Download - Corporate Venture Capital in the TwentyFirst Century an Integral Part of Firms Innovation Toolkit

Corporate Venture Capital in the Twenty-First Century: an Integral Part of Firms'Innovation Toolkit

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PRINTED FROM OXFORD HANDBOOKS ONLINE (www.oxfordhandbooks.com). (c) Oxford University Press, 2015. All RightsReserved. Under the terms of the l icence agreement, an individual user may print out a PDF of a single chapter of a title in OxfordHandbooks Online for personal use (for details see Privacy Policy).Subscriber: CBS Library; date: 22 July 2015

PrintPublicationDate: Apr2012 Subject: EconomicsandFinance,FinancialEconomicsOnlinePublicationDate: Sep2012

DOI: 10.1093/oxfordhb/9780195391596.013.0006

CorporateVentureCapitalintheTwenty-FirstCentury:anIntegralPartofFirms'InnovationToolkit GaryDushnitskyTheOxfordHandbookofVentureCapitalEditedbyDouglasCumming

OxfordHandbooksOnline

AbstractandKeywords

Thisarticlereviewstheacademicliteratureoncorporateventurecapital(CVC),thatis,minorityequityinvestmentsbyestablishedcorporationsinprivatelyheldentrepreneurialventures.Thearticleisorganizedasfollow.Itstartswithadetaileddefinitionofcorporateventurecapital,itshistoricalbackground,andanextensivereviewofinvestmentpatterns.Nextitdiscussesthecorporateventurecapitalliterature,withanemphasisonrigorousempiricalstudiespublishedinleadingacademicjournals.Itreviewsfirms'objectivesthroughthegovernanceoftheirCVCprogramsandtherelationshipswiththeportfoliocompanies,andexaminestheinteractionsbetweenCVCinvestmentandotherfirmactivities(e.g.,alliancesandM&A)aswellasotherentities(e.g.,independentventurecapitalfunds).Theperformanceoftheparentcorporations,entrepreneurialventures,andCVCprogramsissummarizednext.Thearticleconcludeswithdirectionsforfutureresearch.Keywords:minorityequityinvestments,CVCprograms,corporateventurecapital, parentcorporations,entrepreneurialventures

InOctober2009GoogleVentures,apartofthesearchgiantGoogle,leda$15millioninvestmentroundinAdimab,abiotechventurethatdevelopedanintegratedyeast-basedhumanantibodydiscoveryplatform.Thisobservationraisesanumberofquestions:Whatisthemagnitudeofcorporations'venturecapitalinvestments?Whydoindustryincumbentspursueequityinvestmentsinsmallentrepreneurialventures?Andwhenwillentrepreneursseekcorporatebacking?

Ayearearlierthe$150millionBlackBerryPartnersFundstartedinvestinginsoftwareapplicationventures.ThefundowesitsnameaswellaspartofthecapitalundermanagementtoResearchinMotion(RIM),theCanadiancompanythatdevelopsandsellsBlackBerryhandhelddevices.Interestingly,Apple,theU.S.-basedfirmthatmanufacturersthecompetingdevice,iPhone,chosenottofollowasimilarstrategy.AppledecidedtoforgoinvestmentiniFund,a$100millionfund(p.157) launchedatthebeginningof2008bytheprominentventurecapital(VC)firmKleinerPerkinsCaufield&Byers.Apple'sdecisioncannotbeattributedtolackoffamiliaritywithventurecapitalinvestments.ItsStrategicInvestmentGroupwasaleadingcorporateinvestorinthelate1980sandearly1990s,withseveralsuccessfulventuresinitsportfolio,includingPowerPoint(soldtoMicrosoft)andSybase.AcomparisonofRIM'sandApple'sactionsraisesacoupleofquestions:Whydosomeincumbentspursuecorporateventurecapitalinvestmentwhileothersdonot?Whataretheantecedentsandconsequencesoftheiractions?

Theanswerstothesequestionscanadvanceourunderstandingofentrepreneurialsuccess,corporateinnovativeness,andeconomicgrowth.Thischapterreviewstheacademicliteratureoncorporateventurecapital(CVC),thatis,minorityequityinvestmentsbyestablishedcorporationsinprivatelyheldentrepreneurialventures.Itsupplementsearlierreviews(Dushnitsky,2006;Maula,2007)andaddstopriorworkonanumberofnotableissues.First,itpointstoinvestmentpatternsandprograms'longevity,whichconstituteaqualitativedeparturefrompreviousyears.Second,thebodyofscholarlyworkhasgrownsubstantiallysincemychapter(Dushnitsky,2006)


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intheearliereditionofTheOxfordHandbookofVentureCapital.Third,buildingonrecentwork,thechapternotonlyexploresCVCactivitybutalsoadvancesourunderstandingofitsinteractionswithotherfirmactivities.

Thechapterisorganizedasfollow.Istartwithadetaileddefinitionofcorporateventurecapital,itshistoricalbackground,andanextensivereviewofinvestmentpatterns.NextIdiscussthecorporateventurecapitalliterature,withanemphasisonrigorousempiricalstudiespublishedinleadingacademicjournals.Ireviewfirms'objectivesthroughthegovernanceoftheirCVCprogramsandtherelationshipswiththeportfoliocompaniesandexaminetheinteractionsbetweenCVCinvestmentandotherfirmactivities(e.g.,alliancesandM&A)aswellasotherentities(e.g.,independentventurecapitalfunds).Theperformanceoftheparentcorporations,entrepreneurialventures,andCVCprogramsissummarizednext.Thechapterconcludeswithdirectionsforfutureresearch.

DefinitionForthepurposeofthischapter,corporateventurecapitalisdefinedasaminorityequityinvestmentbyanestablishedcorporationinaprivatelyheldentrepreneurialventure.Threefactorsarecommontoallcorporateventurecapitalinvestments.First,whilefinancialreturnsareanimportantconsideration,thereareoftenstrategicobjectivesthatmotivatecorporateventurecapitalactivities.Second,thefundedventuresareprivatelyheldconsiderationsandareindependent(legallyandotherwise)fromtheinvestingcorporation.Third,theinvestingfirmreceivesaminorityequitystakeintheventure.BelowIhighlightthemaintermsinthecorporate(p.158) venturecapitalliteratureandbrieflydiscussrelatedcorporateactionsthatfalloutsidethescopeoftheCVCliterature.

Fourdecadesandasimilarnumberofcorporateventurecapitalwaveshaveleftthefieldwithmany,oftenoverlappingterms.PanelAofFigure5.1summarizestheterminologyusedinthischapter,whichbuildsontheterminologyofDushnitsky(2006).Themainplayersincludetheparentcorporation(e.g.,Google)thatlaunchesacorporateventurecapitalprogram(e.g.,GoogleVentures),whichinturninvestsinentrepreneurialventures(e.g.,Adimab).Scholarsinvestigatetheactivitiesinwhichtheseplayersengage,focusingmainlyongovernanceandinvestmentrelationships.TheformerreferstotherelationshipbetweenaparentcorporationanditsCVCprogram(e.g.,therelationshipbetweenGoogleandGoogleVentures).StudytopicsincludetheorganizationalstructureoftheCVCprogram,itsobjectives,compensationscheme,andsoon.TheinvestmentrelationshipsbetweenaCVCprogramanditsportfoliocompanies(e.g.,GoogleVenturesandAdimab)arecharacterizedbyacertainleveloffit.Theissuesthatfallunderthisrubricincludethemonetaryandnonpecuniarysupportprovidedbythecorporation,theknowledgeandinformationthatflowsbackfromtheventure,andthelevelofrelatednessbetweentheproducts,services,ortechnologiesofthetwo.Finally,drawingonthesucceedingdiscussion,PanelBofFigure5.1accountsforotherventuringactivitiesthatmayinteractwithafirm'scorporateventurecapitalactivity.

Thoughoftenusedsynonymously,thetermcorporateventurecapitaldiffersfrombothcorporateentrepreneurshipandcorporateventuring.Thesetermscapturethesumofacompany'sinnovation,strategicrenewalandcorporateventuring(Zahra,1995:227).Thepracticeofcorporateventurecapitalshouldnotbeconfusedwithothercorporateactivitiesthatareaimedatenhancingfirminnovativeness,growingrevenues,orincreasingprofits.Thedefinitionexcludes(a)internalcorporateventuring,aswellas(b)anumberofexternalventuringactivities,suchas(b1)spin-outs(i.e.,independentbusinessesstartedbydepartingemployees)and(b2)variousinterorganizationalrelationships(e.g.,strategicalliances,jointventures,orinvestmentsinpubliccompanies). Inaddition,investmentsbyfinancialfirmsaimedsolelyatdiversifyingtheirfinancialportfoliosarenotapartofcorporateventurecapitalactivities.

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ClicktoviewlargerFigure5.1 Corporateventurecapital:TheCVCFund,terminology(PanelA).Corporateventurecapital:TheCVCFundincontext,terminology(PanelB).

Inextbrieflyexpandonthefactorsinwhichcorporateventurecapitaldiffersfromeachoftheotherventuringactivities.First,considerinternalcorporateventuring(alsoknownascorporateentrepreneurship).Internalventuringreferstoawidearrayofinternallyorientedactivities,includinginvestmentininternaldivisions,businessdevelopmentfunds,andsoon(forreviews,seeGuthandGinsberg,1990;ThornhillandAmit,2001).Theoriginoftheentrepreneurialteamconstitutesonedifferentiatingfactor:corporateemployeesarefundedbyacorporateventuringinitiative,whereasacorporateventurecapitalunittargetsexternalentrepreneurswhohavenoemploymentrelationshipwiththecorporation.AnotherkeydistinctionisthefactthatboththeCVCinvestorandtheentrepreneurialventureareparticipatinginthemarketforentrepreneurialfinancing,alongwithindependentVCsandangelinvestors.Inthecaseofcorporateventuring,incontrast,employees(p.159) areprovidedwithcorporatefundsanddonotconsidercompetingsourcesofcapital.Finally,afewCVCprogramshavebeenmandatedbytheirparentcorporationtoengageinventuringactivity,inadditiontoventurecapitalinvestment.

Next,consideranexternalactivityknownasaspin-out.Thephenomenonreferstoindividualswholeavetheiremployerandopenanindependent,andoftenrelated,business(e.g.,Klepper,2001;Agarwaletal.,2004;Gompersetal.,2004;(p.160) Chatterji,2009).Thedirectionofemployeemobilitymarksakeydifferentiatingactor.Spin-outdescribeasituationwherebyanemployeewalksawayfromacorporatepositioninordertostarthisorherownbusiness(i.e.,corporateoutflow),whereasCVCisinterestedinharnessingentrepreneurialknowledgeorproducts(i.e.,corporateinflow).

Finally,firmsengageinahostofexternalventuringactivitiesthatinvolveinterorganizationalrelationships,includingstrategicalliances,licensing,jointventures,orinvestmentsinpubliccompanies.InwhatfollowsIfocusonequityalliances,astheyhavethemostincommonwithCVCactivity. AlliancesandCVCexhibitakeysimilarity:bothserveasmechanismsfortwoindependentfirmstoexchangeresources.However,theyinherentlydifferwithrespecttothenatureoftherelationshipanditsorganization(DushnitskyandLavie,2010).Forasummary,seeTable5.1.Alliancesimplymutualdependenceofotherwise(p.161) independentfirmsthatengageininteractivecoordinationofvariousvaluechainactivitiessuchasjointR&Dandmarketinginitiatives.Inalliancesbothpartnersstrivetowardsharedgoalsandseektoappropriatefinancialgainsfromtheircollaboration.Incontrast,CVCinvestmententailsdisparitybetweenaninvestorandtheconsumerofmonetaryfundsandinvolvesaunidirectionalflowoffinancialresourcesfromtheinvestortothefundedventurethatindependentlyperformsitsvaluechainactivities.Allianceshavespecificobjectivesthatarenegotiatedandthenpursuedbybothparties,whereasCVCagreementspertaintotheoperationsofthefundedventure.Incontrast,thescopeofalliance

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operationsisnarrowlydefinedevenwheninvolvinganequitystakeposition(RobinsonandStuart,2007).MoreovermanyfirmsmanagealliancesandCVCthroughseparateunitsaimedateitheralliancemanagement(Dyeretal.,2001)orventurecapitalinvestment(Chesbrough,2002;Dushnitsky,2004).Thisorganizationaldividereflectsmanagers'viewsofalliancesandCVCasdistinctactivitiesandisoftenreflectedindistinctivestaffingpracticesandpersonnelbackgrounds(BlockandOrnati,1987).

