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SEARCH AND INTEGRATION IN EXTERNALVENTURING: AN INDUCTIVE EXAMINATION OFCORPORATE VENTURE CAPITAL UNITS
SANDIP BASU1*, COREY C. PHELPS2, and SURESH KOTHA3
1Loomba Department of Management, Zicklin School of Business, BaruchCollege, City University of New York, New York, New York, U.S.A.2Desautels Faculty of Management, McGill University, Montreal, Canada3Foster School of Business, University of Washington, Seattle, Washington,U.S.A.
Research summary: How do external venturing units effectively achieve external knowledgesearch and integration of their initiatives with mainstream organizational units? We investigatethis largely unexplored question through an inductive study of 17 corporate venture capitalunits. We document a set of five novel practices that influence the efficacy of a unit’s externalsearch and internal integration and identify how these practices complement a broader set ofpractices used by all units. We highlight the entrepreneurial nature of managing an externalventuring unit, often to overcome unfavorable corporate contexts, a perspective that priorresearch has largely overlooked. Our findings provide unique insights into why some corporateinvestors are better at learning from external start-ups than others.
Managerial summary: External venturing involves strategic partnerships by established firmswith entrepreneurial ventures. Top management usually tasks autonomous units with searchingfor willing and potentially valuable partners. These units must integrate their activities with theoperations of parent firms to elicit cooperation from important business units. To understandhow external venturing units implement search and integration in combination, we studycorporate venture capital (CVC) units, which form external partnerships through minorityinvestments in start-ups. While all units adopted fundamental processes that are well estab-lished in the venture capital community, certain processes that are idiosyncratic to corporateinvesting helped units demonstrate superior performance in their strategic missions. Theseprocesses often required CVC unit managers to be entrepreneurial and politically savvy inbuilding connections with relevant personnel in parent firms. Copyright © 2015 StrategicManagement Society.
INTRODUCTION
Although established firms need to adapt to chang-ing competitive environments to survive and prosper
over time, they are often constrained in doing so bytheir own processes, cultures, and capabilities(Leonard-Barton, 1992). An important way incum-bents can remain nimble while continuing tocompete in core businesses is through corporateventuring—programmatic efforts to create newentrepreneurial ventures within the firm (Block andMacMillan, 1993). Venturing can be internal orexternal, depending on whether the venture idea andrequired resources originate inside or outside firmboundaries (Sharma and Chrisman, 1999).
Keywords: external venturing; corporate venture capital;search; integration; qualitative*Correspondence to: Sanip Basu, Loomba Department of Man-agement, Zicklin School of Business, Baruch College, CityUniversity of New York, One Bernard Baruch Way, New York,N.Y. 10010, U.S.A. E-mail: [email protected]
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Strategic Entrepreneurship JournalStrat. Entrepreneurship J., ••: ••–•• (2015)
Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1206
Copyright © 2015 Strategic Management Society
In internal corporate venturing, new businessideas are generated and nurtured within the firm,often through autonomous efforts by lower-levelemployees rather than explicit top-down direction(Burgelman, 1985).1 In contrast, external venturinginvolves a deliberate search for new ideas andknowledge outside firm boundaries (Keil, 2004; Keilet al., 2008). Established firms typically pursueexternal venturing by partnering with and learningfrom young entrepreneurial ventures (Wadhwa andKotha, 2006), through dedicated units distinct fromthe mainstream organization (Dushnitsky, 2012).These external venturing units are tasked with theresponsibility of searching for new ventures that arewilling and potentially valuable partners (Keil,2004). Thus, the effectiveness of an external ventur-ing unit depends considerably on the efficacy of itsexternal search processes (Dushnitsky and Lenox,2005).
Research also suggests the extent to which exter-nal venturing units are effectively integrated withmainstream units complements their external searchefforts (Hill and Birkinshaw, 2014). External ventur-ing units act as boundary spanners between externalpartners and units within their parent firms (Keil,Autio, and George, 2008) and thereby face uniquechallenges in fostering knowledge sharing betweenthese parties (Puranam and Srikanth, 2007). Toperform their assigned role effectively, external ven-turing units must overcome the apathy or outrightresistance of mainstream units toward sharingresources with, or learning from, external venturepartners (Chesbrough and Rosenbloom, 2002).2
Effective integration of external venturing unitssecures cooperation for themselves and externalpartners from the mainstream organization,enhancing these units’ performance (Gaba andBhattacharya, 2012).
In sum, research demonstrates that external ven-turing can contribute to the renewal and resilience ofincumbent firms and is distinct from internal ventur-ing in important ways. Scholars have pointed out thatwhile it is important for external venturing units toengage in both search and integration, achieving
both simultaneously can be challenging. Focusingon external search can result in relative isolationfrom the mainstream organization (Chesbrough andRosenbloom, 2002; Sykes, 1990), while efforts atenhancing integration can detract from the unit’sprimary search mission (Hill and Birkinshaw, 2014).
Despite these contributions to our understanding ofexternal venturing, this literature is limited in twoimportant respects. First, while prior research hashighlighted the importance and challenges of searchand integration during external venturing, there islittle examination of the specific practices3 that allowventuring units to overcome these challenges. Priorresearch has typically highlighted effective searchprocesses without elaborating on how they may affectintegration or vice versa. Therefore, research has yetto identify how search and integration processes canwork in tandem without impeding each other. Forexample, Keil et al. (2008) identify particular prob-lems external venturing units face in searching forexternal ventures and in integrating with mainstreamunits, but do not explore how particular venturingpractices address these problems. Souitaris,Zerbinati, and Liu (2012) demonstrate trade-offsbetween structures that increase venturing units’legitimacy with external venturing audiences (facili-tating search) and those that increase legitimacy withinternal mainstream unit audiences (facilitating inte-gration). However, this study does not examine howthese inconsistencies can be resolved so that units canbe efficacious in search and integration. Similarly,Souitaris and Zerbinati (2014) identify and describeeight practices that differentiate corporate venturecapitalists (a particular form of external corporateventuring) from independent venture capitalists(VCs) but do not investigate which of these practicesaid search or integration and how.
Second, research has primarily focused on topmanagement initiatives that foster search and inte-gration (Dushnitsky and Shapira, 2010; O’Reilly andTushman, 2008). Scholars have highlighted howsenior managers who create specialized units also tryand find ways to integrate these units with the main-stream organization (Tushman and O’Reilly, 1996)4
1 For example, firms often create autonomous units such asincubators or skunk works to nurture internal ventures withstrategic potential but poor strategic fit with mainstream busi-nesses (Burgelman, 1985; Sykes, 1990).2 Mainstream units often lack incentives to work with new ideasor knowledge generated by external venturing units, view suchunits as a threat to their internal activities, and resist ideas thatare inconsistent with the organization’s dominant cognitiveframeworks and business logic.
