of a measurable ROI in weeks, not in years. If you come to me kind of as a startup and say, hey, I'm going to enable your employees to create presentations faster. What's the ROI on this freed up time? How am I going to know how much time they saved? Will people honestly report like, yeah, now I'm spending less time, so I have more free time? It's very, very hard to measure an ROI of this sort. 

But if it's very specific, like, hey, our tickets are answered within five days on average right now. And this startup tells us they're going to do it in one hour, right? This is very measurable. I can measure it. I can see it. I can also take customer satisfaction as a result of this ticket resolution. And I can compare and I can immediately say, look, here is a clear ROI.

Fred Schonenberg
Yeah. I think what's interesting about, you mentioned speed to ROI there. That's really interesting. So you think of corporate venture capital, it's a slow ROI game, whereas this is a venture client team. I think maybe that speed might be a key part of why maybe some of that shift is happening.

Serguei Netessine
Absolutely. Yeah. I think if you look at the data, corporate venture capital firms, something like a third of them, are defunct after just three years of existence. So they just cease to exist because the CEO says, hey, we need to be more innovative. Let's put together a corporate venture capital fund. And then a new CEO comes three years later and says, did we get any return from the corporate venture capital fund? But that takes 10 years, right? So very often they become kind of going into limbo and so on. So yeah, that is the biggest difference. That's ROI in a few weeks versus ROI in 10 years, if any.

Fred Schonenberg
I love it. You've written and taught extensively about business models within uncertainty, including your book that you mentioned, The Risk-Driven Business Model, which I wish we maybe would have to do a second podcast on. As AI continues to reshape industries, do you think that larger organizations need to not only think of how to optimize here and efficiencies, but really rethink their business models and find new ways of executing with their existing ones?

Serguei Netessine
I think some organizations will need completely new business models. Probably most don't. For many big organizations, the opportunity will not be the kind of reinvention of a brand new business model. It might be just using AI to increase revenues, lower costs, improve delivery, capture value better. But I do believe that there's going to be increasingly more organizations that completely rethink business models with AI first, which is very difficult.

Typically it's done by startups, which are not kind of captive to their existing business model. So this is going to be like with any new technology. Like you think about the internet, there were pure play internet retailers that said, internet first, we're going to be just pure play, sell on the internet and so on. And then there were some older companies which said, well, for a while, we're not going to do anything. Then we're going to create an internet website, then we're going to create an omni-channel and so on. 

And then over time, you see big organizations creating more and more kinds of a new business model alongside the old business model. But certainly a lot of organizations will want to completely rethink their business models. And that's what a lot of my executive education classes are about, how to do that in the constraints of a big organization.

Fred Schonenberg
I love that. If you were advising a Fortune 500 CEO and they came to you and this is the first they've heard of the idea of corporate venturing, how would you stage this? Where would you advise them to start? Is it venture clienting, venture capital, venture building?

Serguei Netessine
I think the first stage is to understand what your goals are. Because for many executives, it's unclear. They're like, yeah, we want to become more innovative. So what does it mean exactly? Do you want to infuse your own managers with innovation? Do you want them to think more outside of the box and come up with new business models? Then maybe some kind of a co-working space for startups would make sense, where managers come to demo days and talk to startup founders and kind of look over their shoulder and say, hey, what are you working on? What is kind of cool and interesting? What kind of technologies should I be watching out for? 

So that would probably be kind of a good approach. But if your goal is to implement some innovative solutions from day one, from a few weeks from now, then I do think that venture clienting is probably the best approach.

Fred Schonenberg
So, Serguei, I want to leave you with this. You're in this very interesting space between academia, startups, and large corporations. Is there anything that you're seeing, whether a technology or a trend, that you're really excited about, that you think we're going to look ahead five years from now and say, wow, that was something that people should have been paying more attention to?

Serguei Netessine
Well, I do see a big trend of collaboration between startups and big companies, which I've been observing for a while. And now all we talk about is OpenAI and Microsoft and Anthropic and Amazon. It seems like in the age of AI, it becomes incredibly difficult to innovate alone, whether you’re a startup or a big company, because AI-driven innovation requires significant investment. And startups usually don't have this kind of money. So they want some revenue streams. They want some direct investments. And big companies want this infusion of innovation from smaller startups.

So I think in five years from now, we will be seeing increasingly innovativeness of organization measured by revenue generated from startup partnerships. It will be measured by the speed of technology adoption. It will be measured by AI deployment across the enterprise, across end-to-end processes within the enterprise, not how many people use chatbots or some meaningless metrics like that. 

Not how many lines of code are produced by AI, because that, again, doesn't mean anything. I can produce a lot of lines of codes, but do they solve any specific customer problem? Do they actually create value? So I hope we will be measuring productivity gains from AI within big companies, not how many different LLM models we are using.

Fred Schonenberg
Well, Serguei, I want to be conscious. We just hit the 1:30 mark. Do you have five extra minutes to do a little rapid fire at the end?

Serguei Netessine
Absolutely, yeah.

Fred Schonenberg
All right. So we often end this show with this rapid fire segment where we ask a couple questions just to get your gut instinct in one sentence or so. So let me dive into this for you. This is on here, and I bet you have a very interesting answer. What's one business book every executive should be reading?

Serguei Netessine
Oh, that's easy. That's my book, The Risk-Driven Business Model. Absolutely, yeah.

Fred Schonenberg
I figured that might be an alley-oop to you there. What is one metric every innovation leader should be tracking?

Serguei Netessine
Revenue or cost savings generated from startup partnerships.

Fred Schonenberg
What's one myth about startup corporate collaboration that you'd love to debunk?

Serguei Netessine
That startups need your investment more than they need your purchase order.

Fred Schonenberg
And then I'll end with this one. What makes you most optimistic about the future of innovation?

Serguei Netessine
For the first time in decades, a small team with AI can compete against organizations 100 times larger. So innovation has never been more democratized, and that keeps me very optimistic.

Fred Schonenberg
I love it. Serguei, this has been fantastic. I feel like I could ask you about 500 more questions. So where should people go to learn more about your work? Find your book, the article. I would love to point them in the right direction.

Serguei Netessine
Well, there is an executive program coming up in November, Business Model Innovation in the Age of AI. It's an open enrollment program at Wharton, so you can Google it, you can find it, you can sign up.Another offering is going to be in May, I believe. So I would love to see you there and have in-person discussions. Other than that, if you Google my last name, you'll see my website.

There are all the media mentions there. There's going to be Fortune articles that you referred to, and there's going to be a report on corporate startup collaboration, which is very fresh. It was just a few months back.

Fred Schonenberg
Well, it was awesome. I enjoyed reading it thoroughly, and before even knowing you or that article had looked into this class over time, because I always love to try and do executive education that makes sense. So I encourage everybody to check that out. Serguei, thank you for everything that you’re doing to spark change and for taking the time today to talk with us.

Serguei Netessine
Thank you, Fred. It was a great pleasure. Hope we get to work together on some of those corporate-startup collaborations at some point.