Description
This abstract tell the use of corporate venture capital as a strategic tool literature review.
Année académique 2008-2009
Working paper 09/21
The use of corporate venture capital
as a strategic tool: Literature review
and key characteristics of CVC
investments
Luc Armel G.Da Gbadji, Benoît Gailly
Site de Louvain-la-Neuve - Place des Doyens, 1 - 1348 – Louvain-la-Neuve
THE USE OF CORPORATE VENTURE CAPITAL AS A STRATEGIC TOOL:
LITERATURE REVIEW AND KEY CHARACTERISTICS OF CVC INVESTMENTS
1
Luc Armel G. DA GBADJ I, Benoît GAILLY
Abstract
The exploration and exploitation of innovative opportunities are the essence of corporate
entrepreneurial activities. In the scientific literature, the responsibility and ability of firms to
pursue innovative opportunities and to stimulate the creation of new business received
increasing attention.
Among the mechanisms firms are putting in place to promote the exploration and the
exploitation of attractive innovation opportunities, some are corporate venturing and
particularly the corporate venture capital.
This paper seeks to make a literature review focused on the key features and the strategic
benefits of corporate venture capital. Based on industry data from the VentureXpert database,
we will identify and describe typical key characteristics specific to CVC activities.
KEYWORDS:
Corporate venture capital, strategic objectives, typical key characteristics
Authors:
Luc Armel G. DA GBADJ I is research assistant and PhD candidate at the Center for Research
in Entrepreneurial Change and Innovative Strategies (CRECIS) at Louvain School of
Management.
Benoît GAILLY is Professor in Innovation Management and Strategy at UCL and senior
member of CRECIS. He is Program Director of the executive master in innovation
management and President of the commission of the Academic Council of the University
regarding the transfer and valorization of research results.
1
Paper presented at the European Summer University Conference on Entrepreneurship in Bodø, Norway, 22nd to
26
th
August, 2008.
INTRODUCTION
Identifying, selecting and exploiting the right new business opportunities are the essence
of entrepreneurial activities and among the most important abilities of a successful
entrepreneur. Shane and Venkataraman (2000) define entrepreneurship as the processes of
discovery, evaluation, and exploitation of opportunities in order to create future goods and
services.
Many established corporations engage in leveraging their existing capabilities or engage
in diversification through corporate entrepreneurship activities. Sharma and Chrisman (1999)
define a corporate entrepreneurship as “the process whereby an individual or a group of
individuals, in association with an existing organization, create a new organization or instigate
renewal or innovation within that organization”. In large established firms, corporate
entrepreneurship is an important tool for business development and a promising path to
enhance financial returns (Miles and Covin, 2002). Corporate entrepreneurship contributes to
the achievement of some company’s strategic objectives (Rind, 1981) and is characterized by
the use of internal or external corporate venturing to pursue innovation opportunities
(Chesbrough, H., 2000).
Among the external corporate venturing mechanisms firms are putting in place in order
to promote the exploration and the exploitation of attractive innovation opportunities, some are
corporate venturing and particularly the corporate venture capital. The aim of this research is
to investigate on the key features and particularly on the strategic objectives of corporate
venture capital.
The paper is organized as follows. Firstly, we will focus on the key concepts of CVC,
particularly the typology of CVC and the key success and failure factors specific to CVC.
Secondly this paper will analyze the strategic reasons why corporations set up corporate
venture capital unit. In the third section, we will identify and describe the typical key
characteristics of CVC investments as illustration. Our methodology approach will be based on
an industry data analysis (VentureXpert of Thomson Financial). Our objective is to discuss on
how the nature of parent corporation may influence the decision to invest in new venture. We
will particularly take in account the nature (industry sector) and the stage of the new venture
and if the parent corporations are syndicating their investment or not.
1. THE CONCEPT OF CORPORATE VENTURE CAPITAL
1.1 Definition of corporate venture capital
Corporate venture capital (CVC) refers to “equity or equity-linked investments in young,
privately held companies, where the investor is a financial intermediary of a non-financial
corporation” (Maula, 2007). That refers to corporate activities residing at various levels, where
investments are made directly in external start-up companies or through independent venture
capital (VC) funds as limited partners (Chesbrough, 2002; Maula, 2001). It is important to note
that CVC is one of a number of types of venturing activities, a corporation can set up.
1.2 A typology of corporate venture capital
In the scientific literature, corporate venture capital refers to external corporate venturing
activities (see Figure 1) that include venturing alliances and transformational arrangements
(Sharma and Chrisman, 1999; Keil, 2000 and Maula, 2007).
External Corporate
Venturing
Corporate Venturing
Pooled funds
Internal Corporate
Venturing
Corporate Venture
Capital
Venturing alliances Transformational
arrangements
Dedicated
funds
Self-
managed
funds
Non-equity
alliances
Direct
minority
investments
J oint
ventures
Acquisitions Spin-offs
Figure 1: Corporate venture capital and its linkage with corporate venturing activities
2
Corporate venture capital can be found under different settings. It can differ in terms of
whether the investments are made directly by the parent corporation in the new ventures (self-
managed fund) or indirectly through dedicated or pooled VC funds (Keil, 2000; Kann, 2000;
Maula, 2001, 2007). There are three categories of corporate venture capitals we could identify
in the literature (see grey marked part in figure 1):
2
Adopted from Keil (2000), Maula (2007), Sharma and Chrisman (1999).
Self-managed funds represent those investments where a corporation sets a wholly owned
venturing subsidiary up and endows it with a budget in order to finance directly external start
up. This venture capital entity is usually managed by corporate managers and employees and is
exceptionally reporting to the top management commitment.
Dedicated venture capital funds are managed by a third party, usually an independent venture
capital firm. In practice, these dedicated funds involve several limited partners including a
corporation as strategic or lead investor and other VC funds as financial investors. Dedicated
funds are usually strong specialized and are focusing on specific industry or technology targets
that are exclusively defined by the strategic investor.
Pooled venture capital funds are co-investment funds involving independent VC funds as well
as CVC funds, including maybe potential competitors. Such funds are usually managed by an
independent VC. They could be either interested in maximizing financial returns or in a
specific strategic objective (e.g. aiming to develop a certain technology or market). They are
less specialized as dedicated venture capital funds and are often used to invest in dissimilar or
geographically distant new ventures.
The Table 1 summarizes some characteristics of (corporate) venture capital structures.
Independent VC
(pure VC funds)
Dedicated and pooled
venture capital funds
Self-managed funds
(pure CVC)
Fund
characteristics
Independent fund
with different
limited partners
acting as investors
Funds operating as an
independent fund where
the main (dedicated
funds) or the most
(pooled funds) limited
partners are corporations
Funds where a
corporation (parent) is
the sole fund provider
Fund manager General partner
acting on behalf of
different limited
partners
General partner acting on
behalf of different
limited partners
Subsidiary of the
corporation
Investment
motives
Financial return Financial returns
Contribution to strategic
objectives of corporate
limited partners
Contribution to
strategic objectives of
the parent corporation
Financial returns
Degree of
autonomy
High degree of
autonomy; the
limited partners are
not interfering in
the VC’s
management
Parent corporations
usually interfere in the
VC’s management with a
veto right
Multiple review and
control levels induced
by the parent
corporation: tight cost
controls and high
influence on decision
making
Table 1: (Corporate) venture capital structures
In the practice, most corporate venture capitalists or independent venture capitalists syndicate
their investments in new ventures (Brander, et al., 2002; Bygrave, 1987, 1988; Lerner, 1994;
Riyanto and Schwienbacher, 2006). The syndication of CVC investments describes a process
where a group of (corporate) venture capitalists makes a common decision under uncertainty
and jointly invest in the same venture, in the same financing round (Brander, et al., 2002;
Bygrave, 1987, 1988; Lerner, 1994). A syndication of CVC investments can be justified by
three main motivations: a financial, a resource sharing and a deal flow motivations.
The financial motivations related to the use of syndication in order to access faster to
additional financial resources, to increase the investment fund size and to deal with limited
financial resources and illiquidity. The syndication is used to increase the number of
investments made, to achieve a higher level of diversification and therefore to reduce overall
portfolio risk (Wilson, 1968; Lockett and Wright, 2001; Manigart et al., 2006). Brander et al.
(2002) empirical analysis using venture capital Canadian data showed that on average a higher
rate of return can be expected from syndicated investments than standalone investments,
particularly if there are complementarities between investors’ and ventures’ resources and
objectives.