3 Throughout this article, we use the terms practices and pro-cesses as synonyms.4 For example, an organization’s top management is responsiblefor ‘strategic integration,’ which consists of ‘a common strate-gic intent, an overarching set of values, and targeted structurallinking mechanisms to leverage shared assets . . . orchestratedby a senior team with a common fate incentive system and teamprocesses capable of managing these inconsistent alignments ina consistent fashion’ (O’Reilly and Tushman, 2008: 22–23).
2 S. Basu, C. C. Phelps, and S. Kotha
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., ••: ••–•• (2015)DOI: 10.1002/sej
and establish performance metrics and incentives toinfluence the search for external partners(Dushnitsky and Shapira, 2010). By emphasizing topmanagement’s role in integration and search,researchers have overlooked the potential for entre-preneurial agency by unit-level managers, particu-larly in the context of external venturing, toovercome the constraints and challenges of their cor-porate environment. While some recent studiesacknowledge the importance of integration initia-tives external venturing units undertake to build rela-tionships with the mainstream organization (e.g.,Hill and Birkinshaw, 2014), research is yet to high-light specific practices that unit-level managers canadopt in this regard.
We address these limitations by studying howexternal venturing units effectively achieve externalknowledge search and integration of their initiativeswith mainstream organizational units. We seek toidentify processes that help overcome the challengesof implementing search and integration in combina-tion. We examine an important type of external ven-turing unit, responsible for corporate venture capital(CVC) investments, to address our research ques-tion. CVC units are dedicated, specialized unitsof established firms that make minority equityinvestments in privately held entrepreneurial ven-tures (Dushnitsky and Lenox, 2005; Wadhwa andKotha, 2006). CVC investments allow corporateinvestors to access and learn about potentiallyvaluable or disruptive knowledge their portfoliocompanies are developing (Basu, Phelps, andKotha, 2011; Dushnitsky and Lenox, 2005).Therapid global growth in the pursuit of CVC by incum-bent firms over the past decade has been accompa-nied by increasing academic research on the topic(see Dushnitsky, 2012).
Given the lack of research into how and whyexternal venturing units achieve effective search andintegration, we conducted a qualitative, inductivestudy of 17 corporate venture capital units. Thisstudy extends substantive theory of CVC unit per-formance by explaining how unit-level processesdifferentially influence the efficacy of its search andintegration. In particular, we document a set of fivepractices that prior research has not adequatelyexamined, but which were found to have importantinfluences on either CVC unit search or integration.Our results suggest that CVC units that minimize thecomplexity of deal negotiations with ventures andprotect ventures’ strategic interests improve theirreputation among start-ups and VCs as attractive
investors. Units that evaluate and select venturesbased on an early stage of development increase thesearch benefits they offer their parent firms byhelping them probe potentially useful but uncertaintechnologies, markets, or business models beforerivals. Moreover, CVC units that help developexplicit collaborative blueprints between venturepartners and mainstream businesses create socialcontracts between the parties, thereby increasingventure integration. Finally, CVC units that avoidcompeting with mainstream units and frame theirrole as complementary reduce internal politicalresistance to their activities, resulting in more effec-tive unit integration.
Drawing from our data, we provide in-depthexplanations for how these processes enhanceaspects of search or integration and how they arecomplementary to each other as well as with otherfundamental practices. Therefore, our study high-lights how CVC units can overcome the trade-offs ofeffective search and integration and accomplish botheffectively. It also suggests the benefits of an orga-nizational configuration approach (Miller, 1996), inwhich variations in bundles of practices are respon-sible for favorable organizational outcomes ratherthan individual practices alone. Through our focuson micro-level practices adopted by unit managers,we highlight how these managers are required to beentrepreneurial and politically savvy to respond tocorporate contexts that are sometimes unfavorable.These insights are often counter to conventionalwisdom and have been largely overlooked by priorresearch.
THEORETICAL BACKGROUND
Prior research on CVC has been conducted at threelevels of analysis (Narayanan, Yang, and Zahra,2009). First, considerable research has focused onestablished firms’ motivations to engage in CVCactivity and the resultant outcomes to these firmsfrom such efforts (Basu et al., 2011; Dushnitsky andLenox, 2005; Gaba and Meyer, 2008). Second,researchers have examined ventures’ motivations forpursuing CVC relationships, how they manage therelationships with their investors, and how suchties affect venture performance (Dushnitsky andShaver, 2009; Katila, Rosenberger, and Eisenhardt,2008; Maula, Autio, and Murray, 2009). Finally,research has focused on CVC unit structures andpractices that enable them to function more effec-
Search and Integration in External Venturing 3
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., ••: ••–•• (2015)DOI: 10.1002/sej
tively (Hill et al., 2009; Souitaris et al., 2012; Yang,Narayanan, and Zahra, 2009). We elaborate on thelast research stream given its relevance to ourresearch question.
Search and integration in CVC units
Recent studies have examined CVC units’ searchactivities, that is, the formal role with which theseunits are tasked (Dushnitsky and Lenox, 2005). Animportant aspect of search is the generation ofinvestment opportunities. Some studies highlight thebenefits of ‘syndication’ or co-investing with otherinvestors such as independent VCs (Hill et al., 2009;Yang et al., 2009). Syndication partnerships are ben-eficial in increasing the ‘deal flow’ of potentialinvestment opportunities (Wright and Lockett, 2003)and, particularly for corporate investors, can help inlearning good investment practices from experiencedinvestors (Maula, Keil, and Zahra, 2013). While it isdifficult for CVC units to form these relationshipsinitially, they can gain legitimacy within the VCcommunity by mimicking its decision-making andcompensation practices (Souitaris et al., 2012). CVCunits can also access greater investment opportuni-ties by enhancing their reputations as valuable part-ners that nurture portfolio companies with criticalresources (Wadhwa and Basu, 2013).
CVC units’ search activities also involve selectionof ventures for investment from available opportuni-ties. Some studies highlight the importance of select-ing appropriate sectors in which to invest, proposingthat relatedness to the investor’s expertise (Keilet al., 2008) and the technological opportunities thatsectors offer (Dushnitsky and Lenox, 2005) shouldbe considered. Moreover, research examines howlearning from existing CVC relationships shouldalso inform subsequent selection criteria. Keil et al.(2008) characterized CVC relationships as a form of‘disembodied experimentation,’ wherein multipletrials with new technologies and business modelstake place outside the boundaries of the corporateinvestor, providing information about their potentialeconomic value.