Table5.1ComparisonofCorporateVentureCapitalandStrategicAlliances

CVC Alliances

Definition Aminorityequityinvestmentbyanestablishedfirminanentrepreneurialventurethatseekscapitalforgrowingitsoperations.

Avoluntaryarrangementbetweenindependentfirmsthatshareandexchangeresourcesinthecodevelopmentorprovisionofproducts,services,ortechnologies.

MainObjectives

Sponsoringanemergingorcomplementarytechnology.

Costsharing,jointdevelopment,resourceaccess,andmarketentry,amongothers.

Scope Theagreementcoversthewholeoperationsofthefundedventureandnoneoftheestablishedfirm'soperations.

Theagreementcoversjointoperationswhosespecificscopeislimitedrelativetthepartners'independentoperations.

Activities Thefundedventureperformsvaluechainactivitiesonastandalonebasis.

Valuechainactivitiesareperformedinteractivelybybothpartners.

Funding Onlytheestablishedfirmmakesthefinancialinvestment.

Bothpartnersmaymakefinancialinvestments.

Ownership Theestablishedfirmbuysaminorityequitystakeinthefundedventureandmayexertinfluenceonitscorporatedecisions.

Mostalliancesdonotinvolveequity,withjointventuresdrawingmajorequitystakesfromthepartnersthatdirectlyinfluencetheoperationsofthenewventure.

Timing Therelationshipisestablishedduringspecificinvestmentrounds,oftenearlyinthelifecycleoftheprivatelyheldfundedventure.

Therelationshipcanbeinitiatedthroughoutthelifecyclesofbothpartners.

Setting TheestablishedfirmistypicallyjoinedbyindependentVCfundsthatalsoinvestinthefundedventureaspartofthesyndication.

MostalliancesaredyadicanddonotinvolveindependentVCfunds.

RoleAsymmetry

Acleardistinctionbetweentheinvestorandtherecipientoffunds.

Bothpartnersinvestresourcesandexpectmonetaryreturnsontheirinvestments.

Governance TheestablishedfirmmanagesCVCviaadedicatedVCarmoracorporatebusinessdevelopmentunit.

Alliancesaremanagedbyadedicatedalliancefunctionorbybusinessunitsoftherespectivepartners.

Source:AdoptedfromDushnitskyandLavie(2010).


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HistoricalBackgroundHistorically,corporateventurecapitalinvestmenthasbeenhighlycyclical.Todatewehavewitnessedthreewavesofcorporateventurecapitalandarecurrentlyinthemidstofafourthwave.Asacollective,establishedcorporationsareregardedasanimportantsourceoffundinginthemarketsforentrepreneurialfinancing.TheyaresecondonlytoindependentVCfundsindollaramountinvestedandleadother(p.162) investorgroups,suchasSmallBusinessInvestmentCorporations(SBICs;Prowse,1998;Timmons,1994).

PastWavesofCorporateVentureCapitalThefirstwaveofcorporateventurecapitalstartedinthemid-1960sandcanbetracedtothreemajortrendsofthetime.Theallocationofcorporatefundingtowardnewventureswaspartoftheoveralltrendofcorporatediversificationinthe1960s.RelatedlyCVCactivitieswerefundedbyexcesscashflowaccruedbymanyoftheinvestingfirms(Fast,1978).Thefinancialsuccessofpioneeringindependentventurecapitalfundsandthestellarperformanceoftheirportfoliocompaniesconstitutethethirddrivingfactor(GompersandLerner,1998).

AboutaquarteroftheFortune500firmsexperimentedwithventuringprogramsduringthatperiod,includingsuchfirmsasAmericanStandard,Boeing,Dow,Exxon,Heinz,Monsanto,andW.R.Grace.Theprogramsinvestedineitherexternalstart-ups,employee-basedventures,orboth.Externallyfocusedprogramsfundedstart-upswiththegoalofaddressingorextendingcorporateneeds.Theypursuedventurecapitalinvestmentseitherdirectly(e.g.,GE'sBusinessDevelopmentServices)orindirectlythroughindependentventurecapitalfunds(Gompers,2002).Afewfirmsattemptedtoreinventtheirbusinessbyencouragingemployees,mostlythoseintechnicalroles,tostartnewventures.Theseeffortsweresupportedbyparentcorporations(e.g.,DuPont'sDevelopmentDepartmentandPurina'sNewVentureDivision),whichprovidedfundingaswellasnonmonetarysupport(Gompers,2002).Duringtheseearlydaysmanycorporateventurecapitalprogramsinvestedinexternalaswellasinternalventures.Forexample,ExxonEnterprises,anaffiliateofExxonCorporation,initiatedandfundedsomethirty-sevenhigh-techventuresduringthe1970s.Abouthalfoftheseventureswereinternallygrownventures,whiletheotherhalfwereexternalventures(Sykes,1986).

ThecollapseofthemarketforIPOsin1973broughtanendtotheprosperityintheventurecapitalmarket,andwithitthefirstwaveofcorporateventurecapital(GompersandLerner,1998).Theoilshockandrelatedmacroeconomicchangesmeantthatmanyoftheinvestingcorporationsnolongerearnedexcesscashflows,thusfurtherhaltinginvestmentactivities.Finally,frictionswithintheCVCprogramsandbetweentheprogramsandtheirparentcorporationsresultedininferiorfinancialandstrategicperformance,ultimatelyleadingtotheterminationofCVCefforts.

Theearly1980ssawthesecondwaveofcorporateventurecapital.Changesinlegislation,significantgrowthintechnology-drivencommercialopportunities,andfavorablepublicmarketsstimulatedtheventurecapitalmarketasawhole. Againmanyleadingfirmsinthechemicalandmetalindustrieslaunchedcorporateventurecapitalprograms.Technologyfirms(e.g.,AnalogDevices,ControlDataSystems,andHewlett-Packard)andpharmaceuticalcompanies(e.g.,(p.163) Johnson&Johnson)alsoinitiatednewventurefinancingefforts.Themarketcrashof1987ledtoasharpdeclineinindependentaswellascorporateventurecapitalactivity.

Thethirdwavetookplaceduringthe1990s.Theperiodwascharacterizedbytechnologicaladvancement,explosioninInternet-relatednewventurecreation,andasurgeinventurecapitalinvesting.ThenumberofCVCprogramssoaredtomorethanfourhundred.DiversemultinationalcorporationssuchasNewsCorp.(E-Partners),GlaxoSmithKline(S.R.One),TexasInstrument(TIVentures),Dell(DellVentures),andNovell(NovellVentures)establishedcorporateventurecapitalfunds.Ahandfulofcorporations,suchasIntel,createdmultiplefunds.Inflation-adjustedCVCinvestmentlevelsduringthistimefarexceededpreviouswaves.By2000establishedcorporationshadbecomeimportantplayersintheventurecapitalindustry,participatinginroundswellinexcessof$16billion,approximately15percentofallventurecapitalinvestment.Thismarkedasharpinclinefromthemeager$0.5billioninvestedbycorporationsin1996(VentureEconomics).Aswithpreviouswaves,the2000crisisinthepublicmarketsresultedinadramaticcontractioninventurecapitalactivityandhasdrivenmanycorporationstofoldtheirventuringactivities.

CurrentWaveofCorporateVentureCapital

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Thetwenty-firstcenturyiswitnessingthemostrecentwaveofcorporateventurecapital.DozensoffirmshavejoinedtheCorporateVentureGroupwithintheNationalVentureCapitalAssociation(NVCA)sincelate2003.AndanumberofleadingcorporationsremainedcommittedtoCVCinvestmentevenduringthesharpdeclinesandsignificantfinanciallosses.AlthoughtheabsolutedollaramountofCVCisfarfromitspeak,corporateinvestorshaveaccountedforapproximately15percentofventurecapitalactivityeachyearsincethemid-1990s.

InmanyrespectstherecentwavehasmuchincommonwiththepreviousCVCwave.Corporateinvestmentscontinuetoparallelthebroaderinterestsoftheirindependentcounterparts:Internet-basedventures(Web2.0)remainamajorinvestmenttarget,asdoothertraditionalVCtargetindustries,suchassemiconductors,telecomequipment,andbiotechnology.Therapidgrowthofcleanenergyspacehasattractedindependentandcorporateventurecapitalistsalike.ThesepatternsrepeatintermsofthegeographicaldiversityofCVCinvestment.Forinstance,agrowingfractionofCVCs'portfoliosincludesventuresbasedoutsidetheUnitedStates,includingmanyventuresindevelopingcountries.

Uponcloserinvestigationweobservethatthefourthwavefeaturesacriticalstructuralchange.Itisnowthecasethatanincreasingnumberofcorporationsviewcorporateventurecapitalasakeycomponentoftheirinnovationstrategy.EvidenceonCVClongevityseemstosupportthatobservation.Inthepastthe(p.164) averagelifespanofaCVCprogramwaslessthanthreeyears(GompersandLerner,1998).ItwasoftensuggestedthataCEOlaunchesaCVCprogramonlytobeterminatedbyhisorhersuccessor.NowadaysmostCVCprogramshavebeeninoperationforfouryearsorlonger(seenextsectionfordetails).ThesustainedcommitmenttoCVCinvestmentalludestothekeyroleitplaysinafirm'sinnovationstrategy.

Thischangedidnothappenovernight.RatheritreflectsabroadertransitionincorporateR&Dstrategies:shiftingawayfromanexclusivefocusoninternalR&D(which,attheextreme,canleadtointrovertedbehaviorsuchastheNotInventedHeresyndrome;KatzandAllen,1982)andtowardembracingexternalsourcesofideasandinnovations(alsoknownasthetrendtowardopeninnovation;Chesbrough,2003;alsoseeLaursenandSalter,2006;Birkinshawetal.,2007).Inthatcontext,corporateventurecapitalcanbeviewedasavehicleforengagingandlearningfromoneparticularlyinnovativepool:thatofentrepreneurialventures.Assuch,CVCinvestmentisanintegralpartofafirm'sinnovationtoolkit.

WhereastherootsofthechangehavetodowithabroadershiftincorporateR&Dstrategies,theimplicationsforcorporateventurecapitalactivityremainunclear.ManyscholarsandpractitionersviewedthelimitedlifespancharacteristicofpastCVCwavesasamajorhurdle.ItcreatesinternalchallengesintermsofattractingtalentandstaffingtheCVCprogram.Italsoleadstoexternaldifficultiesandstiflesdealflow:independentventurecapitalistsmayhesitatetoco-investinanentitythatcouldbedissolvedbythetimeafollow-onfundingroundisneeded.ThegreaterstabilityofcurrentCVCprogramshasapotentialtomitigatebothinternalandexternalchallenges.ThenetimpactonCVCactivity,however,isyettoplayoutinthedata.

