Disadvantages of Internal Corporate Ventures

Internal venturing refers to the practice where a company uses internal ideas and resources to start a new business.

While internal ventures may have the support of parent companies, making them successful is not easy because of factors such as long maturity periods, uncertainty, high costs and manager-recruitment. Let’s explore each of these challenges.

• Steep Start-Up Costs

Companies often invest vast amounts of resources to start internal ventures. The costs associated with internal ventures are mainly in the form of resource commitments and managerial involvement.

Companies can incur huge losses if the new business fails. Hence, the high start-up costs may diminish shareholder’s immediate wealth. This is in itself may make the parent company reluctant in sponsoring the new venture.

• Uncertainty

As aforementioned, internal ventures need substantial capital. Thus, managers will need feasibility proof from project initiators before they can give resources.

Nonetheless, conducting a feasibility requires funds. This cloud of uncertainty may make management to hesitate to release resources, killing a new project prematurely.

• Long Maturity Period

It takes a relatively long period of time before an internal venture shows profitability. Experts note that it takes an average of about 10 years before an internal venture’s ROI equals that of the main business.

Consequently, a company considering an internal venture should be ready to bear the long period before profitability shows.

• Manager-Recruitment Challenge

Getting the right manager for an internal venture is challenging because characteristics of the best manager are not cast in stone.

There may be a quandary on whether to choose a manager who can steer the company through a period of fast growth or one who is best in time-consuming definite structures.

There can also be dilemma on whether to go for older experienced managers or young executives who are tech-savvy.

[irp]

In view of the above challenges, internal ventures require careful planning and business astuteness for successful execution. Careful considerations have to be made because rushing in can result in significant losses.