The resource motivation referred to the use of syndication in order to deal with information
asymmetries. The syndication of CVC investments helps to access complementary information
and knowledge. This aims at facilitating the selection of investment targets and improving the
quality of the post-deal management (Brander et al., 2002; Lerner, 1994; Lockett &Wright,
2001; Manigart et al., 2006; Wilson, 1968). Syndicated investments make sharing of
management practices, expertise resources and complementary capabilities possible (Bygrave,
1987; Brander et al., 2002; MacMillan et al., 1988; Gorman and Sahlman, 1989; Rosenstein et
al., 1993; Sapienza, 1992; Sapienza et al., 1996; Hellman and Puri, 2000; 2002).
The third rationale for the syndication of CVC investments is the access to as many deals as
possible in order to increase the quantity and the quality of deal flow (Lockett and Wright,
2001; Sorenson and Stuart, 2001; Manigart et al., 2006). This helps investors to achieve a
better reputation and visibility and a strong position in venture capitalist networks and
increasing the likelihood of being invited into syndications (Lerner, 1994; Manigart et al.,
2006; Podolny, 2001).
After reviewing the typology of corporate venture capital, we will discuss in the next
subsection the key success and failure factors specific to corporate venture capital.
1.3 Key success and failure factors specific to corporate venture capital
Many key success and failure factors at industry, corporation and venture levels might help
some corporate venture capital units to deliver on their objectives while others fail. In the
scientific literature, previous empirical studies on CVC (Gompers and Lerner, 1998;
Dushnitsky and Lenox, 2005, 2006; Keil et al., 2003, Maula et al., 2003; Schildt et al., 2005)
describe those key success and failure factors specific to CVC.
At the industry level, empirical results regarding CVC have shown that industrial environment
with weak intellectual property protection (in particular, patent protection), with high
technological potential, with a complementarity in sharing resources and better distribution of
capability needs and where strong network and ties venture capital communities coexisted, is
positively influencing the performance of CVC and at the same time the decision of
corporation to invest in new ventures (Dushnitsky and Lenox, 2005a). The less new ventures
protect their innovations from imitation through legal mechanisms such as patents, the greater
the corporation benefits from its CVC investments. Indeed, in strong IP environment (e.g. in
biotech industries), new ventures often patent their technology and license it to other
companies (e.g. pharmaceutical firms) (Dushnitsky and Lenox, 2005a). In suchlike
environment, corporate investors don’t gain a privilege to exploit this strategic technical
knowledge to leverage their complementary capabilities. In contrast in weak intellectual
property protection environment, corporations that build good relationships with new ventures
during the early stage may have a privilege of exclusivity to use this new or complementary
knowledge.
At the corporate level, the investment mode (direct or indirect self-managed, pooled or
dedicated funds), the number of investors (syndication of investments) and the choice of
primary strategic objectives might influence the success of the CVC fund (Sykes, 1990).
Furthermore, the intensity of the corporation’s R&D activities, the size of its patent stock
(Dushnitsky and Lenox, 2005a) and the quality of its CVC management team (team with
strong venture capitalists or entrepreneurial background) are also positively related to the
success of the CVC.
At the venture level, building a good relationship and communication between a parent
corporation and new ventures may help the CVC management to deal with information
asymmetries and to achieve better results. Since a CVC had a positive impact on patenting
rate, the relatedness or the complementarities between the parent corporation’s and the new
venture’s lines of business could improve the performance of the CVC fund (Keil et al, 2003).
For example SmithKline beeecham’s fund, S.R One invested between 1985 and 1999 in
biotech and life science ventures such as Amgen, Cephalon and Sepracor and achieved
impressive successes. Its compensation scheme and a positive relationship and communication
with the different partners played a large role in this success (Gompers and Lerner, 2001,
P.164).
CVC-backed ventures are as successful as independent VC-backed, when there were
similarities between the investing firm’s and venture’s lines of business (Gompers and Lerner,
2000). Gompers and Lerner demonstrated higher IPO likelihood for ventures financed by
corporate investors compared to other ventures. This IPO likelihood is particularly higher
when there is a “strategic fit” between new ventures’ business activities and parent
corporation’s business lines. Maula and Murray (2002) reported that ventures co-financed by
industry leading corporate investors received superior IPO valuations over firms financed by
venture capitalists alone.
Additionally to these success factors at venture level, some ventures may prefer to deal with
corporation because they may have an access to additional valuable resources such as technical
expertise, management and board support, market presence. In fact, CVCs may help new
ventures to attract new business partners and customers and therefore may be more attractive
to an entrepreneur than VCs or banks (Maula et al., 2005). For example, being backed by a
leader in an industrial sector may give a new venture, recognition and market credibility
necessary to attract substantial business customers and other potential investors.
In contrast with these key factors positively related to the success of CVC fund, many other
factors could also explain why CVC activities might fail. Many empirical results regarding
CVC highlight a lack of sufficient autonomy (MacMillan et al, 1986), a lack of corporate
commitment, limited resources (Sykes, 1986a), as well as the short average life span of CVC
funds in comparison to VC funds (Gompers and Lerner, 1998, 2001) as generic failure factors
specific to CVC success. Moreover information asymmetries due to ventures’ fears of
expropriation by established firms (Dushnitsky and Lenox, 2005a, 2006) or difficulty to deal
with legal problems (e.g. patent rights) lead to conflicts of interest between parent corporations
and new ventures and hamper the success of corporate venture capital funds. Furthermore, the
lack of entrepreneurial talent, the difficulty to manage investments in high-risky and fast-paced
environments and the difficulty to attract and hire skilled fund-managers due to incentive
problems are serious obstacles for the achievement of CVC financial and strategic objectives
(MacMillan et al, 1986; Chesbrough, 2000).
Although venture capital investing may not appear to be aligned with most corporations’ core
business activities, it becomes increasingly a practice for many established firms as promising
avenues for the achievement of financial, social and much more strategic objectives (Gompers
and Lerner, 1998; Hellmann, 2001; Maula, 2001; Maula and Murray, 2002; Dushnitsky and
Lenox, 2005, 2006; Keil et al., 2003; Schildt et al., 2006; European commission, 2001). After
reviewing the key concepts of CVC, we will explain in the next section the strategic reasons
why corporations set up CVC unit.
2. STRATEGIC OBJECTIVES OF CORPORATE VENTURE CAPITAL
There are three categories of CVC objectives we identified in the literature: the strategic
objectives, the financial objectives and the so-called “social” objectives. The financial
objectives include earning of high Returns on Investment (ROI) and access to new capital. The
social objectives include for instance the aim to increase corporate image, to create new job
opportunities, to support regional development processes, to instigate ecological awareness,
etc. The strategic objectives and the financial objectives are the main motivations for
corporations and both are not substitutes (Hellmann, 2001; Gompers, 2002; Bannock
Consulting, 1999). For example the following statements confirm that corporations are
principally interested in the combination of strategic and financial benefits.
At Microsoft, they asserted that: “If an investment in a company can support and benefit our
customers and strategic partners, as well as provide market traction for our products or
technologies, we consider it a successful venture. Although financial gain is important to us,
we view it as a byproduct of a successful relationship, not the primary goal of investing”
(Nehru, 2000) quoted in Allen and Hevert (2007).
In the same manner, at Cisco Systems they declared that: “While we make strategic
investments, we don’t want to make stupid financial decisions. At the end of the day, if we
make a strategic investment and the company fails, then there is no strategy around it
anymore” (Volpi, 2000) quoted in Allen and Hevert (2007).
In the following section we are not going to discuss the financial objectives of CVC
investments. We will particularly describe the strategic objectives that tend to be much more
important for corporations (Hellmann, 2001; Gompers, 2002; Bannock Consulting, 1999).
The strategic objectives include three categories: the leveraging objectives, the option building
objectives and the learning objectives which will be detailed here after.
2.1 The leveraging objectives
The leveraging objectives are related to investments in new ventures that may help to develop
the investing company’s current operational capabilities, resources and processes and support
its own business growing. There are two categories of leveraging objectives: leveraging own
technologies and platforms and leveraging own complementary resources.
Leveraging own technologies and platforms
To leverage existing technologies and platforms, parent corporation may invest in new venture
to stimulate and secure the demand for their current technologies and products (Dushnitsky
and Lenox, 2005a, 2005b, 2006; Chesbrough, 2002; Riyanto and Schwienbacher, 2006; Kann,
2000; Maula, 2007). Investing in start-ups gives parent companies an opportunity to support
the use of their latent patents, to develop and commercialize unused or non-strategic
technologies (Chesbrough, 2002; McKinsey & Co., 1998).