Toconclude,thehistoryofcorporateventurecapitaloffersseveralinsights.Atthemacrolevel,theemergenceofnoveltechnologiesisanimportantdriverofCVCinvestmentasestablishedfirmsseektoharnessinnovativeentrepreneurialventures.Thefinancialmarketsplayedakeyroleaswell.Notonlydidtheyserveascatalystsforentrepreneurialactivitytobeginwith,butalsotheyfacilitatedthetransformationofnewtechnologyintohighfinancialreturns.Interestingly,asCVCbecomesanintegralpartofafirm'sinnovationstrategyitmaybesensitivetotheformerfactor(i.e.,technologicalferment)attheexpenseofthelatterfactor(i.e.,financialmarkets).Morerecentchangesinthemacroenvironment,includingthegrowingglobalizationofventurecapitalactivityandthetaxationofindependentVCfunds,willlikelyshapethefuturefaceofcorporateventurecapitalinvestment.

AtthefirmlevelwecontinuetoobserveCVCinvestmentasapredominantlylargefirmphenomenon.IncumbentsinturbulentindustriesmainlyundertakeitasaresponsetoSchumpeteriancompetition.Thisobservation,aswellasprograms'greaterlongevity,suggeststhatCVCactivityispartofafirm'sexternalventuringstrategies,alsoknownasopeninnovation.

(p.165) InvestmentPatternsThissectionpresentskeyinvestmentpatternsforthefourthcorporateventurecapitalwave.ItfurthercomparesandcontraststhedatawithpatternsfromtheCVCwaveofthe1990s.ForhistoricaldataonCVCactivitythrough


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2000,seeDushnitsky(2006).

Figure5.2(PanelA)presentsasummaryoftotalannualinvestmentinnewventuresbycorporationsandindependentventurecapitalfundsduringtheperiod19692003. Theamountsrepresentdollarvolumeofroundsandareadjustedto2003dollars. CVCactivityhasgonethroughfourwavesinthepastthirtyyears.Thefirstwavepeakedintheearly1970s.Activitydeclineduntilapproximately1978,whenchangesinlegislationledtoanincreaseinventuringinvestmentsbyindependentventurecapitalistsaswellasestablishedfirms.Thissecondwavepeakedaround1986,withtotalannualinvestmentatapproximately$750million.Investmentlevelsdeclinedsharplyafterthestockcrashof1987,toalevelof$130millionin1993.ThethirdwavebeganwiththeriseoftheInternetinthemid-1990s.Atitspeakintheyear2000thedollarvolumeofroundsinwhichcorporateinvestorsparticipatedexceeded$18billion.WearecurrentlyexperiencingthefourthwaveofCVCinvestment,whichstartedgainingmomentuminthemid-2000s.

Figure5.2(PanelB)focusesonannualinvestmentsduringthemostrecenttwoCVCwaves,namely1995through2009.Theamountsrepresentnominaldollarvolumeofrounds.Thefigurefurtherdelineatesthepercentageofventurecapitaldealsinwhichacorporateinvestorwasinvolved.Itillustratesthatduringthesecondhalfofthe1990s,corporateventurecapitalactivityexpandedatafasterratethanthatofindependentVCfunds.Itpeakedin2000,whenCVCinvestorsparticipatedin25percentofthenumberofdealsthatyear.Duringthe2000scorporateinvestorsmaintainedactiveparticipationintheventurecapitalmarket,accountingfor15to20percentofthenumberofdeals.

ClicktoviewlargerFigure5.2 AnnualIndependentVCandCVCinvestments19692003,CPI-adjusted(PanelA).AnnualIndependentVCandCVCinvestments19952009(PanelB).

Thepatternshideacriticalstructuralchangeincorporateventurecapitalactivity.AgreatercommitmentonthepartofcorporationstotheirCVCinvestmentactivityhascharacterizedtherecentwaveincomparisontothepreviousthreewaves.ItmanifestsitselfinanincreaseinthedurationofCVCprograms.Forexample,GompersandLerner(1998)analyzetheventurecapitalmarketbetween1988and1996.Theyobservethattheaveragetimespanbetweenthefirstandlastcorporateinvestmentwasabout2.5years,orathirdoftheaveragetimespanforindependentVCfunds(7.1years).Incontrast,asurveyofthirty-sevenglobalcorporateinvestorsin2008revealsthatover80percentoftheCVCprogramshavebeeninoperationforfiveyearsorlonger(Ernst&Young,2009).Inotherwords,thefourthCVCwaveseesthedurationoftheprogramsmorethandoubleoverthatinthepreviousthreewaves.(p.166)

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ClicktoviewlargerFigure5.3 CVCprograminvestmentduration.

Acomprehensiveinvestigationofcorporateventurecapitaloverthepasttwodecadespaintsasimilarpicture.Figure5.3presentsahistogramofprogramdurationusingdataonallCVCinvestments.Theaveragedurationjumpedfrom2.2yearsinthe1990sto3.8yearsduringthe2000s. Asthefigureillustrates,thechangeisdrivenbysignificantpersistenceinventuringactivity:thefractionofcorporationsthatengageinequityinvestmentasaone-offactivity(i.e.,investforonlyasingleyear)iscutinhalf,whilethefractionofthosethatinvestforfouryearsorlongerhasdoubled.Asnotedearlier,thisobservationlikelyreflectsabroader(p.167) patternoftransitiontowardembracingexternalsourcesofinnovations,ofwhichcorporateventurecapitalisoneparticularvehicle.

Figure5.4presentsabreakdownoftotalcorporateventurecapitalbyventures'sector.Thatis,thefigureillustratesthesectorsthatreceivedCVCinvestment,bynominalinvestmentamounts.PanelsAandBreportthesectorbreakdownforthethirdandfourthCVCwaves,respectively.Wecanobserveamarkedrealignmentininvestmentactivity.Thesoftwareandtelecommunicationsectors,whichdominatedCVCportfoliosinthe1990s,continuetoattractsignificantcorporateinvestment,yetatamuchsmallerfraction.Biotechnologyventuresaccountforalmost20percentofaggregateCVCinvestment,upfromabout5percentinthepreviousdecade.Thesemiconductorsectorexhibitsasimilarpattern.

TherealignmentintheaggregateCVCportfolioisdrivenbyseveralfactors.First,itreflects,inpart,thereturntomoderatevaluationsofInternet-relatedventures.Second,italsocapturesashiftintheinterestsofCVCinvestors.Acaseinpointistheindustryandenergysector.ThissectorattractssignificantattentionfromindependentVCfundsandhasseenasurgeinventureformation,whichinturnstimulatesCVCinvestment.Alongtheselinesitisimportanttonotethatsomecorporationsinvestinventuresthatoperateintheirownsector,whileothersinvestinneighboringsectors.Forexample,nearly50percentofallCVCinvestmentbychemicalandpharmaceuticalcompanieswentintoventureswithinthosesectors,whileonly18percentofallCVCinvestmentbysemiconductorfirmswentintosemiconductorventures(DushnitskyandLenox,2005b).Third,thematurityofcertainsectorsaswellascurrencyfluctuationsmayalsoimpacttherelativebreakdownofCVCportfolios.

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ClicktoviewlargerFigure5.4 TotalCVCactivitybyventures'sector,19912001(PanelA).TotalCVCactivitybyventures'sector,20012009(PanelB).

Shiftingattentionfromventures'sectoraffiliationtotheircountryoforigin,Figure5.5presentsageographicalbreakdownofcorporateventurecapital.PanelsAandBreportventures'countryoforiginforthethirdandfourthCVCwaves,respectively.ThefractionofCVCinvestmentsinU.S.-basedventuresdeclinedfrom88percentin19912000to75percentin20012009(innominalamounts).U.K.-basedventurescontinuetoaccountfor2percentoftotalCVCinvestment.(p.168)

Therelativefractionofdevelopingcountriesisontherise.China-basedventuresaccountfor4percentoftotalinvestmentamountduringthefourthwave,upfrom1percentduringthepreviouswave.AndIndiaenteredthetopfiverecipientsofcorporateventurecapital,accountingfor1percentofglobalCVCinvestments.


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ClicktoviewlargerFigure5.5 TotalCVCactivitybyventures'nation,19912001(PanelA).TotalCVCactivitybyventures'nation,20012009(PanelB).

Thegeographicallocationofcorporateventurecapitalprogramsremainslargelyunchanged.Assuch,Ireportkeydatabelowyetoptnottopresentgeographicalbreakdown.VentureXpertrecordsaslightdecreaseinthefractionofinvestmentdisbursedbyU.S.-basedcorporateinvestors:downfrom83percent(19912000)to78percent(20012009).DuringtheearlierperiodtopCVCoriginatingcountriesincludedJapan(5percent),Canada(3percent),Singapore,Hong(p.169) Kong,Germany,UnitedKingdom,SouthKorea,andSweden(1percenteach).DuringthelaterperiodtopCVCinvestorswerebasedinCanada(6percent),SouthKorea,UnitedKingdom,Japan,Germany(2percenteach),Singapore,China,HongKong,Switzerland,Israel,France,andtheNetherlands(1percenteach).Thesenumbersmaydownplaytheroleofnon-U.S.CVCinvestors,asmanyofthemarecodedasU.S.-basedthoughtheparentcorporationisnotheadquarteredintheUnitedStates(e.g.,PanasonicVenturesandMitsui&Co.VenturePartners).Finally,thefactthatcorporateventurecapital,inaggregate,tendstooriginateinandreachthesamecountriesdoesnotnecessarilymeanthatfundsareinvesteddomestically.AsIdiscussbelow,CVCisusedattimestolearnaboutgeographicallydistantmarketsortoaccessdistanttechnologies.

(p.170) TheCorporateVentureCapitalLiteratureTheacademiccorporateventurecapitalliteratureexperiencedgrowththatmimicstheoverallpatternsofCVCinvestmentovertheyears(Figure5.6).Therecentsurgeinacademicworkislikelyfueledbytheincreasinglycentralrolecorporateventuringplaysinfirms'innovationstrategyaswellastheavailabilityofsystematicdataonventurecapitalactivity.AsaresultadecadeintothefourthwaveofcorporateventurecapitalthetimeisripetotakestockofstructuralchangesintheCVCphenomenonandrelatedscholarlywork.

Figure5.6juxtaposescorporateventurecapitalstudiespublishedinleadingacademicjournals(countofarticlespublished)andannualCVCinvestments(innominalbillionsofdollars). ThefigureillustratesthatamoderatevolumeofCVCresearchduringthesecondhalfofthe1980sfollowedtheexpansionofcorporateventurecapitalduringthefirsthalfofthatdecade.Thepatternrepeatsitself,withgreaterintensity,insubsequentyears.OverallFigure5.6underscoresthatthegrowthinacademicworkparallelscorporateinvestmentspatterns.

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ClicktoviewlargerFigure5.6 Corporateventurecapitalinvestment($B)andpublications(numberperyear).

ThefigureconcealsanimportantdevelopmentintheCVCliterature:theintroductionofventurecapitaldatabasessuchasVentureXpertandVentureOne.GompersandLerner(1998)firstutilizedcommerciallyavailabledata,theVentureOnedatabase,tostudycorporateparticipationintheventurecapitalmarkets.ManyotherscholarsemploytheVentureXpertdatabase(whichwasoriginallymanagedincollaborationwiththeU.S.-basedNationalVentureCapitalAssociationandiscurrentlyofferedbyThomson).SincethefirsttimeitwasemployedbyDushnitskyandLenox(2005)andWadhwaandKotha(2006)ithasbeenutilizedindozensofCVCstudies.