Other studies have focused on the integrationapproaches that enable CVC units to fulfill their roleas knowledge brokers between parent firms and port-folio ventures. They suggest that effective CVC unitsshould monitor their investments through boardmemberships or observation rights (Wadhwa andKotha, 2006). Further, CVC units can facilitate inte-gration with mainstream units by emphasizing
knowledge sharing at the organizational level and bybuilding relationships with those units’ managersbased on trust and commitment (Weber and Weber,2011). CVC units may also sacrifice the pursuit oflegitimacy with VC firms to increase their legitimacywith internal mainstream units for more effectiveintegration (Souitaris et al., 2012).
In sum, research has typically examined howCVC units pursue either search or integration activi-ties and has highlighted the challenges of pursuingboth aspects simultaneously (Souitaris et al., 2012;Weber and Weber, 2011). However, we know littleabout how CVC units effectively manage search andintegration simultaneously, which is crucial to theirown survival and their parent firms’ renewal (Hilland Birkinshaw, 2014; Keil et al., 2008).
METHODS
We employed a qualitative, inductive researchapproach, which is appropriate for ‘how’ and ‘why’questions (Eisenhardt and Graebner, 2007) such asthose motivating our research. We sought to elabo-rate on ‘substantive’ theory—theory pertaining to aspecific context and phenomenon (Burgelman,2011)—of how and why CVC units achieve effect-ive search and integration. Theory elaboration isimplemented when preexisting conceptual ideasor a preliminary model drive a study’s design, andresults are contrasted with past findings throughdescription, interpretation, and explanation (Lee,1999).
Design and sample
Design
We used a multiple case design following ‘replica-tion’ logic where cases are analogous to experi-ments. Each case serves to confirm or disconfirm theinferences drawn from others (Yin, 1994). Thisapproach enables a broader exploration of theresearch question and a better grounding for theo-retical insights using empirical evidence (Eisenhardtand Graebner, 2007). Although our research ques-tion primarily addresses the level of the CVC unit,we employed an embedded design involving mul-tiple levels of analysis including the CVC unit andthe parent corporation, which increases the likeli-hood of inducing richer and more reliable theoreticalinsights (Yin, 1994). Multiple-case, embedded
4 S. Basu, C. C. Phelps, and S. Kotha
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., ••: ••–•• (2015)DOI: 10.1002/sej
designs have been adopted in prior research on CVCto study related research questions (Keil et al., 2008;Weber and Weber, 2011).
Sample
We sought to observe the CVC units of U.S.-basedfirms5 that exhibited maximum variation in certainobservable characteristics (Miles and Huberman,1994). Based on our reading of the CVC literature,we selected CVC units that varied by four observ-able characteristics: parent firm primary industry,parent firm size, CVC unit size, and age. Thisapproach helped examine any variances in CVC unitpractices in different contexts. To increase the like-lihood of finding contrasting patterns and polar dif-ferences in performance (Yin, 1994), we soughtcases that involved active CVC investors andrecently disbanded units. We used Thomson Finan-cial’s VentureXpert database to identify active orrecently inactive corporate investors that exhibitedvariation across these dimensions. Next, we con-tacted a senior manager at each CVC unit and invitedhim/her to be interviewed. If our initial contactdeclined, we contacted others in the same unit. Ifnone of the managers responded positively, weexpanded our list to other CVC units. Finally, weassembled a set of 17 cases (i.e., units)—13 activeand four recently disbanded. To ensure the samplewas consistent with our research question, we askedspecific questions to corroborate media reports thatall units had a primarily strategic mission involvingaccess to external knowledge. Our CVC unitspursued three types of strategic objectives: horizonscanning, gap filling, and ecosystem building, eachof which have been identified and described in priorliterature (Chesbrough, 2002; Kann, 2000).6
Descriptive information about our sample of CVCunits, their parent firms, and interview subjects isprovided in Table 1. We disguised unit names toprotect their identities.
Data collection and sources
Interviews
We conducted interviews in multiple waves from2006 to 2012. As Table 1 shows, our primary respon-dents were senior managers of active CVC units andformer senior managers of disbanded units. Theyrepresent ‘key informants’ who are highly knowl-edgeable about the phenomenon being studied(Kumar, Stern, and Anderson, 1993). To assess theperspectives of different internal stakeholders abouta particular CVC program, we also interviewedsenior managers from business units and corporatefunctions (e.g., R&D) at the parent organizations ofmany of the CVC units. These managers typicallyhad long tenures and technological backgrounds attheir respective firms. Therefore, our choice ofrespondents helped minimize recall problems thatcould potentially influence the results (Huber andPower, 1985).
Consistent with the theory-elaboration objective,we adopted a focused approach in which findingsfrom prior research guided the data collection andanalytical procedures (Eisenhardt, 1989). In particu-lar, because our motivation is to extend theory con-cerning the role of search and integration in externalcorporate venturing, our data collection efforts werefocused on, but not limited to, these specific aspectsof units’ activities. We developed a semi-structuredprotocol, with some variation among active and dis-banded unit managers and parent organization man-agers. Open-ended questions in the protocolconcerned the following areas of CVC unit opera-tions: (1) motivation and structure of the CVCprogram; (2) determinants of investment volume anddeal flow; (3) unit hiring and compensation prac-tices; (4) evaluation and selection of portfolio com-panies; (5) monitoring of investment relationships;and (6) evaluation of individual investment andprogram success. Interviews followed the ‘court-room’ procedure (Eisenhardt, 1989), focusing onfacts, concrete examples, and quantitative data,which are less subject to cognitive biases andimpression management than opinions or interpreta-tions (Huber and Power, 1985).7 Each interviewlasted one hour on average and was typicallyrecorded and transcribed. We did a total of 28 inter-views with a combined transcript length of 530pages. Of these, 17 were with current and former
5 U.S.-based units carry out the vast majority of CVC invest-ments (Dushnitsky, 2012). Sampling only these units also holdsthe influence of formal and informal national institutions con-stant.6 Most units had more than one type of objective. Twelve unitspursued horizon scanning, i.e., investing in ventures that weredeveloping technologies and business models that could poten-tially disrupt their parents’ products or technologies. Nine unitspursued gap filling, i.e., investing in ventures with knowledgetheir parents did not possess but needed in order to develop newproducts and processes. Three units pursued ecosystem build-ing, i.e., investing in ventures with complementary productsthat may enhance the demand for the parents’ products.
7 To encourage candor and accurate information, all subjectswere assured confidentiality and the opportunity to review andrevise the transcripts (Huber and Power, 1985).
Search and Integration in External Venturing 5
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., ••: ••–•• (2015)DOI: 10.1002/sej
Tabl
e1.
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ple
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ativ
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vest
men
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lum
e($
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ber
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item
ploy
ees
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rox.