Established firms invest in new ventures in order to shape markets proactively and to steer the
promotion and the adoption of their own technology as a standard (Chesbrough, 2002; Kann,
2000; Maula, 2007). For instance, Intel, IBM, Netscape, Oracle, Novell, Compaq and Dell,
highly dependent on the development of Microsoft operating system (OS), invested in Red Hat
to promote Linux OS and reduced their dependency to Microsoft OS (Young and Rohm, 1999
quoted in Maula, 2007). In the same manner, Microsoft invested in start-up firms that would
exploit its new internet services architecture “.Net”, in order to promote the adoption of the
Microsoft standard over rival approaches from Sun Microsystems and IBM (Chesbrough,
2002).
These types of investment aim at sustaining corporate current businesses and are characterized
by tight links between the operational capabilities of the investing company and the start-up
business activities (Chesbrough, 2002).
Leveraging own complementary resources
Investing in high promising new ventures, particularly those which develop complementary
products and services, helps corporation to leverage its own complementary resources by
adding new products to existing distribution channels (Skyes, 1990; Maula, 2007) and by
enabling the use of excess plant space, time and people (Silver, 1993).
For example, Intel realized it could benefit by making complementary products. Intel invested
in many ventures specialized in video, audio and graphics hardware; succeed in stimulating
sales of Intel Pentium chip and increased its revenue (Chesbrough, 2002).
For example, Merck & Co., a pharmaceutical company that develops, manufactures and
markets vaccines and medicines, has invested in a new venture developing ways to speed up
recruitment process of appropriate patients for clinical trials of new drugs. These trials are
necessary for FDA approval. Merck & Co., by investing in this start-up seeks to accelerate
FDA approval process, to lunch earlier its drugs on the market, to increase its sales and to
expand before its patent expires (Chesbrough, 2002).
2.2 The option building objectives
The option building objectives refer to the opportunity for the parent corporation to explore
and exploit potential new market opportunities. CVC activities may help corporation in
identifying emerging markets and new technology platforms that may facilitate diversification
activities and accelerate the expansion on markets different from those in which the
corporation currently operates (Skyes, 1986; Kann, 2000; Keil, 2000; Chesbrough, 2002).
For instance, Agilent Technologies specialized in life sciences, chemical analysis, advanced
electronics and communications invests in strategic areas that it has identified as key to its
growth. Agilent has particularly invested in a start-up company making wireless radio-
frequency devices to explore this product area (Chesbrough, 2002).
Investing in corporate venturing may help corporation in identifying, screening and assessing
potential acquisition targets and to develop new business relationships (Siegel et al., 1988;
Sykes, 1990; Maula, 2007).
CVC activities may help corporation to better understand and respond to customer’s needs by
increasing the pace of innovation. CVC may help corporation to anticipate and respond faster
to market changes in order to become a pioneer and/or one of the major actors on emerging
markets.
For example, Novartis venture fund invests, develop collaborations and business deals with
new ventures in order to stimulate outstanding innovation in life science area and to enhance
discovery of novel therapies. Six new ventures backed by Novartis venture fund made
successfully an IPO and became success stories. Sirtris Pharmaceuticals is one of these
successfully Novartis’s backed new ventures. Sirtris has discovered and developed molecule
drugs to treat diseases associated with ageing, including metabolic diseases such as “Type 2
diabetes”, various types of cancer and osteoporosis, as well as neurodegenerative,
cardiovascular, inflammatory, and mitochondrial diseases (Sirtris Pharmaceuticals, Inc, 2008).
Sirtris Pharmaceuticals, Inc. went public in May 2007 and was listed on the American
NASDAQ (OECD, 2008). Sirtris’s development in a fast-paced biotechnological and
pharmaceutical environment aroused GlaxoSmithKline’s interest. In J une 2008, GSK acquired
Sirtris that has become its wholly-owned subsidiary (Sirtris Pharmaceuticals, 2008).
2.3 The learning objectives
CVC activities may facilitate corporate business units learning from entrepreneurial ventures.
Corporations learn from its CVC activities how to proceed with the identification and the
monitoring of new opportunities. CVC provides a window on new technologies, markets,
business models and practices to corporations (Dushnitsky and Lenox, 2006; Keil, 2000;
Maula 2007; Siegel et al., 1988; Sykes, 1990).
Some corporations set up a CVC unit in order to pursue external innovations and to learn at the
same time how to increase the internal efficiency of their R&D (Skyes, 1990; Kann, 2000;
Maula, 2007). As internal R&D could be limited in capacity or because of different internal or
external barriers, not all innovations can be generated internally. In practice, corporate R&D
personnel or team might be involved in the venture capital process to gauge a venture’s
technical feasibility and to determine business and market risks. As result, the R&D team
might gain an insight into future technologies and products (Chesbrough, 2002).
Corporations may set up a CVC and may build tight relationships with new ventures in order
to have access to new or complementary external knowledge. “The greater the stock of
entrepreneurial knowledge a firm has accessed, the greater the subsequent innovation output”
(Dushnitsky and Lenox, 2005). This stock of entrepreneurial knowledge may lead to novel
possible configurations of existing corporate knowledge and capabilities, and increase the
ability to use additional external knowledge.
For example, Agilent Technologies CVC works closely with existing corporate business units
to share information, qualify investment opportunities, and connect portfolio companies to
Agilent’s own initiatives (Chesbrough, 2002).
In the same way, once the investment round has taken place, several corporate investors (e.g.
UPS, Sony corporation, etc) often secure board seats, or at least board observation rights in
order to facilitate an access to information and a knowledge transfer between corporate
business units and new ventures (Dushnitsky and Lenox, 2005). For example, UPS actively
pursued such advantages from its CVC activities: “United Parcel Service decreases the
distance between business units and venture investments by requiring board observation rights
for its leading business managers. Board meetings help UPS’s senior business managers to
learn about start-up operations, technologies and business models, increasing UPS’s ability to
capture strategic value from its venture investments” (Dushnitsky and Lenox, 2005).
CVC activities help corporation to encourage the entrepreneurial culture within the corporation
and support internal venturing process (Keil, 2000; Maula, 2007), to retain those employees
who are willing to start their own business. CVC activities contribute to training of junior
management, to expose middle management to entrepreneurship (Silver, 1993), to identify and
exploit synergies across the corporation and its ventures (Hellmann, 2001; Chesbrough, 2002).
Corporations take advantage of what they learn from their portfolio companies, develop their
own competencies, technologies and manufacturing processes (Siegel et al., 1988; Sykes,
1990; Schildt et al., 2005; Maula, 2007) and increase their stock of entrepreneurial knowledge
(Dushnitsky and Lenox, 2005).
CVC can also take advantage from failed portfolio ventures. “A failing venture may constitute
a learning experience to the extent that it offers technological insights, or conversely points at
market unattractiveness” (Dushnitsky and Lenox, 2005). For example, Agilent CVC has
invested in a startup company making wireless radiofrequency devices, a product area Agilent
plans to explore in its own business. “If this investment is successful, Agilent’s future business
will benefit; if it fails, Agilent will get a valuable early warning about pitfalls to avoid in that
business” (Chesbrough, 2002).
After reviewing the main reasons why corporations set up CVC, we will describe in the next
section our methodological approach that aims at identifying and describing typical key
characteristics specific to CVC activities.
3. DATA AND METHODOLOGY
In order to explore the typical key characteristics of CVC activities and particularly how the
nature of parent corporation may influence the decision to invest in new venture, taking the
nature (industry sector) of the new venture, the stage of the new venture and if the parent
corporations are syndicating their investment or not in account, we will use information on
23068 CVC deals collected from the VentureXpert database (Thomson Financial). The
VentureXpert database is structured in three levels of information. The first information level
is related to the characteristics of independent venture capital firms (e.g.: VC firm’s name,
founding date, geography, industry, stage preferences, etc). The second information level is
related to the CVC fund characteristics (e.g.: Fund’s name, type of fund, geography, stage
focus, fund size, number of investors, etc). Finally, the third information level is about the
different new ventures each CVC fund is investing in (e.g.: Venture’s name, geography, stage,
funding year, company situation, business description, industry major group, etc).
As methodological approach, we will use descriptive statistics to analyze if parent corporations
are more investing in new ventures operating in their own industrial sector or if they are
investing in other sectors, which are not directly related to their core business. These same
statistic tools will be used to examine in which new venture development stages, parent
corporations prefer to invest and if parent corporations are investing alone or if they are
syndicating their investments.
In the following section, we will present the typical key characteristics and the key findings
from the analysis of these different CVC deals.