(p.171) Theavailabilityofdatabasesonventurecapitalistsandtheircorporatecounterpartshasaffectedtheliteratureinseveralways.Onthemethodologicalfront,thefractionoflarge-sampleeconometricanalysesisontherise,whiletherelativeshareofcasestudiesandsurveyshasdecreased.DuringpastCVCwaves,dataweredifficulttocomeby.Atthattimeoneofthemaincontributionsofscholarlyworkincludedrecordinganddescribingcorporateventurecapitalpractices.Thegeneralizabilityofanyonestudy,however,waslimitedduetothesmallnumberofcompaniesbeingcoveredandthecross-sectionalnatureofthesample.Theintroductionofcommercialdatabasesmadeavailablelargedatapanelsandthusalleviatedmanyobstacles.Scholarscanaccountforawidesetofcausalfactors,suchasfirmsizeandindustrychoice,andpursueeconometrictechniquesthattackleunobservedheterogeneityandtemporalprecedence.

Thebenefitsgobeyondmethodologicalrigor.Robustanalysesaffordsignificanttheoreticaldevelopment.First,scholarscanuncovertheoreticalmechanismsandexploreboundaryconditionsbycomparingandcontrastingcorporateventurecapitalpracticesacrossdifferentindustriesortechnologicaldomains.Second,thetheoreticalscopecanbeexpandedtoincorporateinteractionwithothercorporateactivities.Toseethisconsideracasestudythatdocumentsacloserelationshipbetweenafirm'sinvestmentandallianceactivities.AlthoughevidenceofCVC-allianceinteractionisinstructive,itcouldbeanidiosyncraticcaseandmightnotextendtoothercorporations.Givensystematicdataoninvestmentpracticesacrossmultiplecorporations,onecancrediblydeveloptheoryonvariousformsofopeninnovationstrategies(e.g.,CVC,alliances,M&A).Third,theavailabilityofstandardizeddatafacilitatesgoodresearchpractices,suchasreplication,comparison,andsequentialdevelopment.ItfollowsthattheCVCliteraturehasbenefitedtheoreticallyandmethodologicallyfromtheintroductionofcommercialdatabases.

Inwhatfollows,inlinewithDushnitsky(2006),IopenwithevidenceonthekeycharacteristicsofCVCprograms,theirparentcorporations,theirportfoliocompanies,andtherelationshipsbetweenthem.ThediscussiondealswiththeissuesthatfallwithintheCVCActivitybox(Figure5.1,PanelB).NextIcovertopicsthathaveonlyrecentlybeenaddressedintheCVCliterature:interactionbetweenCVCandotherfirmactivities(e.g.,alliances,M&A),andinteractionwithotherentities(e.g.,independentVCfunds).TheseissuesfalloutsidetheCVCActivitybox(Figure5.1,PanelB).Thesectioncloseswithareviewofperformanceimplications.Forasummaryofthetopicsandcorrespondingstudies,seeTable5.2.

Investors'ObjectivesWhydoestablishedcorporationschoosetoinvestinentrepreneurialventures?Theobjectiveofcorporateventurecapitalinvestorshasbeenanimportantareaofresearch.Weknowthatfinancialobjectivesdriveindependentventurecapitalfunds.Theyinvestinearly-andlate-stagebusinessendeavorswiththesole(p.172) (p.173)purposeofcapitalappreciationthroughlucrativeexitsviaanIPOoratrade-sale.TheliteraturesuggeststhatsomefirmspursueCVCtosecurefinancialgains,whileothersseekstrategicbenefits.Recentevidencesuggeststhatmostcorporateinvestorsattempttopursueorbalancebothobjectives(BlockandMacMillan,1993;Chesbrough,


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2002;Ernst&Young,2009).

Table5.2EmpiricalCVCStudies:MajorPublicationsbyTopic

Topics Studies

InvestorObjectives

Siegeletal.(1988);WintersandMurfin(1988);Sykes(1990);McNally(1997);Kann(2000);Ernst&Young(2002,2009);DushnitskyandLenox(2003);ChesbroughandTucci(2004);DushnitskyandLenox(2005a);GabaandMeyer(2008);Basuetal.(2010);Sahaymetal.(2010)

ProgramGovernance

Rind(1981);BlockandOrnati(1987);Siegeletal.(1988);WintersandMurfin(1988);Sykes(1990,1992);McNally(1997);Kann(2000);Birkinshawetal.(2002);Keil(2002);Keiletal.(2008);Ernst&Young(2009);DushnitskyandShapira(2010)

InvestmentRelationships:

Pre-investment Siegeletal.(1988);Sykes(1990);McNally(1997);Birkinshawetal.(2002);Ernst&Young(2002);Dushnitsky(2004);Keiletal.(2004);Katilaetal.(2008);DushnitskyandShaver(2009)

Post-investment Siegeletal.(1988);Sykes(1990);McNally(1997);Maula(2001);Birkinshawetal.(2002);Bottazzietal.(2004,2008);Cumming(2006);CummingandJohan(2008);HillandBirkinshaw(2008);Keiletal.(2008);Maulaetal.(2009);Yangetal.(2009);BengtssonandWang(2010);DushnitskyandShapira(2010);MasulisandNahata(2010)

InterdependencieswithOtherFirmActivities

Siegeletal.(1988);WintersandMurfin(1988);Sykes(1990);McNally(1997);Colomboetal.(2006);DushnitskyandLenox(2005a);Keiletal.(2008);BensonandZiedonis(2009);Ernst&Young(2009);PhelpsandWadhwa(2009);VandeVrandeetal.(2009);BensonandZiedonis(2010);DushnitskyandLavie(2010);TongandLi(2010)

InterdependencieswithOtherEntities

WintersandMurfin(1988);Sykes(1990);Hochbergetal.(2007);DushnitskyandShaver(2009);Ernst&Young(2009);Hilletal.(2009);Keiletal.(2010)

PerformanceImplications:

Ventures BlockandMacMillan(1993);McNally(1997);GompersandLerner(1998);MaulaandMurray(2001);Hochbergetal.(2007);Maulaetal.(2009);IvanovandXie(2010)

CVCprograms Siegeletal.(1988);Sykes(1990);McNally(1997);GompersandLerner(1998);HillandBirkinshaw(2008);Hilletal.(2009);DushnitskyandShapira(2010)

Parentcorporations

ChesbroughandTucci(2004);DushnitskyandLenox(2005b);Schildtetal.(2005);DushnitskyandLenox(2006);WadhwaandKotha(2006);AllenandHevert(2007)

Note:SeeFigure5.1(PanelsAandB)formainCVCtopics.

AsearlyasthesecondCVCwave,thereisevidenceofadiversesetofCVCobjectives.Siegeletal.(1988)presentoneofthefirstcomprehensivesurveysofcorporateventurecapitalpractices.TheauthorsreportthatCVC


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programsrankreturnoninvestmentasthemostimportantobjective.Theyqualifytheirfindinggiventhatalmost42percentoftherespondentsrankfinancialreturnsaslessthanessential,whileemphasizingvariousstrategicobjectives.Combinedwiththefactthatmanyprogramsseekfinancialreturnsalongwithstrategicobjectives,thisimpliesthatcorporateventurecapitalisnotsolelyafinancialexercise.Amongthestrategicbenefits,exposuretonewtechnologiesandmarketsrankssignificantlyhigherthananyotherstrategicobjective.Otherobjectives,byorderofimportance,arepotentialtomanufactureormarketnewproducts,potentialtoacquirecompanies,andpotentialtoimprovemanufacturingprocesses.

WintersandMurfin(1988)identifytwoadditionalstrategicobjectives.First,corporateventurecapitalequipsmultinationalfirmswithinternationalbusinessopportunities,specificallytheopportunitytolicenseentrepreneurialventures'technologiesorproductsandmarketthemoverseas.Second,CVCactivityexpandsafirm'scontactsbeyonditscommonnetwork,thusopeningittomanynewbusinessopportunities.Third,theauthorsarecriticaloftheviewthatCVCfacilitatesacquisitionsgiventheinherenttensionassociatedwithactingasapotentialacquirerwhilesimultaneouslyservingasanexistinginvestor.

Sykes(1990)conductsasurveyofstrategicallydrivencorporateventurecapitalists.Hereportsthatidentifynewopportunitiesanddevelopbusinessrelationshipstopthelistofstrategicobjectives.Otherobjectives,byorderofimportance,arefindpotentialacquisitions,learnhowtodoventurecapital,andchangecorporateculture.Thelowestrankingobjective,asreportedbythethirty-onerespondingfirms,isassistspin-outsfromthecorporation.

ThethirdCVCwaveaffordsauniqueopportunitytogainfurtherinsightintocorporateobjectives.Inadditiontocasestudiesandsurveys,theavailabilityofcommercialventurecapitaldatabasesstimulatedanumberofscholarstoderiveCVCgoalsfromobservedinvestmentpatterns.Theformerapproachaffordsrichinsightsaboutstatedobjectives,whilethelattergroupunderscoresCVCgoalsasenactedthroughtheirinvestmentbehavior.Importantly,large-sampleanalysesfacilitatesystematiccomparisonbetweenCVCinvestingfirmsandtheirnoninvestingindustrypeers.Suchanalysiscanshedmorelightonafirm'sdecisiontopursuecorporateventurecapital.

Asurveyoffortyglobalcorporationsthatengageinventurecapitalinvestmentsindicatesthat56percentoftherespondentsstatestrategicobjectives,33percentdeclarefinanciallydriveninvestment,and11percentclaimtopursue(p.174) both(Ernst&Young,2002).Againwindowontechnologydevelopmentsisrankedastheleadingstrategicobjective.Othergoals,byranking,includeimporting/enhancinginnovationwithexistingbusinessunits,leveraginginternaltechnologicaldevelopments,tappingintoforeignmarket,andcorporatediversification.

Studyingoveronehundredstrategicallydrivencorporateinvestors,Kann(2000)reportsthatexternalR&Disthemostcommonobjective(45percent),wherebycorporationsseektoincreaseinternalR&Dcapabilitiesthroughentrepreneurialtechnologies. Oftentimestheultimategoalistofillgapsinthecorporatetechnologyportfolioorenhanceawarenesstostrategicblindspots.Thesecondandthirdobjectivesareacceleratedmarketentry(30percent)anddemandenhancement(24percent),respectively.Firmsthreatenedbyrapidchangestotheircorebusinessesoftenpursueacceleratedmarketentryinanattempttoleverageentrepreneurialtechnologiesandreinventthemselves.Kannobservesthatdemandenhancemententailsinvestmentinventureswithcomplementarytechnologies,products,orservices.Shenotesthatthisgoaliscommoninindustriesthatareattheearlystageoftheirlifecycle,experienceemergenceofstandards,orfacesaturateddemand.

McNally(1997)studiesU.K.-basedcorporateventurecapitalists.Inresponsetohissurvey,only36percentofthefirmscitefinancialreturnsastheprimaryreasonfortheirinvestmentactivity.NonethelessfinancialreturnoninvestmentremainsaprominentgoalwhenconsideringeitherprimaryorsecondaryCVCobjectives.AswithU.S.-basedprograms,identificationofnewmarketsisthetopstrategicobjective(68percent),withotherobjectivesbeingexposuretonewtechnologies(43percent),developbusinessrelationships(38percent),andidentificationofnewproducts(38percent). Similartootherstudies,thelowestrankedobjectiveisassesspotentialacquisitioncandidates(21percent).

McNally's(1997)studyoffersauniqueviewpointonthedecisionsoffirmsthatconsideredbutdidnotpursuecorporateventurecapital.Thesurveycoversseventy-threefirms,ofwhichforty-fivedidnotinvestinnewventuresbutpartiallyconsidereddoingso. Amongthenoninvestors,themostcommonmotivationfor

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contemplatingsuchactivityistogainawindowontechnology.ThisfindingholdsirrespectiveofwhetherthefirmsconsiderinvestingdirectlyorthroughindependentVCfunds.ThedecisionnottopursueCVCismotivatedeitherbythelackofcorporateresources(i.e.,capitalandmanagerialtime)orbythepreferenceformoreconventionalmechanismsforknowledgeacquisition(i.e.,internalR&Doracquisitions)thatoffergreatercontrol.