)In
form
ants
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tst
atus
in20
06
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essi
veV
entu
res
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icon
duct
ors
1/2/
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1990
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ent
grou
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inci
pal
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itect
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rent
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ncip
alen
gine
erat
pare
nt
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ive
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lified
Ven
ture
sSe
mic
ondu
ctor
s1/
37,
526
1999
(3ad
hoc
inve
stm
ents
earl
ier)
200
(Com
mitm
ent
of50
0m
illio
n)In
itial
ly6
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erno
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6 S. Basu, C. C. Phelps, and S. Kotha
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., ••: ••–•• (2015)DOI: 10.1002/sej
CVC unit managers and 11 were from other perspec-tives (mostly parent firm managers, but also a fewportfolio company managers, co-investors, and com-peting firm managers).
Archival data
We supplemented interview data and follow-upe-mails with archival information about each CVCunit and corresponding parent firm. This informationwas collected from a variety of sources such asparent firm 10K statements, company Web sites,Factiva, Lexis-Nexis, and VentureXpert databases. Itincluded data on unit investment volumes and pat-terns, choices of sectors, motivations, rounds ofinvestments, and syndication activities. The supple-mentary data enriched informant statements, helpedclarify ambiguous statements, and confirmed inter-view data where applicable. Such diverse sourceshelped triangulate our primary data (Jick, 1979) andexamine them from multiple vantage points (Yin,1994).
Data coding and analysis
Following prior research (Eisenhardt and Graebner,2007; Miles and Huberman, 1994), we used a three-step analytical procedure, as described next:
Step 1: Within-case analysis to identify search andintegration processes
We treated all data about a sample CVC unit asconstituting a single case (Miles and Huberman,1994). We followed the practice of ‘constant com-parison’ (Strauss and Corbin, 1998) through cyclesof comparing basic coding of raw data with inducedhigher level abstractions. First, we carefully read theinterview transcripts and associated archival materi-als in order to ‘open code’ an informant’s responsesusing his/her own language (retaining words,phrases, terms, or labels offered by the informant).We tagged each passage that conveyed a particularpoint, thought, or idea with one or more codes thatreflected what the informant was describing. Next,we reduced the dimensionality of these open codesby constructing first-order processes (Strauss andCorbin, 1998). Finally, first-order processes weregrouped into broad activity themes that involved acritical aspect of search or integration. The mappingand clustering of codes and processes involvednumerous iterations until we reached ‘theoretical
saturation’ (Miles and Huberman, 1994) where nonew theoretical categories emerged from the last fewcases studied.
Step 2: Evaluating performance outcomes foreach case
Research suggests that high performing CVC unitspositively affect diverse stakeholders and maintainfavorable relationships with these stakeholders(Bassen et al., 2006; Hill and Birkinshaw, 2014).Thus, we sought to capture the nature of our units’relationships with three important sets of stakehold-ers: the parent firm’s top management, business unitpersonnel, and investing partners, each of whom isvital to the units’ continuance (Hill and Birkinshaw,2014). Observations by unit managers (and parentfirm managers wherever applicable) on relationshipswith these critical stakeholders were used to evaluateeach unit’s performance in fulfilling its strategicmission.
We identified four strong performers based onrespondents’ observations of favorable relationshipswith all three stakeholders: Impressive, Qualified,Momentous, and Leading Ventures. We also identi-fied three weak performers where respondentsreported unfavorable relationships with each of thesestakeholders: Booming, Advanced, and KnockoutVentures. The remaining units, which had mixedassessments, were treated as average performers.
In 2006 (when we conducted our initial inter-views), the four strong performers had been activefor five to 16 years, and their cumulative investmentsranged from $80 million to $3 billion. In contrast,two of our weak performers, Booming andAdvanced, had been disbanded recently. The thirdunit, Knockout, was still active and had accumulatedinvestments of around $100 million, but annualinvestment volumes were volatile and the unit wasoften on the verge of termination.8
The strong and weak performers are highlightedin Table 2, along with representative quotes regard-ing their relationships with the three types of impor-tant stakeholders.
We also attempted to confirm our categorizationsof strong, average, and weak performers using archi-val data to evaluate the extent to which the CVC
8 The unit was terminated in 2012 as we were working onsubsequent revisions, which increased our confidence in thepredictive reliability of our evaluative approach. The respon-dents from the other two disbanded units reported mixed out-comes and suggested that closure might have occurred forreasons other than performance.
Search and Integration in External Venturing 7
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., ••: ••–•• (2015)DOI: 10.1002/sej
Tabl
e2.
Stro
ngan
dw
eak
perf
orm
ing
units
Uni
tO
bser
ved
perf
orm
ance
Rep
rese
ntat
ive
quot
es
Top
man
agem
ent
rela
tions
hip
Bus
ines
sun
itre
latio
nshi
pE
xter
nal
part
ner
rela
tions
hip
Impr
essi
veSt
rong
Posi
tive
Posi
tive
Posi
tive
‘[O
urm
anag
emen
t]w
asve
rycl
ear
abou
tm
aint
aini
ngou
rin
vest
men
tpa
cean
dqu
ite
publ
icin
thei
rvi
ewth
atth
eri
ght
tim
eto
inve
stis
duri
ngdo
wn
cycl
es.
We
wer
eco
ncer
ned
abou
tw
here
inno
vati
onw
asgo
ing
toco
me
from
,whi
chis
ulti
mat
ely
wha
tdr
ives
our
indu
stry
,and
we
wer
eno
tgo
ing
tole
tup
.’
‘We’
revi
ewed
aski
ndof
anho
nest
info
rmat
ion
brok
erso
urce
for
the
com
pany
.Peo
ple
wan
tto
talk
tous
all
ofth
eti
me
toge
ta
sens
eof
wha
t’s
goin
gon
out
ther
ein
the
mar
ketp
lace
whi
chth
eym
ight
bem
issi
ng.’
‘Our
mos
tim
port
ant
sour
ceof
qual
ity
deal
sis
our
entr
epre
neur
ial
netw
ork.
Thi
sco
nsis
tsof
prov
enen
trep
rene
urs
that
we’
vew
orke
dan
din
vest
edw
ith
inth
epa
st.’
Qua
lified
Stro
ngPo
sitiv
ePo
sitiv
ePo
sitiv
e‘N
owit
’sa
situ
atio
nw
here
not
only
isth
ere
ast
rate
gic
need
tosu
stai
nth
isac
tivi
ty,b
utpe
ople
are
actu
ally
very
happ
yab
out
the
resu
lts
ofth
is.A
ndbe
caus
eof
that
,[w
e]w
ant
toco
ntin
ueth
isac
tivi
ty.’
‘The
busi
ness
unit
sw
ere
part
ofhe
lpin
gus
bols
ter
our
case
that
aco
mpa
nyw
asst
rate
gic
to[t
hepa
rent
’s]
need
s.A
ndth
enth
eyw
ould
also
help
uson
the
part
ners
hip
side
,whe
ther
itw
asa
code
velo
pmen
tty
pepa
rtne
rshi
por
ach
anne
lpa
rtne
rshi
p.’