4. STATISTICAL RESULTS AND ANALYSIS OF THE K CHARACTERISTICS OF
CVC INVESTMENTS
As can be seen in Table 2, the majority of CVC funds are investing in new ventures during
their expansion stage and in a less extend during their early stage. Corporations are less
investing in new venture during their later stage and “other” development stages or special
situations.
The Table 3 shows the share of CVC deals that have been completed in different industrial
sectors. This analysis focuses on the relatedness between the parent corporations’ own
industrial sectors and other new or adjacent industrial sectors. Firstly, we observe that the
majority of CVC funds are investing in other neighboring/adjacent or new sectors. Secondly,
we observe that they are also investing in new ventures that are operating in their own industry
sectors. For example, CVC funds that are acting in medical, pharmaceuticals, health and life
science are focusing their investments on new ventures acting in their own industrial sector
(25,8%) as well as in new ventures operating in adjacent industries like biotechnology (28,6%)
and also in computer related industries (22,8%) which do not necessarily belong to their core
competencies.
The Table 4 shows a prevalence of co-investing across all industrial sectors. The majority of
the syndicated CVC funds include from two to five investors.
According to the fund size, as can be seen in Table 5, we observe that the size of these CVC
funds differs across the industrial sectors and their majority are less than 500 $ Mil.
Fund industry sectors Venture development stages
Early stage Expansion Later stage Others
3
Medical, pharmaceuticals, health, and life science
related industries
27,8% 40,1% 24,1% 8,0%
Biotechnology related industries 28,7% 39,3% 21,7% 10,2%
Communications and media related industries 25,0% 48,9% 19,8% 6,3%
Materials related industries 32,3% 38,7% 25,8% 3,2%
Computer related industries 25,3% 48,8% 20,0% 5,9%
Semiconductors and other electronic related industries 22,2% 49,7% 23,0% 5,1%
Other high-tech industries 24,5% 47,3% 1 8,4% 9,8%
Energy related industries 29,3% 39,0% 9,8% 22,0%
Education Related 30,8% 42,3% 9,6% 17,3%
Environmental, agricultural, animal related industries 32,0% 48,0% 4,0% 16,0%
Other non high-tech industries 29,1% 42,1% 16,2% 12,6%
Average of all fund industry sectors 27,4% 44,5% 18,1% 10,1%
Table 2: Share of CVC deals completed in each venture development stages
3
Others include other venture development stages and special situations like e.g.: distressed debt;
recapitalizations; turnaround; mezzanine, etc.
Fund industry sectors Venture industry sectors
Medical,
pharmaceuticals,
health, and life
science related
industries
Biotechnology
related industries
Communications
and media related
industries
Computer
related
industries
Semiconductors
and other electronic
related industries
Other non high-
tech industries
Medical, pharmaceuticals, health,
and life science related industries
25,8% 28,6% 7,3% 22,8% 7,3% 8,2%
Biotechnology related industries 36,1% 34,0% 5,9% 16,2% 2,0% 5,7%
Communications and media related
industries
2,6% 2,5% 26,3% 49,6% 11,4% 7,6%
Materials related industries 9,7% 12,9% 6,5% 25,8% 35,5% 9,7%
Computer related industries 3,2% 4,1% 22,0% 61,5% 4,1% 5,1%
Semiconductors and other electronic
related industries
3,4% 2,2% 28,7% 39,8% 21,2% 4,7%
Other high-tech industries 14,1% 8,8% 16,6% 39,4% 8,2% 12,9%
Energy related industries ,0% 2,4% 7,3% 7,3% 22,0% 61,0%
Education Related 13,5% 11,5% 1,9% 23,1% 9,6% 40,4%
Environmental, agricultural, animal
related industries
20,0% 56,0% ,0% ,0% 4,0% 20,0%
Other non high-tech industries 7,8% 6,6% 18,0% 40,9% 10,8% 15,9%
Average of all fund industry sectors 8,1% 7,1% 19,6% 42,2% 10,6% 12,4%
Table 3 Share of CVC deals completed in different industry sectors
Fund industry sectors Number of Investors
4
1 [2 to5] [6 to 10] [11 to 15] [16 to 20] [> 20]
Medical, pharmaceuticals, health, and life
science related industries
13,9% 44,3% 30,1% 9,9% 1,7% 0,2%
Biotechnology related industries 11,3% 46,5% 30,1% 10,2% 1,6% 0,2%
Communications and media related industries 14,3% 49,6% 27,0% 7,0% 1,8% 0,3%
Materials related industries 6,5% 61,3% 22,6% 9,7% 0% 0%
Computer related industries 12,5% 45,2% 31,4% 9,0% 1,8% 0,1%
Semiconductors and other electronic related
industries
5,7% 51,1% 32,8% 8,1% 2,1% 0,3%
Other high-tech industries 13,4% 46,8% 30,9% 7,1% 1,4% 0,4%
Energy related industries 22,0% 43,9% 17,1% 7,3% 2,4% 7,3%
Education Related 17,3% 50,0% 28,8% 3,8% 0% 0%
Environmental, agricultural, animal related
industries
20,0% 68,0% 12,0% 0% 0% 0%
Other non high-tech industries 12,9% 45,0% 28,8% 9,0% 3,1% 1,3%
Average of all fund industry sectors 13,0% 46,5% 28,7% 8,4% 2,5% 0,9%
Table 4: Share of CVC deals according to the number of investors
4
The maximum number of investors in the database is 34.
Table 5: Share of CVC deals according to the fund sizes
5
Fund industry sectors Fund Size ($ Mil.)
0,1 to 100 100,1 to 500 500,1 to 1000 1000,1 to 1500 >= 1500,1 N.A.
Medical, pharmaceuticals, health, and life
science related industries
42,9% 16,6% 0% 0% 0% 40,5%
Biotechnology related industries 55,7% 8,8% 0% 0% 0% 35,5%
Communications and media related industries 25,6% 17,2% 4,1% 0,6% 2,8% 49,8%
Materials related industries 3,2% 77,4% 0% 0% 0% 19,4%
Computer related industries 52,9% 5,1% 2,5% 0% 0% 39,5%
Semiconductors and other electronic related
industries
27,8% 12,1% 0% 0% 0% 60,1%
Other high-tech industries 30,8% 8,2% 0% 0% 0% 61,0%
Energy related industries 41,5% 0% 9,8% 0% 0% 48,8%
Education Related 9,6% 59,6% 0% 0% 0% 30,8%
Environmental, agricultural, animal related
industries
12,0% 56,0% 24,0% 0% 0% 8,0%
Other non high-tech industries 42,0% 3,6% 0,1% 0,1% 0% 54,1%
Average of all fund industry sectors 37,3% 8,6% 1,2% 0,2% 0,7% 51,9%
5
11088 values out of 23068 CVC deals were available in the database. Most values varied form 01 $ Mil to 1750 $ Mil and only one was 3415,5 $ Mil.
DISCUSSION AND CONCLUSION
In this paper, we made a mapping of the theoretical field of CVC activities. This literature review
seeks to develop the basis for our research framework.
Using the typical key characteristics identified and the key findings from our descriptive analysis
above, we will discuss here after the potential strategic objectives corporations may pursue
through CVC activities and the potential avenues for future research.
Corporations may invest in new ventures that are operating in similar or complementary
business sectors (see Table 3) and during their early or expansion phases (see Table 2), in order
to leverage corporate own technologies, platforms and complementary resources. Through these
types of investment, corporations may be exposed and may be able to develop new applications,
to stimulate the demand of own technologies and products and may be able to shape proactively
markets through a promotion of its own standards.
The statistical analysis show that the majority of the CVC funds are investing in new ventures
that are operating in new industrial sectors (see Table 3). These investments are mostly
syndicated (see Table 4) and are made during the early and the expansion stage of the new
ventures (see Table 1). Through these types of investment, corporations may explore new
innovative opportunities, may identify and assess potential acquisition targets and may diversify
their business activities. These CVC activities may help to develop new business relationships, to
encourage the entrepreneurial culture within the corporation and to increase the internal
efficiency of R&D. Corporations may also take advantage of what they learn from their portfolio
companies and from the venture capital networks in order to develop their own competencies,
technologies and manufacturing processes, to facilitate an entry in new markets and to expose
middle management to entrepreneurship.
According to the academic literature, CVC remain an important strategic tool in the corporate
“open innovation” toolbox. Corporations consider the strategic values they can pursue as well as
the potential financial returns before making an investment in a new venture. But less empirical
researches have been made on how to quantify the strategic benefits and the performance of
CVC activities and these issues remain opened research fields. Our future studies will focus on
how these strategic benefits and the performance of CVC activities can be assessed.