DushnitskyandLenox(2005a)systematicallycomparecorporateinvestorsandnoninvestingfirms.Specificallytheyconstructalargepanelofallpublicfirmsthatwereinindustrieswhereatleastonefirminvestedcorporateventurecapitalduringthe1990s. TotheextentthatCVCinvestmentispartofafirm'sopeninnovationstrategy,theyconjecture,oneshouldobserveaprofit-seekingfirminvestingcorporateventurecapitalwhenCVC'smarginalinnovativeoutputisexpectedtobehigherthanthatofinternalR&D.Theanalysishighlightsindustry-leveland(p.175) firm-levelfactorsthataffectCVC'smarginalcontributionandthusstimulateCVCactivity.

DushnitskyandLenox(2005a)reportapositiverelationshipbetweenafirm'sannualequityinvestmentsanditsinternalcashflow,inlinewithMcNally's(1997)findings.TheyalsofindthatCVCinvestmentisaffectedbytheabsorptivecapacityoftheparentcorporation:afirmismoreinclinedtoinvestastechnologicalproximitytoinnovativeventuresincreases,yetatsomepointinvestmentdecreasesinproximity.Equallyimportantistheevidencefurnishedbytheauthors'investigationofCVCsectorbreakdown.Forexample,theyreportthatcorporationsaremorelikelytofundventuresbasedinindustriesthatexperiencegreatertechnologicalferment.Intheseindustries,theargumentgoes,entrepreneursaremorelikelytoidentifyvaluableinventions;andasthepoolofhighlyinnovativeventuresgrows,thestrategicbenefitofCVCinvestmentrisesrelativetointernalR&D.Corporateventurecapitalisalsodirectedtowardventuresinindustrieswithweakintellectualpropertyprotectionand,tosomeextent,inindustrieswherecomplementarydistributioncapabilityisimportant.Takentogether,theobservationthatCVCpatternsaresensitivetoparentfirmandventureindustrycharacteristicsimpliesthatcorporateventurecapitalisaformofexternalR&D.

ChesbroughandTucci(2004)investigatetheresearchactivitiesof270U.S.andforeignCVCinvestingfirmsduringtheperiod19802000.TheyexplorevariationsinthelevelofcorporateR&DexpensespriortoandimmediatelyaftertheonsetoftheCVCprogram.AmultivariateregressionanalysisindicatesthattheexistenceofaCVCprogramissignificantlyassociatedwithincreasesincorporateR&D,evenaftercontrollingforfirmfactorsandindustryaffiliation.Buildingonthesefindings,theauthorsstatethatcorporateventurecapitalisofstrategicvaluetotheparentcorporationandmaysupplementotherR&Defforts.

Thecharacteristicsofaparentfirm'sindustryhavebeenthesubjectofotherstudies(Basuetal.,2010;DushnitskyandLenox,2003;GabaandMeyer,2008;Sahaymetal.,2010).Thedriversofindustry-levelcorporateventurecapitalpatternsareaddressedbySahaymetal.UsingdataonallU.S.manufacturingindustriesbetween1997and1999,theauthorsfindthathigherlevelsofindustryR&DexpendituresareassociatedwithanincreaseinthenumberofCVCdealsinthatindustry.ThepositiveR&D-CVCassociationismoderatedbyindustrygrowthandproductivity.Specificallyindustriesthatexhibithigherlevelsofgrowthinsalesbetween1992and1996exhibitastrongerrelationshipbetweentotalindustryR&DandaggregateCVCactivity.Asimilarpatternisobservedforindustriesthatexperiencehighgrowthintotalfactorproductivitybetween1985and1994.Theeffectoftheformer(latter)moderatorisconsistentwithcorporateventurecapitalasavehiclegearedtowarddemandenhancement(windowontechnology).

DushnitskyandLenox(2003)replicateDushnitskyandLenox(2005a)whilefocusingontheindustrycharacteristicsoftheparentcorporationratherthanthefundedventures.Analysisofabout1,200U.S.publicfirmsfindsthatCVCactivityismorelikelytobeundertakenbythoseoperatinginindustriesthatexperiencetechnologicalturbulenceandfeatureastrongpatentregimeandwherecomplementary(p.176) assetsareimportant.Theseconditionslikelymotivateestablishedfirmstoseekawindowontechnology.

Basuetal.(2010)studyFortune500corporationsduringthe1990sandexploretheirpropensitytoinvestcorporateventurecapital.Thecharacteristicsofacorporation'sindustryofoperationareinvestigatedfirst.TheresultscorroborateDushnitskyandLenox(2005a):technologicalturbulenceandastrongpatentregimeareassociatedwithgreaterinclinationtofundinnovativeventures.TheauthorsfurtherreportthatCVCinvestmentismorelikelywhenacorporationexperiencesintensecompetitivepressures.TheyconcludethatthosewhoarebasedindynamicenvironmentsoftenundertakeCVC.Theanalysisalsovalidatestheeffectoffirm-levelfactorsreportedinDushnitskyandLenox.Theinteractionbetweenfirmandindustryfactorsyieldsasurprisingresult:the

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magnitudeofCVCinvestmentremainsunchanged,andmayactuallydecrease,whenresource-richfirmsfacedynamicenvironments.Theresultspointtotheexistenceofsubstantialintra-industry(i.e.,withinindustry,acrossfirms)varianceinCVCactivity.Inotherwords,withinahomogeneousindustrysetting,firmsmayexhibitheterogeneousinvestmentbehaviors.

GabaandMeyer(2008)studyasimilarsamplewhileapplyingadifferentperspective.SpecificallytheauthorsanalyzeCVCadoptionpatterns.TheytooinvestigateasampleofFortune500firmsthatwereactiveintheinformationandtelecommunicationsectorbetween1992and2001.TheyfindevidenceofcontagionprocessesnotonlyamongtheITfirms,butalsobetweenITfirmsandindependentVCfunds.WithintheITsector,theproximityandprominenceofCVC-investingfirms,aswellasevidencethattheprogramsstimulateotheractivities(e.g.,acquisition)areassociatedwithfurtheradoptionofCVCbyotherITfirms.Interestinglyfactorsassociatedwiththeventurecapitalmarketexhibitthestrongesteffectonfirms'adoptionpatterns.AfirmismorelikelytolaunchaCVCprogramifitisgeographicallyproximatetoaVCcluster(e.g.,SiliconValley)andwhenventurecapitalists'success(i.e.,numberofIPOs)issalient.Finally,theauthorsreportthatthemoredistantafirmisfromaVCcluster,themorecloselyitsadoptionpatternsmimicthatofitsITindustrypeers.

AsforthefourthCVCwave,wemainlyhaveanecdotalevidenceregardingtheobjectivesofCVCinvestors.Ontheonehand,theavailabilityofcommercialdatabasesimpliesthatitislessattractivetoinitiateextensivesurveys.Ontheotherhand,sufficientdatahavenotaccumulatedtomakepossiblelarge-sampleanalysesofthelatestCVCwave.

Arecentsurveyofthirty-sevencorporateinvestorsofferssomeinsightsintocontemporaryCVCobjectives(Ernst&Young,2009).Itechoesthesentimentthatcorporateventurecapitalplaysasignificantroleinafirm'sinnovationstrategy:97percentoftherespondentspursuestrategicinvestment,upfrom67percentintheformerErnst&Young(2002)survey.Manyoftheseinvestorsbalancetheirstrategicgoalswithfinancialaspirations.Yetonly3percentaresolelyfinanciallydriven,lessthanatenthofthefractionpreviouslyreported(33percent).Thetoptwostrategicobjectivesaremapemerginginnovationsandtechnicaldevelopments(p.177) andwindowonnewmarketopportunities.Thelowestrankingobjectivesincludeleverageinternaltechnologicaldevelopmentsandidentifyacquisitioncandidates.

Toconclude,establishedfirmspursueinvestmentinnewventuresforvariousreasons.Afewcleartrendsemerge.Althoughcorporationscontinuetograpplewiththebestapproachtobalancingstrategicobjectivesandfinancialreturns,thefractionofCVCprogramsdrivensolelybyfinancialobjectiveshasdeclined. Amongthestatedstrategicobjectives,themostcommonobjectiveiswindowontechnology(alsoexternalR&Dorevenpotentialtoimprovemanufacturingprocesses).Thatis,firmsinvestCVCinthepursuitofnoveltechnologiesthatarerelevanttocorporatebusinesses.AnalysisofCVCinvestmentpatternssubstantiatesthisobservation:investingfirmsexperiencegreatertechnologicalandcompetitivepressurestoinnovate,targetventuresthatarelikelytopossesscutting-edgetechnologies,andhavecapabilitiestoabsorbthesetechnologies(Basuetal.,2010;DushnitskyandLenox,2003,2005a;Sahaymetal.,2010).

Anotherstatedobjectiveisdemandenhancement;corporationsbackthoseventuresthatmayincreasedemandforthecorporation'sownproductorservices.ThepatternofCVCinvestmentsispartiallyconsistentwiththisobjective.Thereissomeevidencethatinvestingfirmsnotonlyexperiencegreaterinnovationpressuresandtargetinventiveventures,butalsothatthecorporationsallocateinvestmentsoutsidetheirownindustryandtowardthoseindustriesthatoffercomplementaryproductsorservices(Chesbrough,2002;DushnitskyandLenox,2005a;DushnitskyandShaver,2009).Atelecommunicationcorporation,forinstance,mayopttofunddigitalmediaventures.Alongtheselinescorporateventurecapitalmayaffordanopportunitytoentercomplementaryforeignmarkets(e.g.,internationalbusinessopportunitiesortappingintoforeignmarkets).Interestinglythereareparallelobjectivesintherelatedcontextofbankventurecapital(i.e.,banksmakinginvestmentsinentrepreneurialventures).Hellmannetal.(2008)reportthatbanksbuilddemandfortheirlendingbusinessthroughventurecapitalinvestments;apriorinvestmentrelationshipwithaventureincreasesabank'schanceofsubsequentlymakingaloantothatventure.

ItisalsoimportanttonotethatanumberofobjectivesthathavebeentraditionallyascribedtoCVCprogramshavebeenrankedconsistentlylowbycorporateventurecapitalists.Forexample,exposuretoentrepreneurialspiritandchangecorporatecultureappear,atbest,assecondaryobjectives.Similarlyprogramsarenolongertasked

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withspottingpotentialacquisitioncandidates,asmorecorporationsbecomeawareoftheinherenttensionassociatedwithactingasapotentialacquirerwhileservingasanexistinginvestor.Thatsaid,acommonCVCobjectiveisthedevelopmentofstrategicrelationships,mostoftenwithcompaniesandindividualsthatthecorporationswouldnothaveinteractionswithotherwise(e.g.,engagementwithsmallentrepreneurialventures,ordeveloprelationshipswithindependentVCs).Finally,onlyasmallnumberofcorporationsmandatetheirprogramstoassistspin-outsfromthecorporationinordertoleverageinternaltechnologicaldevelopments.