‘In
the
wir
eles
sco
mm
unic
atio
nva
lue
chai
n,w
ew
ere
ave
ryne
utra
lpa
rty.
So,f
orex
ampl
e,pa
rtne
ring
wit
hus
wou
ldno
tpr
eclu
depa
rtne
ring
wit
h[t
hepa
rent
’sri
vals
].So
we
play
edon
that
neut
rali
ty.W
ew
ere
the
Swit
zerl
and
ofth
eva
lue
chai
n.’
Mom
ento
usSt
rong
Posi
tive
Posi
tive
Posi
tive
‘Iha
veen
dors
emen
tat
the
very
top
ofth
eco
rpor
atio
n.W
eha
vea
CE
Ow
hois
wel
law
are
ofth
eur
genc
yan
dth
esp
eed
and
inno
vati
onth
atca
nbe
real
ized
via
thes
eou
tsid
ein
vest
men
ts;
and
soa
grea
tap
prec
iati
onfo
rw
hat
itis
that
we
doan
da
grea
tin
tere
stin
it.’
‘Iw
ould
say
[the
busi
ness
unit
s]ar
eve
ryde
eply
invo
lved
.Whe
nth
ere
isa
spec
ific
prod
uct
link
age,
Iw
ant
tom
ake
sure
they
have
near
day-
to-d
ayvi
sibi
lity
.My
team
spen
dsm
ost
ofit
sti
me
outs
ide
the
wal
lsof
the
gard
enar
eabu
tul
tim
atel
yth
attr
acti
on[h
as]
tota
kepl
ace
insi
dean
dth
atre
ally
isde
pend
ent
upon
ast
rong
rela
tion
ship
wit
hth
ebu
sine
ssun
its.
’
‘Isi
ton
the
vent
ures
’bo
ards
asa
[par
ent]
inve
stor
soI
have
tona
viga
tebo
thsi
des
ofev
eryt
hing
.But
itre
ally
has
been
desi
gned
tobe
aw
in-w
in;
soth
atth
eco
mpa
nies
Iin
vest
inw
inas
wel
las
[the
pare
nt].
Ith
ink
we’
vedo
nea
pret
tygo
odjo
bof
that
.’
Lea
ding
Stro
ngPo
sitiv
ePo
sitiv
ePo
sitiv
e‘T
hevi
cepr
esid
ents
ofch
emis
try
and
biol
ogy,
disc
over
y,et
cete
ra,i
n[t
hepa
rent
com
pany
]ar
eke
enly
inte
rest
edin
the
expl
ore
side
ofou
rin
vest
men
ts.T
hey
see
the
vent
ure
capi
tal
grou
pas
bein
ga
grea
tw
ayfo
rth
emto
expl
ore
new
area
sof
rese
arch
ina
very
leve
rage
dw
ay.’
‘We
foun
dth
isli
ttle
com
pany
and
brou
ght
itto
[our
rese
arch
ers’
]at
tent
ion,
and
soyo
ukn
ow,w
ew
ere
very
muc
hth
eex
tra
set
ofey
esan
dea
rsfo
rth
em.O
nth
eot
her
hand
,thi
sco
mpa
nyth
atw
e’re
look
ing
atri
ght
now
was
brou
ght
toou
rat
tent
ion
byso
me
ofou
rea
rly-
stag
edi
scov
ery
chem
ists
who
said
‘you
know
,the
re’s
this
real
lybr
ight
guy
inA
ustr
alia
,and
hede
sper
atel
yne
eds
fund
ing.
’’
‘We
have
alw
ays
dem
ande
dth
atif
ther
eis
anas
set
wit
hin
apo
rtfo
lio
com
pany
that
’sop
enfo
rbe
ing
lice
nsed
,tha
tso
meb
ody
pick
upth
eph
one
and
call
som
eone
at[t
hepa
rent
].W
hen
Isa
y‘d
eman
ded,
’it
’spr
obab
lya
stro
ngte
rmbe
caus
ew
e’ve
neve
rha
dan
yone
inou
rpo
rtfo
lio
com
pani
esw
ho’s
anyt
hing
othe
rth
ande
ligh
ted
[to
doso
].’
Boo
min
gW
eak
Neg
ativ
eN
egat
ive
Neg
ativ
e‘B
ehin
dth
esc
enes
,peo
ple
wer
ego
ing
toth
ech
airm
anan
dth
eC
TOan
dw
hisp
erin
gin
thei
rea
rsbe
caus
eev
eryb
ody
had
thei
rdi
ffer
ent
agen
das.
Whe
nth
ose
guys
disa
ppea
red
beca
use
ofot
her
prob
lem
s,th
ere
was
nobo
dyto
man
age
the
fam
ily
disp
utes
,and
that
’sw
hen
thin
gsre
ally
got
ugly
.’
‘Mos
tof
the
prod
uct
divi
sion
sre
sent
edus
and
wer
eje
alou
s.T
hey
actu
ally
view
edus
asa
tax.
We
wer
esp
endi
ngtr
easu
rym
oney
,whi
chis
mon
eyth
eyge
nera
ted,
and
we
wou
ldn’
tbe
inth
eto
p10
thin
gsth
eyw
ould
spen
dm
oney
onif
they
had
avo
te.’
‘Bec
ause
we
wer
ebi
g,[t
heV
Cs]
neve
rtr
uste
dus
.So
ifit
wen
tw
ell,
they
’dsa
y,‘W
ell,
that
wor
ked
out
bett
erth
anw
eth
ough
tit
wou
ld.’
And
ifit
didn
’tw
ork
out
they
’dsa
y,‘S
ee,w
eth
ough
tit
wou
ldn’
t.’’
Adv
ance
dW
eak
Neg
ativ
eN
egat
ive
Neg
ativ
e‘I
fyo
uta
lkto
a[p
aren
t]pa
rtne
r,m
ost
ofth
emw
ould
prob
ably
say,
‘Ido
n’t
thin
kw
edi
dal
lth
atw
ell
[in
CV
Cin
vest
ing]
.’I
was
aske
dth
atqu
esti
onsi
xm
onth
sag
oby
our
CE
O.
‘Aco
uple
guys
athe
adqu
arte
rsst
art
tell
ing
the
prac
tice
,‘O
kay,
here
’sth
eso
luti
on[f
rom
apo
rtfo
lio
com
pany
]w
e’re
goin
gto
use.
’A
ndou
rpr
acti
ceis
abu
nch
offr
ee,i
ndep
ende
ntgu
ysw
hoar
ego
ing
tosa
y,‘B
ulls
hit.
Nob
ody
tell
sm
ew
hat
todo
.I’m
goin
gto
pick
the
best
solu
tion
that
Ide
emfit
for
this
clie
nt.’