18
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doc_874155539.pdf
This abstract tell the use of corporate venture capital as a strategic tool literature review.
Année académique 2008-2009
Working paper 09/21
The use of corporate venture capital
as a strategic tool: Literature review
and key characteristics of CVC
investments
Luc Armel G.Da Gbadji, Benoît Gailly
Site de Louvain-la-Neuve - Place des Doyens, 1 - 1348 – Louvain-la-Neuve
THE USE OF CORPORATE VENTURE CAPITAL AS A STRATEGIC TOOL:
LITERATURE REVIEW AND KEY CHARACTERISTICS OF CVC INVESTMENTS
1
Luc Armel G. DA GBADJ I, Benoît GAILLY
Abstract
The exploration and exploitation of innovative opportunities are the essence of corporate
entrepreneurial activities. In the scientific literature, the responsibility and ability of firms to
pursue innovative opportunities and to stimulate the creation of new business received
increasing attention.
Among the mechanisms firms are putting in place to promote the exploration and the
exploitation of attractive innovation opportunities, some are corporate venturing and
particularly the corporate venture capital.
This paper seeks to make a literature review focused on the key features and the strategic
benefits of corporate venture capital. Based on industry data from the VentureXpert database,
we will identify and describe typical key characteristics specific to CVC activities.
KEYWORDS:
Corporate venture capital, strategic objectives, typical key characteristics
Authors:
Luc Armel G. DA GBADJ I is research assistant and PhD candidate at the Center for Research
in Entrepreneurial Change and Innovative Strategies (CRECIS) at Louvain School of
Management.
Benoît GAILLY is Professor in Innovation Management and Strategy at UCL and senior
member of CRECIS. He is Program Director of the executive master in innovation
management and President of the commission of the Academic Council of the University
regarding the transfer and valorization of research results.
1
Paper presented at the European Summer University Conference on Entrepreneurship in Bodø, Norway, 22nd to
26
th
August, 2008.
INTRODUCTION
Identifying, selecting and exploiting the right new business opportunities are the essence
of entrepreneurial activities and among the most important abilities of a successful
entrepreneur. Shane and Venkataraman (2000) define entrepreneurship as the processes of
discovery, evaluation, and exploitation of opportunities in order to create future goods and
services.
Many established corporations engage in leveraging their existing capabilities or engage
in diversification through corporate entrepreneurship activities. Sharma and Chrisman (1999)
define a corporate entrepreneurship as “the process whereby an individual or a group of
individuals, in association with an existing organization, create a new organization or instigate
renewal or innovation within that organization”. In large established firms, corporate
entrepreneurship is an important tool for business development and a promising path to
enhance financial returns (Miles and Covin, 2002). Corporate entrepreneurship contributes to
the achievement of some company’s strategic objectives (Rind, 1981) and is characterized by
the use of internal or external corporate venturing to pursue innovation opportunities
(Chesbrough, H., 2000).
Among the external corporate venturing mechanisms firms are putting in place in order
to promote the exploration and the exploitation of attractive innovation opportunities, some are
corporate venturing and particularly the corporate venture capital. The aim of this research is
to investigate on the key features and particularly on the strategic objectives of corporate
venture capital.
The paper is organized as follows. Firstly, we will focus on the key concepts of CVC,
particularly the typology of CVC and the key success and failure factors specific to CVC.
Secondly this paper will analyze the strategic reasons why corporations set up corporate
venture capital unit. In the third section, we will identify and describe the typical key
characteristics of CVC investments as illustration. Our methodology approach will be based on
an industry data analysis (VentureXpert of Thomson Financial). Our objective is to discuss on
how the nature of parent corporation may influence the decision to invest in new venture. We
will particularly take in account the nature (industry sector) and the stage of the new venture
and if the parent corporations are syndicating their investment or not.
1. THE CONCEPT OF CORPORATE VENTURE CAPITAL
1.1 Definition of corporate venture capital
Corporate venture capital (CVC) refers to “equity or equity-linked investments in young,
privately held companies, where the investor is a financial intermediary of a non-financial
corporation” (Maula, 2007). That refers to corporate activities residing at various levels, where
investments are made directly in external start-up companies or through independent venture
capital (VC) funds as limited partners (Chesbrough, 2002; Maula, 2001). It is important to note
that CVC is one of a number of types of venturing activities, a corporation can set up.
1.2 A typology of corporate venture capital
In the scientific literature, corporate venture capital refers to external corporate venturing
activities (see Figure 1) that include venturing alliances and transformational arrangements
(Sharma and Chrisman, 1999; Keil, 2000 and Maula, 2007).
External Corporate
Venturing
Corporate Venturing
Pooled funds
Internal Corporate
Venturing
Corporate Venture
Capital
Venturing alliances Transformational
arrangements
Dedicated
funds
Self-
managed
funds
Non-equity
alliances
Direct
minority
investments
J oint
ventures
Acquisitions Spin-offs
Figure 1: Corporate venture capital and its linkage with corporate venturing activities
2
Corporate venture capital can be found under different settings. It can differ in terms of
whether the investments are made directly by the parent corporation in the new ventures (self-
managed fund) or indirectly through dedicated or pooled VC funds (Keil, 2000; Kann, 2000;
Maula, 2001, 2007). There are three categories of corporate venture capitals we could identify
in the literature (see grey marked part in figure 1):
2
Adopted from Keil (2000), Maula (2007), Sharma and Chrisman (1999).
Self-managed funds represent those investments where a corporation sets a wholly owned
venturing subsidiary up and endows it with a budget in order to finance directly external start
up. This venture capital entity is usually managed by corporate managers and employees and is
exceptionally reporting to the top management commitment.
Dedicated venture capital funds are managed by a third party, usually an independent venture
capital firm. In practice, these dedicated funds involve several limited partners including a
corporation as strategic or lead investor and other VC funds as financial investors. Dedicated
funds are usually strong specialized and are focusing on specific industry or technology targets
that are exclusively defined by the strategic investor.
Pooled venture capital funds are co-investment funds involving independent VC funds as well
as CVC funds, including maybe potential competitors. Such funds are usually managed by an
independent VC. They could be either interested in maximizing financial returns or in a
specific strategic objective (e.g. aiming to develop a certain technology or market). They are
less specialized as dedicated venture capital funds and are often used to invest in dissimilar or
geographically distant new ventures.
The Table 1 summarizes some characteristics of (corporate) venture capital structures.
Independent VC
(pure VC funds)
Dedicated and pooled
venture capital funds
Self-managed funds
(pure CVC)
Fund
characteristics
Independent fund
with different
limited partners
acting as investors
Funds operating as an
independent fund where
the main (dedicated
funds) or the most
(pooled funds) limited
partners are corporations
Funds where a
corporation (parent) is
the sole fund provider
Fund manager General partner
acting on behalf of
different limited
partners
General partner acting on
behalf of different
limited partners
Subsidiary of the
corporation
Investment
motives
Financial return Financial returns
Contribution to strategic
objectives of corporate
limited partners
Contribution to
strategic objectives of
the parent corporation
Financial returns
Degree of
autonomy
High degree of
autonomy; the
limited partners are
not interfering in
the VC’s
management
Parent corporations
usually interfere in the
VC’s management with a
veto right
Multiple review and
control levels induced
by the parent
corporation: tight cost
controls and high
influence on decision
making
Table 1: (Corporate) venture capital structures
In the practice, most corporate venture capitalists or independent venture capitalists syndicate
their investments in new ventures (Brander, et al., 2002; Bygrave, 1987, 1988; Lerner, 1994;
Riyanto and Schwienbacher, 2006). The syndication of CVC investments describes a process
where a group of (corporate) venture capitalists makes a common decision under uncertainty
and jointly invest in the same venture, in the same financing round (Brander, et al., 2002;
Bygrave, 1987, 1988; Lerner, 1994). A syndication of CVC investments can be justified by
three main motivations: a financial, a resource sharing and a deal flow motivations.
The financial motivations related to the use of syndication in order to access faster to
additional financial resources, to increase the investment fund size and to deal with limited
financial resources and illiquidity. The syndication is used to increase the number of
investments made, to achieve a higher level of diversification and therefore to reduce overall
portfolio risk (Wilson, 1968; Lockett and Wright, 2001; Manigart et al., 2006). Brander et al.
(2002) empirical analysis using venture capital Canadian data showed that on average a higher
rate of return can be expected from syndicated investments than standalone investments,
particularly if there are complementarities between investors’ and ventures’ resources and
objectives.