(p.178) AproductiveapproachtowardthinkingaboutCVCobjectivescouldbebasedontheintendedeffectofaventure'ssuccessonexistingcorporatebusinesses.Strategicobjectivescanbepositionedalongacontinuumrangingfromseekingsubstitutestosponsoringcomplements.Ontheonehand,investmentactivitymaybeusedtoidentifynovelproducts,services,ortechnologiestoreplaceexistingcorporateproducts,services,ortechnologies,thatis,targetingpotentialsubstitutes.Forexample,CVCmayserveasanearlyalertsystemallowingthefirmtoidentifypotentiallycompetingentrepreneurialtechnologies.Someoftheobjectivesthatfithereincludeexposuretonewtechnologies(McNally,1997),externalR&D,andacceleratedmarketaccess(Kann,2000).Ontheotherhand,CVCactivitiesmayseektocomplementcorporatebusinessesbyfundingventuresthatincreasethevalueofexistinglinesofbusinesses(BrandenburgerandNalebuff,1996).Thetwomaycomplementeachotheralongdifferentdimensions:technologically(e.g.,developbusinessrelationships;Birkinshawetal.,2002),intheproductmarket(e.g.,demandenhancement;Kann,2000),aswellasgeographically(e.g.,tappingintoforeignmarket;Ernst&Young,2002).

ProgramGovernanceThegovernanceofCVCactivitiesisamultifacetedsubject.IthastodowiththestructureofaCVCprogram,thedegreeofautonomyitexperiences,andthecompensationofthepersonneltaskedwithmakinginvestmentdecisions.Becausecommercialdatabasesdonotcoverthesetopics,wehaveseenlimitedprogressinthisdomain.Moreovertheobservedpatternsmaybeparticularlysensitivetosamplingbias. Thatisnottosaythattheissueisunimportant.Onthecontrary,severalstudiesfindthatgovernanceconsiderationexplainsmuchofCVCabilitytomeetitsobjectives(e.g.,Keiletal.,2008;DushnitskyandShapira,2010).

ClicktoviewlargerFigure5.7 Corporateventurecapitalmajorstructures.

Tofacilitatesystematicdiscussionandcomparisonacrossstudies,Figure5.7labelsthefourprevalentCVCstructures.SomefirmschoosetoinvestinentrepreneurialventuresindirectlybyjoiningexistingVCfundsaslimitedpartners;IlabelthispracticeCVCasLP.OtherfirmschoosetoestablishCVCprograms.Incontrasttotheindependentventurecapitalfunds,whicharestructuredalmostexclusivelyasalimitedpartnership,weobserveheterogeneityinprogramstructures.Theserangefromtightstructurestolooseones.ProgramswherecurrentoperatingbusinessunitsareresponsibleforCVCactivitiesaredenotedashavingatightstructure.Thisisadirectinvestmentstructure(e.g.,TIVentureCapitalProgram).Otherprogramsareorganizedaswhollyownedsubsidiaries,whichareseparateorganizationalstructuressetupforthesolepurposeofpursuingcorporateventurecapital(e.g.,NovartisVentureFunds).Dedicatedfundsconstitutethelast,andleastcommon,structurewhereafirmandanindependentVCfundcomanagetheinvestmentactivity.PastandpresentexamplesincludeSequoiaSeedCapital,ajointventurebetweenSequoiaCapitalandCiscoSystems,andTate&LyleVentures,a(p.179) 25millionfundmanagedbyCircadiaVenturesinwhichthekeylimitedpartnerisTate&Lyle(agloballeaderinindustrialingredientsthatownssuchbrandsasSplenda).Finally,itispossiblethatacorporationwillhavemultipleCVCfundsactiveatthesametime,forexample,Nokia(NokiaGrowthPartners,BlueRunVentures),and

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DeutscheTelekom(e.g.,T-MobileVentureFund,T-HomeVentureFund,andT-CorporateVentureFund).

Siegeletal.(1988)providedetailedsurvey-basedevidenceregardingprogramstructure.Mostprogramsexperiencemoderatetolowlevelsofautonomy:66percentundergoathoroughreviewbycorporateheadquarterspriortoeachinvestment,21percentaresubjecttoformalapprovalprocess,and11percentarefreetoinvestwithoutpriorapproval.InterestinglyabouthalfoftheCVCprograms(48percent)reportthatadedicatedpooloffundsismadeavailabletothemonaone-timebasis,whileotherprogramsareallocatedsmallerfundsperiodically(27percent)oronanad-hocbasis(19percent). Usingclusteranalysis,theauthorsidentifytwoCVCtypes:programscharacterizedbyahighdegreeofautonomyandpermanentfinancialcommitment(denotedpilots)andprogramsthatarehighlydependentofcorporateapprovalandcapitalcommitment(denotedcopilots).AsforthecompensationofCVCpersonnel,someprogramsofferonlybasesalary(31percent),othersawardbonusesbasedontheventure'sperformance(overtheshortterm,29percent;overthelongterm,14percent),andyetothersallowfordirectparticipationintheventurefund(10percent).

WintersandMurfin(1988)observeseveraldifferentCVCstructures.ThetypesmapontotheCVCasLP,directinvestment,andwhollyownedsubsidiarylabels.Thelaststructure,theauthorsnote,ismorelikelytohavefundsdedicatedforinvestmentactivity.FurthermoreasubsidiarystructureisadvantageousbecauseitattractsVCs'cooperationbysignalingcorporatecommitmenttoventureinvesting.Italsomitigatesentrepreneurs'concernsofmalfeasantcorporatebehaviorandoffersflexibilityinlocatingtheprogramsinastatewithlowcapitalgainstaxes.

(p.180) Sykes(1990)underscoresanevolutioningovernancepractices.SpecificallyhepointstotheemergenceofdedicatedVCfundsthatservetheinterestsofasolecorporateinvestor.AmongthestrategicallydrivenCVCprogramshestudies,84percentinvestaslimitedpartners,81percentactasdirectinvestors,and64percentpursueboth.Hefurtherobservesthatthedifferencesinstructuredonotreflectdissimilarityinobjectives.

McNally(1997)reportsthat82percentoftherespondentsprovidefundstoentrepreneurialventures,43percentinvestthroughindependentVCfunds,and25percentdoboth.MoreovertheevidencesuggeststhatwhollyownedCVCsubsidiariesinvestinventuresdirectlyaswellasthroughindependentVCs.Asforautonomy,mostCVCprogramsexperienceamoderatelevelofflexibility.ThisisespeciallytrueofinvestmentinindependentVCs,whereathirdoftheprogramswerenotsubjecttoheadquarters'approval.Incontrast,only9percentoftheprogramsinvestingdirectlyinnewventuresdidnotrequireanyheadquarters'approval.AsfortheinteractionbetweentheCVCstructureanditsobjectives,thereislittleevidencetoindicatethetwoarecorrelated.BoththeprogramsthatinvestthroughVCfundsandthosethatfundventuresdirectlyrankthesearchfornewtechnologies,establishmentofbusinessrelationships,andhighfinancialgainsastheirtopobjectives. InlinewithSykes(1990),McNallypointstoagrowingsalienceofdedicatedfunds:46percentoftheindependentVCfundswithnonfinancialfirmsaslimitedpartnershadasolelimitedpartner(themajorityofthesefundsaremanagedbyAdventInternational).

Kann(2000)distinguishesbetweenthreestructures:CVCasLP(11percentoftheprogramsinhersample),dedicatedfund(also11percent),andathirdcategoryofcorporate-managed-programsthataggregatesdirectinvestmentandwhollyownedsubsidiary(78percent).InterestinglyshefindsasignificantcorrelationbetweenCVCstructureandobjectives:firmsthatsponsorcomplementaryventuresaremorelikelytopursueCVCasLP,whilefirmsthataimtoincreaseinternalR&Dcapabilitiesaremorelikelytoemployacorporate-managedprogramstructure. The2002Ernst&Youngsurveyfindsthat32percentoftheprogramsarestructuredasaCVCsubsidiary,and59percentpursuesomevariationofdirectinvestment,eitherasanindependentunit(5percent)orafullyintegratedpartofacorporatebusinessunit(55percent).

Keiletal.(2008)offerinsightonthegovernanceofCVCprogramsusinglongitudinalcasestudiesoffivetelecommunicationcorporationsbetween1998and2002.Theiranalysishighlightsthetrade-offsbetweendirectinvestmentandwhollyownedsubsidiary.Theformerisassociatedwithgreatertechnicalexperience,apersonalnetworkwiththecorporation,andunderstandingofcorporatecapabilitiesneeds.Thelatterusuallyaffordsexperiencewithentrepreneurs,personalrelationshipswiththeexternalVCcommunity,andadegreeofbufferfromcognitiveandstructuralcorporatepracticesthatenablethediscoveryandassimilationofcutting-edgetechnologies.MorebroadlythegovernanceofaCVCprogramhasanimpactonmultipledimensions:functionalexpertise,contactsandtieswithdifferentcommunities,aswellasstructuralandcognitivebarriers.Allgovernanceforms(p.181) sharesomeadvantagesanddisadvantagesalongthesedimensions. Forinstance,programs

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structuredaswhollyownedsubsidiariesarebufferedfromshort-termthinkingprevalentinmanybusinessunits.Yetthisadvantageisbalancedbythefactthattheseprogramsareisolatedandthuslesseffectiveincommunicatingnewopportunitiestothebusinessunits.

Keil(2002)presentscomplementaryinsightsbasedonadetailedstudyoftwotelecommunicationfirmsduringasimilartimeperiod.HisfindingsalludetoatemporalfacetofCVCstructure.Namely,aCVCasLPstructuremaybeadoptedearlyontofacilitatefamiliaritywithandlearningfromtraditionalventurecapitalists.Asafirmdevelopsabetterunderstandingofventurecapitalpractices,itmaythenpursueadifferentCVCstructure.MorebroadlyKeilreportsthatlearningprocesses(ofwhichlearningfromtraditionalVCfundsisoneaspect)andknowledgemanagement(e.g.,formalcodificationofinvestmentpracticesandinformalnetworkingwithconstituenciesinsideandoutsidethecorporation)driveafirm'sexternalventuringcapability.

Birkinshawetal.(2002)reportthattheparentcorporation(eitherasdirectinvestmentorwhollyownedsubsidiary)solelyowns90percentoftheprogramsintheirsample.Theprogramsareonlymoderatelyautonomousabout35percentdonothaveadedicatedpooloffundsandseekapprovalforeachinvestment.TheauthorsfindthatCVCgovernanceandobjectivesarecorrelated.Programsthatinvestexternallyforstrategicgainsaremorelikelytohavetheirfundssubjecttocorporateapproval(35percentofprogramswithsuchobjective),incomparisontofinanciallydrivenprograms(25percentofprogramswithsuchobjective).Interestingly,strategicallydrivenprogramsexperiencelesser(greater)autonomywithrespecttothemanagementoftheirportfoliocompanies(makingdecisionsregardingtheCVCprogram). Finally,theyfindthatstandardcorporatesalaryisthecommoncompensationschemeamongCVCpersonnel,mainlyduetoconcernsoverpayinequalityandattemptstoalignaprogram'sinterestswiththatoftheparentcorporation.Bonusesbasedoneitherfinancialorstrategicperformanceareusedoccasionallyand,toalesserextent,carriedinterestinCVCportfoliocompanies.

Asmallbodyofworkfocusesonthecompensationpracticesfirmsundertakewhentheyestablishnewventuredivisions.InBlockandOrnati's(1987)studyofforty-twoFortune500companies,theyfindthatmanyfirmsrecognizetheimportanceofpay-for-performance,yetinpracticecorporateventuremanagersarepaidnodifferentlythanothercorporatepersonnel. CareerconcernsmaydriveCVCpersonneltoshunpotentiallyprofitableventuresthatpayoverthelonghaul(Rind,1981).SpecificallyCVCmanagersarewarythattheywillnotbeinapositiontoenjoythefruitsofsuchinvestments,butwillbeheldaccountableforthelossesintheshortrun.