Sow
eal
way
sha
dth
isba
ttle
goin
gon
for
abou
tfo
uror
five
year
son
that
fron
t.’
‘Oft
enti
mes
our
port
foli
oco
mpa
nies
wer
edi
sapp
oint
edth
atev
enth
ough
they
crac
ked
the
vent
ure
orga
niza
tion
,it
was
very
diffi
cult
tocr
ack
the
cons
ulti
ngor
gani
zati
on.’
Kno
ckou
tW
eak
Neg
ativ
eN
egat
ive
Neg
ativ
e‘W
e’ve
neve
rha
dst
rong
ersu
ppor
t[t
han
the
pres
ent]
beca
use
we
alm
ost
died
man
yti
mes
,bel
ieve
me.
’‘[
Tens
ion
wit
hR
&D
grou
ps]
isre
ally
,rea
lly
aho
tbu
tton
arou
ndhe
re.I
t’s
alm
ost
that
the
long
erI
drag
my
proj
ect
out
inth
ere
sour
ces
labs
,the
high
erpr
obab
ilit
yI
have
ofgu
aran
teed
empl
oym
ent.
Why
inth
ew
orld
wou
ldI
ever
goou
tsid
e?T
hat
alon
gw
ith
the
arro
ganc
eof
are
sear
cher
who
wil
lne
ver
adm
itth
atyo
uco
uld
get
itou
tsid
ebe
tter
.So
we
stru
ggle
wit
hth
ata
lot.’
‘We’
reex
pert
sin
our
indu
stry
,but
we
not
goin
gto
brin
gan
expe
rtne
cess
aril
yfr
omso
me
othe
rin
dust
ryto
help
the
com
pany
,per
se.S
omet
imes
othe
rpe
ople
are
conc
erne
dth
atif
you
have
apo
tent
ial
cust
omer
asan
inve
stor
,the
not
her
cust
omer
sw
hoar
eco
mpe
titi
vew
ith
the
inve
stor
mig
htno
tco
me
thei
rw
ay.’
8 S. Basu, C. C. Phelps, and S. Kotha
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., ••: ••–•• (2015)DOI: 10.1002/sej
units were able to transfer knowledge to and fromportfolio firms.9 Building on prior research (e.g.,Gomes-Casseres, Hagedoorn, and Jaffe, 2006), weused patent cross-citations to measure interfirmknowledge transfer. We collected bibliometric dataon all U.S. patents issued from 2001 to 2006 (the fiveyears prior to when we conducted our first round ofinterviews) to parent firms and their portfolio com-panies. Inbound knowledge transfer from a portfoliocompany was assumed when the focal corporateinvestor’s patents cited the portfolio company’spatents (at least once) after the investor’s initialinvestment. Outbound knowledge transfer to a port-folio company was assumed when the portfolio com-pany’s patents cited the patents owned by thecorporate investor (at least once). Parent companiesof the strongly performing units generated inboundlearning from 17 percent of their portfolio firms,while 27 percent of portfolio firms garnered out-bound learning from these parents, which were sig-nificantly higher than corresponding figures for theaverage and weak performers. In contrast, weaklyperforming units’ parents generated inbound learn-ing from 7 percent of their portfolio firms, while 11percent of the portfolio firms garnered outboundlearning from the parents. Both values were signifi-cantly lower than those for the strong and averageperformers.
Step 3: Cross-case analyses usingpredictor-outcome matrices
Finally, we created ‘case-ordered predictor-outcomematrices’ (Miles and Huberman, 1994) to discernsimilarities and differences in adoption of processesamong strong and weak performers. A focused com-parison of only the polar cases enabled clearer con-trasts to emerge and stronger inferences to be made(Yin, 1994). This exercise allowed us to identify keysearch and integration processes that appear toenhance unit performance (cf. Weber and Weber,2011, for a similar approach). We also examined howaverage performers adopted these processes in com-bination. Throughout our analyses, we developedcausal explanations for the observed relationships bytheorizing about underlying mechanisms, consider-
ing existing evidence, and checking respondents’explanations for any linkages (Miles and Huberman,1994).
FINDINGS: IMPORTANTUNIT PROCESSES
As discussed earlier, we first conducted within-caseanalyses to identify all search and integration pro-cesses adopted by units. This approach helped usuncover processes related to generating and select-ing venture investment opportunities (aspects of aunit’s search mission) and integrating specific ven-tures as well as overall unit activities with the main-stream. We summarize the primary links betweenthese practices and the different dimensions ofsearch and integration in Figure 1. We subsequentlydiscuss how some practices have secondary linkswith other aspects of search and integration.
After identifying the strong, weak, and averageperformers as reported earlier, we conducted cross-case analyses to identify patterns in the adoption ofeach search and integration process. The results ofthese analyses are presented as a case-ordered matrixin Table 3, depicting the use of all observed searchand integration practices by each sample unit,arrayed by unit performance.
Based on differences in adoption among sampleunits, we identified three types of unit-level pro-cesses that are also depicted in Figure 1. Four of thesearch processes and two integration processes wereadopted by all units and were, therefore, termed asuniversal processes. Most CVC managers probablyunderstand the benefits of these processes, resultingin their widespread adoption. Consequently, theseprocesses appear to be necessary but not sufficient toensure that a unit stands out as a strong performer.Our findings also highlighted a few contingent pro-cesses, of which one was in search and two in inte-gration. For these processes, the links to unitperformance appear to be ambiguous since somestrong units did not adopt these processes and someweak units did. While these processes perhaps helpunit performance in certain situations, they mayimpede performance in others.
While we briefly describe all identified universaland contingent processes in this section for the sakeof completeness, we focus particularly on a thirdtype of unit-level process, which all the strong per-formers but none of the weak performers had
9 Both inbound and outbound knowledge transfers are central tothe performance of a CVC unit (Basu et al., 2011). Whileinward learning is necessary to realize investor strategic objec-tives (Wadhwa and Kotha, 2006), outbound knowledge transferindicates an investor’s ability to nurture portfolio firms and,thereby, realize long-term collaborative goals (Keil et al.,2008).
Search and Integration in External Venturing 9
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., ••: ••–•• (2015)DOI: 10.1002/sej
adopted.10 Therefore, processes of this type, whichwe term differentiating, appear to be strongly relatedto CVC unit performance. We identified three differ-entiating search and two differentiating integr-ation processes. The qualitative evidence for the dif-ferences in adoption of these processes betweenstrong and weak performers is provided in Tables 4and 5.
Search processes
The formal role of a CVC unit is to search for newinvestment opportunities (Dushnitsky and Lenox,2005). Effectively doing so ensures that valuableknowledge from portfolio firms is available to main-stream units and complements their internal compe-tencies (Chesbrough, 2002). As vital aspects of the
search function (Siggelkow and Levinthal, 2003), wefound that CVC units adopted processes that helpedin both generating adequate venture investmentopportunities and selecting ventures for investment.All three types of processes—universal, contingent,and differentiating—were among the search pro-cesses observed.