The resource motivation referred to the use of syndication in order to deal with information
asymmetries. The syndication of CVC investments helps to access complementary information
and knowledge. This aims at facilitating the selection of investment targets and improving the
quality of the post-deal management (Brander et al., 2002; Lerner, 1994; Lockett &Wright,
2001; Manigart et al., 2006; Wilson, 1968). Syndicated investments make sharing of
management practices, expertise resources and complementary capabilities possible (Bygrave,
1987; Brander et al., 2002; MacMillan et al., 1988; Gorman and Sahlman, 1989; Rosenstein et
al., 1993; Sapienza, 1992; Sapienza et al., 1996; Hellman and Puri, 2000; 2002).
The third rationale for the syndication of CVC investments is the access to as many deals as
possible in order to increase the quantity and the quality of deal flow (Lockett and Wright,
2001; Sorenson and Stuart, 2001; Manigart et al., 2006). This helps investors to achieve a
better reputation and visibility and a strong position in venture capitalist networks and
increasing the likelihood of being invited into syndications (Lerner, 1994; Manigart et al.,
2006; Podolny, 2001).
After reviewing the typology of corporate venture capital, we will discuss in the next
subsection the key success and failure factors specific to corporate venture capital.
1.3 Key success and failure factors specific to corporate venture capital
Many key success and failure factors at industry, corporation and venture levels might help
some corporate venture capital units to deliver on their objectives while others fail. In the
scientific literature, previous empirical studies on CVC (Gompers and Lerner, 1998;
Dushnitsky and Lenox, 2005, 2006; Keil et al., 2003, Maula et al., 2003; Schildt et al., 2005)
describe those key success and failure factors specific to CVC.
At the industry level, empirical results regarding CVC have shown that industrial environment
with weak intellectual property protection (in particular, patent protection), with high
technological potential, with a complementarity in sharing resources and better distribution of
capability needs and where strong network and ties venture capital communities coexisted, is
positively influencing the performance of CVC and at the same time the decision of
corporation to invest in new ventures (Dushnitsky and Lenox, 2005a). The less new ventures
protect their innovations from imitation through legal mechanisms such as patents, the greater
the corporation benefits from its CVC investments. Indeed, in strong IP environment (e.g. in
biotech industries), new ventures often patent their technology and license it to other
companies (e.g. pharmaceutical firms) (Dushnitsky and Lenox, 2005a). In suchlike
environment, corporate investors don’t gain a privilege to exploit this strategic technical
knowledge to leverage their complementary capabilities. In contrast in weak intellectual
property protection environment, corporations that build good relationships with new ventures
during the early stage may have a privilege of exclusivity to use this new or complementary
knowledge.
At the corporate level, the investment mode (direct or indirect self-managed, pooled or
dedicated funds), the number of investors (syndication of investments) and the choice of
primary strategic objectives might influence the success of the CVC fund (Sykes, 1990).
Furthermore, the intensity of the corporation’s R&D activities, the size of its patent stock
(Dushnitsky and Lenox, 2005a) and the quality of its CVC management team (team with
strong venture capitalists or entrepreneurial background) are also positively related to the
success of the CVC.
At the venture level, building a good relationship and communication between a parent
corporation and new ventures may help the CVC management to deal with information
asymmetries and to achieve better results. Since a CVC had a positive impact on patenting
rate, the relatedness or the complementarities between the parent corporation’s and the new
venture’s lines of business could improve the performance of the CVC fund (Keil et al, 2003).
For example SmithKline beeecham’s fund, S.R One invested between 1985 and 1999 in
biotech and life science ventures such as Amgen, Cephalon and Sepracor and achieved
impressive successes. Its compensation scheme and a positive relationship and communication
with the different partners played a large role in this success (Gompers and Lerner, 2001,
P.164).
CVC-backed ventures are as successful as independent VC-backed, when there were
similarities between the investing firm’s and venture’s lines of business (Gompers and Lerner,
2000). Gompers and Lerner demonstrated higher IPO likelihood for ventures financed by
corporate investors compared to other ventures. This IPO likelihood is particularly higher
when there is a “strategic fit” between new ventures’ business activities and parent
corporation’s business lines. Maula and Murray (2002) reported that ventures co-financed by
industry leading corporate investors received superior IPO valuations over firms financed by
venture capitalists alone.
Additionally to these success factors at venture level, some ventures may prefer to deal with
corporation because they may have an access to additional valuable resources such as technical
expertise, management and board support, market presence. In fact, CVCs may help new
ventures to attract new business partners and customers and therefore may be more attractive
to an entrepreneur than VCs or banks (Maula et al., 2005). For example, being backed by a
leader in an industrial sector may give a new venture, recognition and market credibility
necessary to attract substantial business customers and other potential investors.
In contrast with these key factors positively related to the success of CVC fund, many other
factors could also explain why CVC activities might fail. Many empirical results regarding
CVC highlight a lack of sufficient autonomy (MacMillan et al, 1986), a lack of corporate
commitment, limited resources (Sykes, 1986a), as well as the short average life span of CVC
funds in comparison to VC funds (Gompers and Lerner, 1998, 2001) as generic failure factors
specific to CVC success. Moreover information asymmetries due to ventures’ fears of
expropriation by established firms (Dushnitsky and Lenox, 2005a, 2006) or difficulty to deal
with legal problems (e.g. patent rights) lead to conflicts of interest between parent corporations
and new ventures and hamper the success of corporate venture capital funds. Furthermore, the
lack of entrepreneurial talent, the difficulty to manage investments in high-risky and fast-paced
environments and the difficulty to attract and hire skilled fund-managers due to incentive
problems are serious obstacles for the achievement of CVC financial and strategic objectives
(MacMillan et al, 1986; Chesbrough, 2000).
Although venture capital investing may not appear to be aligned with most corporations’ core
business activities, it becomes increasingly a practice for many established firms as promising
avenues for the achievement of financial, social and much more strategic objectives (Gompers
and Lerner, 1998; Hellmann, 2001; Maula, 2001; Maula and Murray, 2002; Dushnitsky and
Lenox, 2005, 2006; Keil et al., 2003; Schildt et al., 2006; European commission, 2001). After
reviewing the key concepts of CVC, we will explain in the next section the strategic reasons
why corporations set up CVC unit.
2. STRATEGIC OBJECTIVES OF CORPORATE VENTURE CAPITAL
There are three categories of CVC objectives we identified in the literature: the strategic
objectives, the financial objectives and the so-called “social” objectives. The financial
objectives include earning of high Returns on Investment (ROI) and access to new capital. The
social objectives include for instance the aim to increase corporate image, to create new job
opportunities, to support regional development processes, to instigate ecological awareness,
etc. The strategic objectives and the financial objectives are the main motivations for
corporations and both are not substitutes (Hellmann, 2001; Gompers, 2002; Bannock
Consulting, 1999). For example the following statements confirm that corporations are
principally interested in the combination of strategic and financial benefits.
At Microsoft, they asserted that: “If an investment in a company can support and benefit our
customers and strategic partners, as well as provide market traction for our products or
technologies, we consider it a successful venture. Although financial gain is important to us,
we view it as a byproduct of a successful relationship, not the primary goal of investing”
(Nehru, 2000) quoted in Allen and Hevert (2007).
In the same manner, at Cisco Systems they declared that: “While we make strategic
investments, we don’t want to make stupid financial decisions. At the end of the day, if we
make a strategic investment and the company fails, then there is no strategy around it
anymore” (Volpi, 2000) quoted in Allen and Hevert (2007).
In the following section we are not going to discuss the financial objectives of CVC
investments. We will particularly describe the strategic objectives that tend to be much more
important for corporations (Hellmann, 2001; Gompers, 2002; Bannock Consulting, 1999).
The strategic objectives include three categories: the leveraging objectives, the option building
objectives and the learning objectives which will be detailed here after.
2.1 The leveraging objectives
The leveraging objectives are related to investments in new ventures that may help to develop
the investing company’s current operational capabilities, resources and processes and support
its own business growing. There are two categories of leveraging objectives: leveraging own
technologies and platforms and leveraging own complementary resources.
Leveraging own technologies and platforms
To leverage existing technologies and platforms, parent corporation may invest in new venture
to stimulate and secure the demand for their current technologies and products (Dushnitsky
and Lenox, 2005a, 2005b, 2006; Chesbrough, 2002; Riyanto and Schwienbacher, 2006; Kann,
2000; Maula, 2007). Investing in start-ups gives parent companies an opportunity to support
the use of their latent patents, to develop and commercialize unused or non-strategic
technologies (Chesbrough, 2002; McKinsey & Co., 1998).