InarelatedstudySykes(1992)findsthattheneedforperformancepaycompensationforventuremanagersisacknowledgedbutnotalwayspracticed. Amongthemainreasonsforthelackofequity-basedcompensationsare(1)aneedforpayequalityvis--visothercorporateemployees,(2)anefforttoaligntheventure's(p.182) goalwithcorporateinterests,(3)aninabilitytodetermineventureperformanceormanagecomplexcompensationsystems,and(4)anattempttoavoidproblemswhentransferringemployeestoandfromtheventure.

Aswithprogramgovernance,theincentivesawardedtocorporateventurecapitalistsplayacriticalrole.Studyinginvestmentpracticesofallcorporateandindependentinvestorsduringthe1990s,DushnitskyandShapira(2010)findthat,onaverage,CVCsshyawayfromrisk.CorporationsinvestinmorematureandpotentiallylessriskyventuresthanindependentVCsdo.Inaddition,dealsinvolvingacorporateVCunitareassociatedwithasyndicatesizethatis49percentlargerthanthosewithindependentVCparticipationalone.Thesepatternspersistevenaftercontrollingforunits'objectives(financialorstrategic)andothercorporatecharacteristics.Interestingly,inthepresenceofperformancepay,corporateVCpersonnelengageinpracticesthatdifferonlyslightlyfromthatoftheirindependentVCcounterparts.Putdifferently,CVCprogramswithperformance-basedpaypartakeindealsthatlookalotliketheonesdonebyindependentVCs;thecorporateVCsinvestedinearlierstagesandmadetheirinvestmentsthroughsmallersyndicates.

Theaforementionedcompensationpracticespersistnowadays.Asurveyofthirty-sevenveteranCVCprograms(Ernst&Young,2009)findsthat75percentofferflatsalarywithnopay-for-performance.TheprogramsoftenparallelindependentVCsonotherdimensions:55percentemploysixprofessionalorfewer,andonly20percenthavetenormoreemployees.

Tosummarize,priorworknotesthatfirmsoftenadoptgovernancestructurestheybelievecansupportbenefitscapture(Keil,2002;Keiletal.,2008),andthatdeviationfromidealstructuretypesmayresultininferiorperformance(HillandBirkinshaw,2008).WecanidentifythreemajorthemesthatshapeaCVCprogram'sultimate

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governancestructure.First,withrespecttoprograms'structure,themaincategoriesincludedirectinvestment(i.e.,acorporatebusinessunitmanagesCVCactivity),whollyownedsubsidiary(i.e.,asubsidiaryissetuptohandleinvestments),dedicatedfund(i.e.,afundcomanagedbythefirmandaventurecapitalist),andCVCasLP(i.e.,capitalallocatedtoaventurecapitalfund).ThereisanotablepresenceofdedicatedfundssupportedbyagrowingnumberofVCprofessionalswhoareexperiencedinworkingcloselywithlargecorporationsandtheiruniqueCVCneeds.

Second,thereissubstantialvariationinprogramautonomyintermsofcapitalallocationanddecisionautonomy.Someprogramsareallocatedalargeamountofcapitalupfront,whileothersreceivethenecessaryfundsonanad-hocbasis.Thediscretiontomakeinvestments(i.e.,fundaparticularventure)andexit(i.e.,sellaventureortakeitpublic)isfullydelegatedtotheCVCprograminsomecorporationsyetremainssubjecttoscrutinyandcorporateapprovalinothers.Third,alivelydebatecontinuesregardingCVCcompensationschemes.Aflat-ratecorporatesalarywastheprevailingcompensationschemeamongCVCpersonnelinthepastandremainsacommonpracticeinalargeminorityofprogramsnowadays.

(p.183) Theinterdependenciesbetweenthethreegovernancefacetshavereceivedlittleattentionintheliterature.Yetthereissomeevidencetosuggestthatthesefacetsarepartiallycorrelated.Tightlystructuredprograms(e.g.,directinvestments)aremorelikelytobesubjectedtorigorouscorporatescrutiny.Alsotheyaremorelikelytoemploycorporate-widecompensationtoavoidinequalityconcernsandensurealignmentwiththeinterestsoftheparentcorporation.Incontrast,looselystructuredprograms(e.g.,whollyownedsubsidiariesanddedicatedfunds)arelikelytohaveadedicatedpooloffundsandenjoydecision-makingautonomy.Theseprogramsoftenemploycompensationschemesthathaveasubstantialperformancepaycomponent.

InvestmentRelationshipsInvestmentrelationshipsbetweenCVCprogramsandentrepreneurialventuresarecomplexandinvolvethebidirectionalflowofinformation,capital,andcommercialassets.Fromentrepreneurs'perspective,therelationshipisanopportunityformonetaryandnonpecuniarysupport.Giventheasymmetryinsize,italsorequirescarefulmanagementinthetimeleadingtotheinvestmentaswellasoncefundingisreceived.FromtheCVC'sperspective,firstandforemostitseekstoidentify,select,andattractprospectiveportfoliocompanies.AftertheinvestmentCVCprogramsemployvariousmechanismstomanageportfoliocompanies.Takentogether,selectionandmonitoringarethefundamentalbuildingblocksofasuccessfulinvestmentrelationship.Theyalsoallowthefirmtoleverageorlearnaboutentrepreneurialinventions.

Thetopicofinvestmentrelationshipshasreceivedmuchattentionintheliterature.Inawaythatechoesthecomplexityoftheserelationships,theworkspansvariousmethodologies,includinglarge-sampleanalysis,surveys,andanecdotalevidence.IbeginbydiscussingevidenceregardingCVC-entrepreneurrelationshipsleadinguptothefundinground,andthenproceedtoreviewworkonthepostinvestmentperiod.

Pre-InvestmentRelationshipDynamicsInhisstudyofthirty-onestrategicallydrivenprograms,Sykes(1990)findsthattiestotheventurecapitalcommunity,andtoalesserextentreferralfromcorporatepersonnel,areimportantdeal-flowsources.Siegeletal.(1988)reportthatthesourceofdealflowvariesacrossprograms.Themoreautonomousprograms(i.e.,pilots)viewtiestoindependentVCsasthemainsourceofdealflow.Incontrast,referralfromafirm'sowndepartmentsismoreimportantforprogramsthataredependentoncorporateapprovalandcapital(i.e.,copilots).TheauthorsalsofindthatCVCprogramsandindependentVCfundsemploysimilarinvestmentcriteria.Interestinglytheyreportthatinthosecaseswhereventuresoperateinanindustrythatisattractivetotheparentfirm,aCVCprogramismorelikelytofacedifficultiesattractingadequatedealflow.

(p.184) IntheUnitedKingdomMcNally(1997)observesthatdealflowiscontingentonwhetherafirmapproachespotentialportfoliocompaniesdirectlyorthroughintermediariessuchasventurecapitalists.Oftentimesabusinessrelationship(i.e.,customer-supplierlinkagesorcontractualalliances)predatestheinvestmentrelationship.Asfortheinvestmentcriteria,contrarytoSiegeletal.(1988),McNallyfindsthatCVCsassessventures'productsandmarketfirst,andonlythenevaluateentrepreneurs'experiences.Theselectionprocessisstrict,andCVCinvestorsfundlessthan10percentofthepotentialtargets.24


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Birkinshawetal.(2002)findsubstantialvariationinselectionandmonitoringpracticesacrossprograms'objectives.Venturecapitalistsarethemainsourceofdealflowforexternallyfocusedprogramsinvestingeitherforfinancialorstrategicreasons.Otherexternalsourcesincludedirectcontactbyentrepreneurs(rankedsecond)andreferralbycorporateemployees(rankedthird).Thereverserank-orderholdsforinternallyfocusedprograms.Asfortheacceptancerates,mostinternallyfocusedprogramsandallexternallyfocusedonesscreenoutabout85to90percentofalltheincomingideasandfundonly2to3percentoftheinitialproposalpool. SimilarlyanErnst&Young(2002)surveypointstoVCanddirectentrepreneurreferralsasthemainsourcesofnewinvestments,eachaccountingforabout30percentofCVCdealflow.Othersourcesinclude,inorderofimportance,internalemployeesandprofessionalservicefirms.

Basedonlarge-sampleempiricalanalysis,agroupofstudiesfurtheradvancesourunderstandingoftheprocessbywhichcorporateventurecapitalistsandentrepreneursconsummateaninvestmentrelationship(Dushnitsky,2004;Katilaetal.,2008;DushnitskyandShaver,2009).Katilaetal.studyarandomsampleof701venturesfundedbetween1979and1995(11percentoftheU.S.technologyventuresfundedduringthatperiod).Theyfindthattheresourceandsafeguardprofileofaventure'sindustryexplainsthelikelihooditreceivesCVCfunding.Ontheresourcefront,anentrepreneurialventurewithgreaterresourceneeds(asmeasuredbytheintensityofcapitalandmarketingexpendituresinventure'sindustry,aswellasroundamount)ismorelikelytooptforCVCfunding.Asforsafeguards,anentrepreneuroperatinginanindustrycharacterizedbystrongersafeguards(e.g.,patentsorleadtime)ismorelikelytoseekCVCbacking.Theauthorsalsoreportevidenceofapeckingorderinventures'resourcedependency:CVCinvestmentismostlikelyinthepresenceofmanufacturingresourceneeds,thenmarketingneeds,andfinallyfinancialneeds.Theyfurtherfindahierarchyinsafeguardmechanisms(leadtime,followedbytradesecrets,andpatents).

Dushnitsky(2004)andDushnitskyandShaver(2009)takeadifferentapproach.Ratherthanstudyingtheneedsofaventureandtheresourceprofileofitsindustry,theyadvanceanapproachthatconsiderscorporateandentrepreneurperspectivesintandem.Dushnitsky(2004)arguesthatmanyinvestmentrelationshipsdonotmaterializebecausethecorporationwillnotinvestunlesstheentrepreneurdisclosesherinvention,andtheentrepreneuriswaryofdoingso,fearingimitation.AsaresultDushnitskypredictsthatafirmismorelikelytoexploitentrepreneurialdisclosure,andthusrelationshipsarelesslikelytobeformedwhenentrepreneurs'(p.185)concernsofCVCactionsareattheirhighestlevel:when(1)theinventionisapotentialsubstituteofcorporateproducts,and(2)abusinessunitmanagesinvestmentsthatpotentiallysubstituteitsownproducts.Incontrast,aninvestmentismorelikelytoformwhentheproductsarecomplements.

Giventhatdisclosurerequirements(andthereforeimitationconcerns)aremostseverefornascentventures,Dushnitsky(2004)amassesdataonthepopulationof1,646start-up-stageventuresfinancedduringthe1990s.Toaccountfortheaforementioneddynamics,thefocusisontherelativepositionoftheventureratherthantheCVC. Theresultsareconsistentwiththehypothesesandofferlarge-samplesupporttoSiegeletal.'s(1988)observationthatqualitydealflowisparticularlythininareascloselyrelatedtoparentfirmproductsandservices.

DushnitskyandShaver(2009)shiftattentionfromthemoderatingeffectofCVCorganizationtowardtheroleoftheIntellectualPropertyRights(IPR)regime.Drawingonsimilarlogic,theyhypothesizethatacorporateinvestorismorelikelytoexploitentrepreneurialdisclosure,andthusarelationshipislesslikelytoformwhen(1)theentrepreneurialinventionisapotentialsubstituteofcorporateproductsand(2)theindustryischaracterizedbyaweakIPRregime.TheauthorsexpandtheanalysistoincludethevariousIPRregimes,suchasthepharmaceuticalandhealthcaresectors.Theresultsareinstructive:aninvestmentrelationshipbetweenpotentialsubstitutesdecreasesunderaweakIPR(strongIPR)regimewhereimitationconcernsareintense(alleviated).IftheproductsofaCVC-entrepreneurpairarenotsubstitutes(i.e.,thereisnoreasontofearimitationinthefirstplace),thelikelihoodofaninvestmentrelationshipishighandinsensitivetotheIPregime.