Opportunity generation
We observed two universal processes, adopted by allunits, for generating new investment opportunities.The first such fundamental approach was syndica-tion with traditional VCs, that is, investing in part-nership with such investors. This practice enabledunits to gain visibility and legitimacy within theinvestor community and consequently increase dealflow. As the manager of Productive Venturesasserted:
‘We also happen to be a pretty nice syndicationpartner because we invest relatively small amounts.
10 We found evidence that either a weakly performing unit hadnot adopted a particular process or no evidence to show it hadadopted the process, whereas we found strong evidence for theadoption of each process by all strongly performing units.
Opportunity generation
CVC Unit Search
Reduction of deal complexity
Protection of venture interests
Lead investor role
Evaluation of venture potential
Focus on thematic areas
Commitment to early-stage ideas
Advisory role to parent management
Development of collaborative blueprints
Mainstream assistance in selection
Avoidance of competitive postures
Unit-generic integration
Going alonePricing the dealPutting together the syndicate
Closing the deal fasterReducing terms and conditions
Providing technological assistanceProviding sales/ marketing assistance
Safeguarding ventures’ IPAvoiding competing investments
Coinvesting with VCs and private investors
Evaluating usefulness of technologyEvaluating capabilities of team
Evaluating complementaritiesUsing strategic planning
Investing in young start-upsMaking follow-on investments
Creating business agreement during investmentNominating relevant personnel as board observers
Seeking board membership or observation rights
Advising parent management on technological and market trends
Rotating personnel from mainstream divisionsPromoting mainstream personnel
Emphasizing low size and powerNot investing in substitutes for internal technologies
Getting strategic value vettedFollowing-up on leads
Opportunity generation
Opportunity selection
CVC unit search
Syndication with VCs
Nurturing orientation
Formal governance mechanisms
Mainstream assistance in selection
Recruitment of internal personnel
Venture-specific
integration
CVC unit integration
Underlying codes First-order processes Broad ac� sedocgniylrednUsessecorpredro-tsriFsemehtytiv
Differen�a�ng process Universal process Con�ngent process
Figure 1. Framework of CVC unit search and integration processes
10 S. Basu, C. C. Phelps, and S. Kotha
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., ••: ••–•• (2015)DOI: 10.1002/sej
Tabl
e3.
Cas
e-or
dere
dm
atri
xof
sear
chan
din
tegr
atio
npr
oces
ses
Sear
chIn
tegr
atio
n
Opp
ortu
nity
gene
ratio
nO
ppor
tuni
tyse
lect
ion
Ven
ture
-spe
cific
inte
grat
ion
Uni
t-ge
neri
cin
tegr
atio
n
CV
Cun
itna
me
Synd
icat
ion
with
VC
sL
ead
inve
stor
role
Nur
turi
ngor
ient
atio
nR
educ
tion
ofde
alco
mpl
exity
Prot
ectio
nof
vent
ure
inte
rest
s
Eva
luat
ion
ofve
ntur
epo
tent
ial
Focu
son
them
atic
area
s
Com
mitm
ent
toea
rly-
stag
eid
eas
Form
algo
vern
ance
mec
hani
sms
Mai
nstr
eam
assi
stan
cein
sele
ctio
n
Col
labo
rativ
ebl
uepr
ints
Adv
isor
yro
leto
man
agem
ent
Avo
idan
ceof
com
petit
ive
post
ures
Rec
ruitm
ent
ofin
tern
alpe
rson
nel
Stro
ngpe
rfor
mer
sIm
pres
sive
**
**
**
**
**
**
*Q
ualifi
ed*
**
**
**
**
**
**
Mom
ento
us*
**
**
**
**
**
**
Lea
ding
**
**
**
**
**
**
**
Ave
rage
perf
orm
ers
Mas
terf
ul*
**
**
**
**
*A
uspi
ciou
s*
**
**
**
**
**
Glo
riou
s*
**
**
**
**
**
**
Ulti
mat
e*
**
**
**
**
**
Joyo
us*
**
**
**
**
Prod
uctiv
e*
**
**
*D
ynam
ic*
**
**
**
**
**
*A
ccom
plis
hed
**
**
**
**
**
**
Bou
ntif
ul*
**
**
**
**
**
Inno
vativ
e*
**
**
**
Wea
kpe
rfor
mer
sB
oom
ing
**
**
**
**
Adv
ance
d*
**
**
**
**
Kno
ckou
t*
**
**
**
*To
tal
adop
tion
s17
1117
99
1717
917
117
1710
12
*A
dopt
edby
unit
Search and Integration in External Venturing 11
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., ••: ••–•• (2015)DOI: 10.1002/sej
Tabl
e4.
Dif
fere
ntia
ting
sear
chpr
oces
ses
Asp
ect
ofse
arch
Proc
ess
Ado
ptio
nby
stro
ngpe
rfor
mer
sA
dopt
ion
byw
eak
perf
orm
ers
Opp
ortu
nity
gene
ratio
nR
educ
tion
ofde
alco
mpl
exity
Impr
essi
ve,Q
ualifi
ed,M
omen
tous
,Lea
ding
—Y
esB
oom
ing,
Adv
ance
d,K
nock
out—
No
Impr
essi
ve:
‘We
typi
call
yhe
ard
[fro
mve
ntur
es]
that
our
deal
proc
ess
isto
oco
mpl
ex,w
eha
vea
lot
ofte
rms
and
cond
itio
ns.I
thin
kw
e’re
addr
essi
ngan
dge
ttin
ga
lot
bett
erat
[the
sear
eas]
.’B
oom
ing:
‘To
avoi
dlo
sing
the
abil
ity
toco
ntro
lor
influ
ence
asow
ners
hip
dilu
tes,
I’d
nego
tiat
eth
ings
like
war
rant
san
dth
ings
,so
ifth
eth
ing
was
goin
gw
ell
we
coul
dta
kem
ore
in.’
Qua
lifie
d:‘W
ene
ver
trie
dto
inse
rtco
ntra
ctua
lcl
ause
sfo
rpr
ivil
eged
acce
ss.A
ndac
tual
lyth
atw
asde
libe
rate
beca
use
Iha
ddo
neen
ough
rese
arch
thro
ugh
vari
ous
mea
nsto
know
how
that
kind
ofan
appr
oach
ispe
rcei
ved
byth
ein
vest
men
tco
mm
unit
yan
dby
the
com
pani
esth
emse
lves
.’