Established firms invest in new ventures in order to shape markets proactively and to steer the
promotion and the adoption of their own technology as a standard (Chesbrough, 2002; Kann,
2000; Maula, 2007). For instance, Intel, IBM, Netscape, Oracle, Novell, Compaq and Dell,
highly dependent on the development of Microsoft operating system (OS), invested in Red Hat
to promote Linux OS and reduced their dependency to Microsoft OS (Young and Rohm, 1999
quoted in Maula, 2007). In the same manner, Microsoft invested in start-up firms that would
exploit its new internet services architecture “.Net”, in order to promote the adoption of the
Microsoft standard over rival approaches from Sun Microsystems and IBM (Chesbrough,
2002).
These types of investment aim at sustaining corporate current businesses and are characterized
by tight links between the operational capabilities of the investing company and the start-up
business activities (Chesbrough, 2002).
Leveraging own complementary resources
Investing in high promising new ventures, particularly those which develop complementary
products and services, helps corporation to leverage its own complementary resources by
adding new products to existing distribution channels (Skyes, 1990; Maula, 2007) and by
enabling the use of excess plant space, time and people (Silver, 1993).
For example, Intel realized it could benefit by making complementary products. Intel invested
in many ventures specialized in video, audio and graphics hardware; succeed in stimulating
sales of Intel Pentium chip and increased its revenue (Chesbrough, 2002).
For example, Merck & Co., a pharmaceutical company that develops, manufactures and
markets vaccines and medicines, has invested in a new venture developing ways to speed up
recruitment process of appropriate patients for clinical trials of new drugs. These trials are
necessary for FDA approval. Merck & Co., by investing in this start-up seeks to accelerate
FDA approval process, to lunch earlier its drugs on the market, to increase its sales and to
expand before its patent expires (Chesbrough, 2002).
2.2 The option building objectives
The option building objectives refer to the opportunity for the parent corporation to explore
and exploit potential new market opportunities. CVC activities may help corporation in
identifying emerging markets and new technology platforms that may facilitate diversification
activities and accelerate the expansion on markets different from those in which the
corporation currently operates (Skyes, 1986; Kann, 2000; Keil, 2000; Chesbrough, 2002).
For instance, Agilent Technologies specialized in life sciences, chemical analysis, advanced
electronics and communications invests in strategic areas that it has identified as key to its
growth. Agilent has particularly invested in a start-up company making wireless radio-
frequency devices to explore this product area (Chesbrough, 2002).
Investing in corporate venturing may help corporation in identifying, screening and assessing
potential acquisition targets and to develop new business relationships (Siegel et al., 1988;
Sykes, 1990; Maula, 2007).
CVC activities may help corporation to better understand and respond to customer’s needs by
increasing the pace of innovation. CVC may help corporation to anticipate and respond faster
to market changes in order to become a pioneer and/or one of the major actors on emerging
markets.
For example, Novartis venture fund invests, develop collaborations and business deals with
new ventures in order to stimulate outstanding innovation in life science area and to enhance
discovery of novel therapies. Six new ventures backed by Novartis venture fund made
successfully an IPO and became success stories. Sirtris Pharmaceuticals is one of these
successfully Novartis’s backed new ventures. Sirtris has discovered and developed molecule
drugs to treat diseases associated with ageing, including metabolic diseases such as “Type 2
diabetes”, various types of cancer and osteoporosis, as well as neurodegenerative,
cardiovascular, inflammatory, and mitochondrial diseases (Sirtris Pharmaceuticals, Inc, 2008).
Sirtris Pharmaceuticals, Inc. went public in May 2007 and was listed on the American
NASDAQ (OECD, 2008). Sirtris’s development in a fast-paced biotechnological and
pharmaceutical environment aroused GlaxoSmithKline’s interest. In J une 2008, GSK acquired
Sirtris that has become its wholly-owned subsidiary (Sirtris Pharmaceuticals, 2008).
2.3 The learning objectives
CVC activities may facilitate corporate business units learning from entrepreneurial ventures.
Corporations learn from its CVC activities how to proceed with the identification and the
monitoring of new opportunities. CVC provides a window on new technologies, markets,
business models and practices to corporations (Dushnitsky and Lenox, 2006; Keil, 2000;
Maula 2007; Siegel et al., 1988; Sykes, 1990).
Some corporations set up a CVC unit in order to pursue external innovations and to learn at the
same time how to increase the internal efficiency of their R&D (Skyes, 1990; Kann, 2000;
Maula, 2007). As internal R&D could be limited in capacity or because of different internal or
external barriers, not all innovations can be generated internally. In practice, corporate R&D
personnel or team might be involved in the venture capital process to gauge a venture’s
technical feasibility and to determine business and market risks. As result, the R&D team
might gain an insight into future technologies and products (Chesbrough, 2002).
Corporations may set up a CVC and may build tight relationships with new ventures in order
to have access to new or complementary external knowledge. “The greater the stock of
entrepreneurial knowledge a firm has accessed, the greater the subsequent innovation output”
(Dushnitsky and Lenox, 2005). This stock of entrepreneurial knowledge may lead to novel
possible configurations of existing corporate knowledge and capabilities, and increase the
ability to use additional external knowledge.
For example, Agilent Technologies CVC works closely with existing corporate business units
to share information, qualify investment opportunities, and connect portfolio companies to
Agilent’s own initiatives (Chesbrough, 2002).
In the same way, once the investment round has taken place, several corporate investors (e.g.
UPS, Sony corporation, etc) often secure board seats, or at least board observation rights in
order to facilitate an access to information and a knowledge transfer between corporate
business units and new ventures (Dushnitsky and Lenox, 2005). For example, UPS actively
pursued such advantages from its CVC activities: “United Parcel Service decreases the
distance between business units and venture investments by requiring board observation rights
for its leading business managers. Board meetings help UPS’s senior business managers to
learn about start-up operations, technologies and business models, increasing UPS’s ability to
capture strategic value from its venture investments” (Dushnitsky and Lenox, 2005).
CVC activities help corporation to encourage the entrepreneurial culture within the corporation
and support internal venturing process (Keil, 2000; Maula, 2007), to retain those employees
who are willing to start their own business. CVC activities contribute to training of junior
management, to expose middle management to entrepreneurship (Silver, 1993), to identify and
exploit synergies across the corporation and its ventures (Hellmann, 2001; Chesbrough, 2002).
Corporations take advantage of what they learn from their portfolio companies, develop their
own competencies, technologies and manufacturing processes (Siegel et al., 1988; Sykes,
1990; Schildt et al., 2005; Maula, 2007) and increase their stock of entrepreneurial knowledge
(Dushnitsky and Lenox, 2005).
CVC can also take advantage from failed portfolio ventures. “A failing venture may constitute
a learning experience to the extent that it offers technological insights, or conversely points at
market unattractiveness” (Dushnitsky and Lenox, 2005). For example, Agilent CVC has
invested in a startup company making wireless radiofrequency devices, a product area Agilent
plans to explore in its own business. “If this investment is successful, Agilent’s future business
will benefit; if it fails, Agilent will get a valuable early warning about pitfalls to avoid in that
business” (Chesbrough, 2002).
After reviewing the main reasons why corporations set up CVC, we will describe in the next
section our methodological approach that aims at identifying and describing typical key
characteristics specific to CVC activities.
3. DATA AND METHODOLOGY
In order to explore the typical key characteristics of CVC activities and particularly how the
nature of parent corporation may influence the decision to invest in new venture, taking the
nature (industry sector) of the new venture, the stage of the new venture and if the parent
corporations are syndicating their investment or not in account, we will use information on
23068 CVC deals collected from the VentureXpert database (Thomson Financial). The
VentureXpert database is structured in three levels of information. The first information level
is related to the characteristics of independent venture capital firms (e.g.: VC firm’s name,
founding date, geography, industry, stage preferences, etc). The second information level is
related to the CVC fund characteristics (e.g.: Fund’s name, type of fund, geography, stage
focus, fund size, number of investors, etc). Finally, the third information level is about the
different new ventures each CVC fund is investing in (e.g.: Venture’s name, geography, stage,
funding year, company situation, business description, industry major group, etc).
As methodological approach, we will use descriptive statistics to analyze if parent corporations
are more investing in new ventures operating in their own industrial sector or if they are
investing in other sectors, which are not directly related to their core business. These same
statistic tools will be used to examine in which new venture development stages, parent
corporations prefer to invest and if parent corporations are investing alone or if they are
syndicating their investments.
In the following section, we will present the typical key characteristics and the key findings
from the analysis of these different CVC deals.