ItfollowsthattheefficacyofaCVCprogramisshapedbyitsgovernancestructure(e.g.,Keiletal.,2008;HillandBirkinshaw,2008)anditsrelationshipwitheachventure(e.g.,DushnitskyandShaver,2009;Katilaetal.,2008).Keiletal.(2004)identifyanadditionalfactor:therelationshipamongtheventuresinaCVC'sportfolio.Theauthorsconjecturethat,irrespectiveoftheirrelationshiptocorporatecorebusinesses,themorerelatedportfolioventuresare,thegreaterafirm'sabilitytoleverageinsightsfromCVCinvestmentstoexploititsownknowledgebase.Incontrast,thegreaterthenumberofventuresinaCVCportfoliotheloweritsabilitytoleverageinsightstoexploititsownknowledgebase.

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Post-InvestmentRelationshipDynamicsOnceaninvestmentisconsummated,thecorporationproceedstomonitoritsportfoliocompanies(e.g.,Bottazzietal.,2004,2008;Cumming,2006;MasulisandNahata,2010;Sykes,1990).Onealsoobservesbidirectionalflowofinformationandassetsbetweenthecorporationandtheventures(e.g.,BengtssonandWang,2010;Birkinshawetal.,2002;Maulaetal.,2009;McNally,1997;Siegeletal.,1988;Yangetal.,2009).

Sykes(1990)offersevidenceofmonitoringmechanisms,documentingCVCparticipationinboardmeetingsandareviewofperiodicreports.McNally(1997)(p.186) reportsthatU.K.corporationscloselymonitortheirportfoliocompanies:96percenttakeaseatontheboardandcommunicatewiththeirportfoliocompaniesonamonthlyorweeklybasis.RecentsurveysfurtheruncovertheextenttowhichCVCsonbothsidesoftheAtlanticseekboardparticipation.Maula(2001)studiesU.S.-basedportfoliocompaniesinthecomputerandcommunicationindustries,reportingthattheirCVCinvestorsholdeitheraboardseat(31percent)orpassiveobserverrights(40percent).AcontemporaneoussurveyofEuropeanventurecapitalinvestors(Bottazzietal.,2004)findsthatCVCinvestorsserveonportfoliocompanies'boards(68percent)andconductclosemonitoringandmonthlysitevisits(70percent)atalevelthatisslightlylowerthanthoseforindependentVCs(78and76percentrespectively).BasedonasurveyofCVCsacrosstheglobe,Birkinshawetal.(2002)reportsthatthemajoritytakesaboardseat(50percent)oranobserverseat(39percent).

Inacomprehensivestudyofthesubject,MasulisandNahata(2010)derivedetailedboardinformationfromIPOprospectuses.Specificallytheyinvestigate177CVC-backedU.S.-basedventuresthatwentpublicinthe19962001period. TheanalysisrevealsthatboardrepresentationissensitivetotherelativepositionoftheventureversustheCVC:stronglycomplementaryCVCinvestorsreceivethemostboardseats,followedbyweaklycomplementaryCVCs,withthepotentialsubstituteshavingthefewestseats.ThepatternholdsnotonlyfortheabsolutenumberofCVCseatsbutalsowithrespecttopercentageshareofCVCseats.TheauthorsfindthatCVCsarelesslikelytobeleadinvestors,andinthosefewcaseswheretheydo,theleadCVCholdslowerboardrepresentationthandotheleadtraditionalVCs.

Boardrepresentationisnotthesoledimensiononwhichcorporateandindependentventurecapitalistsdiffer.Thedifferencesextendtoothercontractualfeatures,suchasvetorights.CummingandJohan(2008)analyze223termsheetsforEuropeanventuresandfindthatcaptiveinvestors(whichincludemanyCVCs)areapproximately20percentmorelikelytotakeagreaternumberofvetorights.

Cumming(2006)observesdifferencesinthetypeofsecuritiesinvestorsseekinreturntotheirinvestments.HereportsthatindependentVCsaremorelikelythanCVCstousecommonequityandconvertiblesecurities.Thesesecuritiesaredesignedtogiveaninvestorsubstantialfinancialparticipationinventures'success.Corporateinvestors,incontrast,aremorelikelytousenonconvertibledebt,whichispredominantlydesignedtoprotectaninvestorincaseofventures'failure.CummingthereforeconcludesthatcomparedtoindependentVCs,corporationsarefocusedmoreondownsideprotectionthanupsidepotential.ThesepatternspersistforCanadianandU.S.investorsinCanadianventures,aswellasforEuropeancorporateinvestors.

Giventhestrategicnatureoftherelationships,severalstudiesinvestigatethecomplexflowofinformationandassetsbetweenacorporateinvestoranditsportfoliocompanies.Thesestudiesconsidernotonlytheimpactofaninvestorontheventure,butalsothereverse.McNally(1997)findsthatmanyventuresviewCVCboardpresencepositivelyandparticularlycommendcorporateassistanceinsolving(p.187) short-termproblemsandacorporateroleasasoundingboardtomanagementteam.Sykes(1990)observesthatcorporateinvestorsprovidevalue-addedservicestotheventure(e.g.,awardingexpertadvice)andatthesametimeleverageportfoliocompaniestothebenefitoftheparentfirm(e.g.,seekingadvicefromtheventure,identifyingotherinvestmentopportunities,formingbusinessrelationships).

Therelationshipsarenotwithoutchallenges.Culturalasymmetry,forexample,playsacriticalrole;Siegeletal.(1988)notethatincompatibilitybetweencorporateandentrepreneurialculturesisaleadingobstacletoaneffectiverelationship.Relatedly,whileCVCpersonnelinteractwiththeventureonaweeklyormonthlybasis,othercorporatepersonnelseldomdoso(Birkinshawetal.,2002).Indeedrichdataforover1,600VC-backedEuropeanventuresrevealthatcorporateinvestorsarenotasengagedintheirportfoliocompaniescomparedtoindependentVCs:theCVCsarelessinvolvedinrecruitingseniormanagementaswellashiringoutsidedirectors(Bottazzietal.,2008).AsnotedinthepreviousdiscussionofCVCgovernance,manycorporationsadoptstructuresthatseekto

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promotefruitfulrelationships,althoughwithmostlymodestsuccess(e.g.,HillandBirkinshaw,2008;Keiletal.,2008).ThefindingsreportedinBengtssonandWang(2010)illustratethispoint.Studyingalargerepositoryofentrepreneurialtestimonies,theyfindthatcorporateinvestorsscorepoorlyonthebroadtrackrecordrankings. Moreovercorporations'rankingissignificantlylowerthanthatofindependentVCsonspecificdimensions,includingoperatingcompetence.

Itisimportanttonotethatnotallcorporateinvestorsexhibitsimilarbehavior.Rathertheirrelationshipwithanygivenventureismultifacetedandhighlysensitivetothelevelofcomplementaritiesbetweenthetwo.Aswithboardrepresentation(MasulisandNahata,2010),Maulaetal.(2009)findthattheCVC-entrepreneurrelationshipissensitivetothelevelofcomplementarities.InasurveyoftheCEOsofninety-oneCVC-backedventures,theyrevealthatthegreaterthelevelofcomplementarities(i.e.,capabilitiesorproductsthatareconstruedtobecomplementary),thegreateristhesocialinteractionbetweenthetwo.Similarly,ascomplementaritylevelsdecrease,aportfoliocompanyismorelikelytoemploysafeguards(e.g.,surrenderlowerequityshare,baraboardseatfromitsCVCinvestors,orwaitbeforeraisingCVC).Moreimportant,anincreaseintheuseofsafeguardsprotectstheventurefromerosioninautonomyaswellasinvoluntarytransferofitsinventiontotheparentcorporation.Italsoleadstolowerlevelsofsocialinteraction.Thelattermayprovedetrimentalsincesocialinteractionsbetweenthecorporateinvestorandtheventureareassociatedwithlearningbenefitstotheventure.

Toconclude,anewbodyofworkhascatapultedourunderstandingofinvestmentrelationships.OnthetopicofCVC-entrepreneurrelationshipsleadinguptothefundinground,Ihavesubstantiatedpreviousobservationsandgainednovelinsights.Forinstance,corporateinvestorsrelyonreferralsfromotherventurecapitalinvestorsforthemajorityoftheirdealflow,withemployeesandbusinesspartnersbeinganadditionalsourceofprospectivetargets.Wealsogaininsightsintotheissueofinvestmentformation.Large-sampleempiricalworkdemonstratesthatcorporationsaremostlikelytofundventureswithsignificantresourceneedsor(p.188) thosewithahighlevelofcomplementarities.TheresearchuncoverssubtledynamicsbetweenCVCsandentrepreneurs:investmentbetweenthosewithpotentiallysubstitutingproductsissensitivetoIPregimeandCVCorganizationalstructure.

WealsohavemuchevidenceonCVC-entrepreneurrelationshipspost-investment.Corporateventurecapitalistscommunicatewiththeirportfoliocompaniesmorethantwiceamonth.Morethantwo-thirdsoftheprogramshaveaboardseat,oratleastholdobserverrights.Therelationships,however,arenotlimitedtomonitoringactivities.Theentrepreneursbenefitfromcorporateadvice,andattimestheventureseducatetheparentcorporationaboutnewtechnologiesorbusinessopportunities.InterestinglythereisevidencethatthelevelofcomplementaritiesofaCVC-entrepreneurpairshapestheintensityofmonitoringandotherinteractionsbetweenthetwo.

InteractionswithOtherFirmActivitiesCorporateventurecapitalallowsestablishedfirmstoharnesstheinnovativespiritofexternalventures.Afirmmaydecidetopursuealternativemodesofinteractionwiththoseentrepreneurialventures.Forexample,itmayopttoacquireaventure,formastrategicalliance,licensethetechnology,orrecruitkeypersonnelawayfromtheventure.AroraandGambardella(1990)wereamongthefirsttodocumentinterdependenciesbetweenthesedifferentactivities.Subsequentworksuggeststhatafirmchooseswhichactivitytoundertake(e.g.,FoltaandLeiblein,1994;GaretteandDussauge,2000;HagedoornandDuysters,2002;ReuerandRagozzino,2008),andthatafirm'sparticipationinoneactivityaffectsitsinclinationorabilitytoinitiateotheractivities(e.g.,Beckmanetal.,2004;GulatiandWestphal,1999;Nicholls-NixonandWoo,2003;RosenkopfandAlmeida,2003).Thesestudies,however,didnotcoverCVCinvestment.

RecentworkhasbeguntoinvestigatetheinterdependencebetweenCVCandotherfirmactivities.Thisstreamofresearchismotivated,onthetheoreticalfront,bytheaforementionedworkand,ontheempiricalfront,bytheavailabilityofsystematicventurecapitaldata.Todate,researchindicatesthatCVCisindeedapartofacomprehensivefirmstrategy.Specificallytherearenotableinterdependenciesbetweencorporateventurecapitalandotherfirmactivities(VandeVrandeetal.,2009;Keiletal.,2008).Inparallel,recentstudiesfocusonthespecificinterdependenciesbetweencorporateventurecapitalandinternalR&D(ChesbroughandTucci,2004;DushnitskyandLenox,2005a),strategicalliances(e.g.,DushnitskyandLavie,2010;WadhwaandPhelps,2009),orM&Aactivity(BensonandZiedonis,2009,2010;TongandLi,2010).Ireviewthesestudiesbelow.

ThereisevidencethatinternalR&D,atraditionalformofinnovationeffort,doesinteractwithcorporateventure

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