4. STATISTICAL RESULTS AND ANALYSIS OF THE K CHARACTERISTICS OF
CVC INVESTMENTS
As can be seen in Table 2, the majority of CVC funds are investing in new ventures during
their expansion stage and in a less extend during their early stage. Corporations are less
investing in new venture during their later stage and “other” development stages or special
situations.
The Table 3 shows the share of CVC deals that have been completed in different industrial
sectors. This analysis focuses on the relatedness between the parent corporations’ own
industrial sectors and other new or adjacent industrial sectors. Firstly, we observe that the
majority of CVC funds are investing in other neighboring/adjacent or new sectors. Secondly,
we observe that they are also investing in new ventures that are operating in their own industry
sectors. For example, CVC funds that are acting in medical, pharmaceuticals, health and life
science are focusing their investments on new ventures acting in their own industrial sector
(25,8%) as well as in new ventures operating in adjacent industries like biotechnology (28,6%)
and also in computer related industries (22,8%) which do not necessarily belong to their core
competencies.
The Table 4 shows a prevalence of co-investing across all industrial sectors. The majority of
the syndicated CVC funds include from two to five investors.
According to the fund size, as can be seen in Table 5, we observe that the size of these CVC
funds differs across the industrial sectors and their majority are less than 500 $ Mil.
Fund industry sectors Venture development stages
Early stage Expansion Later stage Others
3
Medical, pharmaceuticals, health, and life science
related industries
27,8% 40,1% 24,1% 8,0%
Biotechnology related industries 28,7% 39,3% 21,7% 10,2%
Communications and media related industries 25,0% 48,9% 19,8% 6,3%
Materials related industries 32,3% 38,7% 25,8% 3,2%
Computer related industries 25,3% 48,8% 20,0% 5,9%
Semiconductors and other electronic related industries 22,2% 49,7% 23,0% 5,1%
Other high-tech industries 24,5% 47,3% 1 8,4% 9,8%
Energy related industries 29,3% 39,0% 9,8% 22,0%
Education Related 30,8% 42,3% 9,6% 17,3%
Environmental, agricultural, animal related industries 32,0% 48,0% 4,0% 16,0%
Other non high-tech industries 29,1% 42,1% 16,2% 12,6%
Average of all fund industry sectors 27,4% 44,5% 18,1% 10,1%
Table 2: Share of CVC deals completed in each venture development stages
3
Others include other venture development stages and special situations like e.g.: distressed debt;
recapitalizations; turnaround; mezzanine, etc.
Fund industry sectors Venture industry sectors
Medical,
pharmaceuticals,
health, and life
science related
industries
Biotechnology
related industries
Communications
and media related
industries
Computer
related
industries
Semiconductors
and other electronic
related industries
Other non high-
tech industries
Medical, pharmaceuticals, health,
and life science related industries
25,8% 28,6% 7,3% 22,8% 7,3% 8,2%
Biotechnology related industries 36,1% 34,0% 5,9% 16,2% 2,0% 5,7%
Communications and media related
industries
2,6% 2,5% 26,3% 49,6% 11,4% 7,6%
Materials related industries 9,7% 12,9% 6,5% 25,8% 35,5% 9,7%
Computer related industries 3,2% 4,1% 22,0% 61,5% 4,1% 5,1%
Semiconductors and other electronic
related industries
3,4% 2,2% 28,7% 39,8% 21,2% 4,7%
Other high-tech industries 14,1% 8,8% 16,6% 39,4% 8,2% 12,9%
Energy related industries ,0% 2,4% 7,3% 7,3% 22,0% 61,0%
Education Related 13,5% 11,5% 1,9% 23,1% 9,6% 40,4%
Environmental, agricultural, animal
related industries
20,0% 56,0% ,0% ,0% 4,0% 20,0%
Other non high-tech industries 7,8% 6,6% 18,0% 40,9% 10,8% 15,9%
Average of all fund industry sectors 8,1% 7,1% 19,6% 42,2% 10,6% 12,4%
Table 3 Share of CVC deals completed in different industry sectors
Fund industry sectors Number of Investors
4
1 [2 to5] [6 to 10] [11 to 15] [16 to 20] [> 20]
Medical, pharmaceuticals, health, and life
science related industries
13,9% 44,3% 30,1% 9,9% 1,7% 0,2%
Biotechnology related industries 11,3% 46,5% 30,1% 10,2% 1,6% 0,2%
Communications and media related industries 14,3% 49,6% 27,0% 7,0% 1,8% 0,3%
Materials related industries 6,5% 61,3% 22,6% 9,7% 0% 0%
Computer related industries 12,5% 45,2% 31,4% 9,0% 1,8% 0,1%
Semiconductors and other electronic related
industries
5,7% 51,1% 32,8% 8,1% 2,1% 0,3%
Other high-tech industries 13,4% 46,8% 30,9% 7,1% 1,4% 0,4%
Energy related industries 22,0% 43,9% 17,1% 7,3% 2,4% 7,3%
Education Related 17,3% 50,0% 28,8% 3,8% 0% 0%
Environmental, agricultural, animal related
industries
20,0% 68,0% 12,0% 0% 0% 0%
Other non high-tech industries 12,9% 45,0% 28,8% 9,0% 3,1% 1,3%
Average of all fund industry sectors 13,0% 46,5% 28,7% 8,4% 2,5% 0,9%
Table 4: Share of CVC deals according to the number of investors
4
The maximum number of investors in the database is 34.
Table 5: Share of CVC deals according to the fund sizes
5
Fund industry sectors Fund Size ($ Mil.)
0,1 to 100 100,1 to 500 500,1 to 1000 1000,1 to 1500 >= 1500,1 N.A.
Medical, pharmaceuticals, health, and life
science related industries
42,9% 16,6% 0% 0% 0% 40,5%
Biotechnology related industries 55,7% 8,8% 0% 0% 0% 35,5%
Communications and media related industries 25,6% 17,2% 4,1% 0,6% 2,8% 49,8%
Materials related industries 3,2% 77,4% 0% 0% 0% 19,4%
Computer related industries 52,9% 5,1% 2,5% 0% 0% 39,5%
Semiconductors and other electronic related
industries
27,8% 12,1% 0% 0% 0% 60,1%
Other high-tech industries 30,8% 8,2% 0% 0% 0% 61,0%
Energy related industries 41,5% 0% 9,8% 0% 0% 48,8%
Education Related 9,6% 59,6% 0% 0% 0% 30,8%
Environmental, agricultural, animal related
industries
12,0% 56,0% 24,0% 0% 0% 8,0%
Other non high-tech industries 42,0% 3,6% 0,1% 0,1% 0% 54,1%
Average of all fund industry sectors 37,3% 8,6% 1,2% 0,2% 0,7% 51,9%
5
11088 values out of 23068 CVC deals were available in the database. Most values varied form 01 $ Mil to 1750 $ Mil and only one was 3415,5 $ Mil.
DISCUSSION AND CONCLUSION
In this paper, we made a mapping of the theoretical field of CVC activities. This literature review
seeks to develop the basis for our research framework.
Using the typical key characteristics identified and the key findings from our descriptive analysis
above, we will discuss here after the potential strategic objectives corporations may pursue
through CVC activities and the potential avenues for future research.
Corporations may invest in new ventures that are operating in similar or complementary
business sectors (see Table 3) and during their early or expansion phases (see Table 2), in order
to leverage corporate own technologies, platforms and complementary resources. Through these
types of investment, corporations may be exposed and may be able to develop new applications,
to stimulate the demand of own technologies and products and may be able to shape proactively
markets through a promotion of its own standards.
The statistical analysis show that the majority of the CVC funds are investing in new ventures
that are operating in new industrial sectors (see Table 3). These investments are mostly
syndicated (see Table 4) and are made during the early and the expansion stage of the new
ventures (see Table 1). Through these types of investment, corporations may explore new
innovative opportunities, may identify and assess potential acquisition targets and may diversify
their business activities. These CVC activities may help to develop new business relationships, to
encourage the entrepreneurial culture within the corporation and to increase the internal
efficiency of R&D. Corporations may also take advantage of what they learn from their portfolio
companies and from the venture capital networks in order to develop their own competencies,
technologies and manufacturing processes, to facilitate an entry in new markets and to expose
middle management to entrepreneurship.
According to the academic literature, CVC remain an important strategic tool in the corporate
“open innovation” toolbox. Corporations consider the strategic values they can pursue as well as
the potential financial returns before making an investment in a new venture. But less empirical
researches have been made on how to quantify the strategic benefits and the performance of
CVC activities and these issues remain opened research fields. Our future studies will focus on
how these strategic benefits and the performance of CVC activities can be assessed.
18
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