Adv
ance
d:‘S
oif
we
had
anop
port
unit
yth
atth
epr
acti
cesa
id,‘
Wow
,thi
sis
real
lyco
ol,’
Isa
id,‘
Wel
l,I’
llte
llyo
uw
hat,
ther
e’s
aw
ayof
mak
ing
even
mor
em
oney
onth
is:
we’
llha
veto
doa
war
rant
stru
ctur
eso
we
can
exte
ndth
eva
lue
ofth
eca
shin
vest
men
t.’’
Mom
ento
us:
‘Con
trac
tual
term
sli
keth
eri
ght
tofir
stre
fusa
lis
rare
[for
the
unit
]be
caus
eth
eycr
eate
afin
anci
alim
pedi
men
tto
the
com
pany
and,
quit
efr
ankl
y,m
ost
com
pani
esw
on’t
sign
them
.’
Kno
ckou
t:‘W
epu
tin
the
righ
tto
part
icip
ate
shou
ldth
ere
bea
chan
geof
cont
rol,
such
asan
acqu
isit
ion
kind
ofth
ing.
At
tim
es,w
eca
n’t
alw
ays
get
abo
ard
seat
orob
serv
erse
at,s
ow
eha
vedo
nesi
dele
tter
sw
here
we’
llas
kfo
rth
ebo
ard
info
rmat
ion
sepa
rate
.’L
eadi
ng:
‘We
try
not
toin
sert
any
sort
ofpr
efer
enti
alco
ntra
ctua
lla
ngua
gein
the
term
shee
tbe
caus
ew
eth
ink
that
has
ate
nden
cyto
redu
ceth
eva
lue
ofan
asse
tfr
oman
econ
omic
sst
andp
oint
.’Pr
otec
tion
ofve
ntur
ein
tere
sts
Impr
essi
ve,Q
ualifi
ed,M
omen
tous
,Lea
ding
—Y
esB
oom
ing—
No,
Adv
ance
d,K
nock
out—
Not
indi
cate
dIm
pres
sive
:‘W
etr
yno
tto
have
[the
port
foli
oco
mpa
nies
]be
dire
ctly
com
peti
tive
.If
anex
isti
ngpo
rtfo
lio
com
pany
stro
ngly
obje
cts,
we’
llgo
mee
tw
ith
them
totr
yan
dfig
ure
out
ifw
eca
ndo
this
ina
way
that
isn’
ta
prob
lem
orno
tdo
the
deal
.’Q
uali
fied:
‘We
wou
ldno
tin
vest
inco
mpe
tito
rsof
our
port
foli
oco
mpa
ny.W
ew
ere
very
loya
lto
the
com
pany
that
we
inve
sted
in.S
oth
atcr
eate
da
repu
tati
onof
thes
eco
mpa
nies
wan
ting
toha
veus
onas
anin
vest
orve
rsus
look
ing
atus
asa
sort
ofne
cess
ary
evil
.’
Boo
min
g:‘C
lear
ly,i
tw
asa
cont
rol
issu
e[f
orth
eve
ntur
es].
Wou
ldou
rbu
reau
crac
yan
dou
rm
anag
emen
tsu
ppor
tth
ese
thin
gs,o
rat
the
sam
eti
me,
wou
ldth
eyst
ayaw
ay?
And
,of
cour
se,l
egal
wou
ldco
me
inan
dsa
y,‘W
ell,
no,
we
can’
tst
ayou
tof
thei
rha
irbe
caus
ew
eha
vea
lega
lre
spon
sibi
lity
.’’
Mom
ento
us:
‘We
don’
tw
ant
toin
vest
inth
ings
that
we
have
confl
ict
wit
h.W
ete
llpe
ople
,‘if
you
don’
tha
veth
ein
tell
ectu
alpr
oper
tyon
som
ethi
ngye
t,[w
e]do
n’t
wan
tto
see
it.’
’L
eadi
ng:
‘We
wil
lqu
ite
cons
ciou
sly
segr
egat
epe
ople
who
are
invo
lved
inou
rac
tivi
ties
.Wit
hre
spec
tto
inte
llec
tual
prop
erty
,we
real
lyne
ver
let
[par
ent]
peop
lelo
okat
the
pate
ntap
plic
atio
nsor
anyt
hing
like
that
,we
use
outs
ide
pate
ntco
unse
lfo
rth
at.’
Opp
ortu
nity
sele
ctio
nC
omm
itmen
tto
earl
y-st
age
idea
s
Impr
essi
ve,Q
ualifi
ed,M
omen
tous
,Lea
ding
—Y
esB
oom
ing—
Part
ial,
Adv
ance
d—N
o,K
nock
out—
Not
indi
cate
dIm
pres
sive
:‘F
ora
reas
onab
lyhe
alth
ypo
rtio
nof
our
deal
s,w
eca
nlo
okat
som
ethi
ngan
dsa
y,’
that
thin
gre
ally
look
sli
keit
has
seri
ous
long
-ter
mpo
tent
ial.’
And
we’
rere
lati
vely
pati
ent
mon
eyas
long
asth
eco
mpa
nyis
prog
ress
ing
and
mov
ing
and
doin
gth
eth
ings
that
mak
ese
nse.
We
can
stic
kw
ith
it.’
Boo
min
g:‘W
ene
ver
wen
tbe
yond
anA
roun
d.O
nce
you
get
toan
Aro
und,
othe
rin
vest
ors
are
com
ing
inan
dyo
urow
ners
hip
isdi
luti
ng.Y
ou’r
elo
sing
the
abil
ity
toco
ntro
lor
influ
ence
.’
Qua
lifie
d:‘W
ew
ould
ofte
nfo
cus
onSe
ries
Aro
unds
sinc
ew
ew
ould
look
atco
mpa
nies
wit
hco
rean
ddi
srup
tive
tech
nolo
gies
.We
wou
ldbe
able
tobe
tter
asse
ssus
ing
our
inte
rnal
tech
nica
lre
sour
ces
and
the
tech
nica
lm
erit
thes
ein
vest
men
tsha
d.B
ySe
ries
B,I
wou
ldex
pect
the
com
pany
toha
vea
prot
otyp
ean
da
wel
lth
ough
tou
tbu
sine
ssor
go-t
o-m
arke
tpl
an.’
Adv
ance
d:‘S
ow
efe
ltth
atw
eco
uld
get
inea
rlie
rre
lati
onsh
ips
wit
hth
ese
com
pani
esas
anin
vest
or,a
sop
pose
dto
ast
rate
gic
part
ner,
sim
ply
beca
use
asan
Aor
Bro
und
inve
stor
,the
ydo
n’t
have
am
arke
tabl
epr
oduc
t.T
he[p
aren
t]co
nsul
ting
busi
ness
isno
tgo
ing
tore
com
men
dto
our
clie
nts
nonm
arke
tpr
oven
solu
tion
s.So
that
was
the
dile
mm
aan
dth
at’s
the
appr
oach
we
took
.’M
omen
tous
:‘O
fth
e[s
elec
tion
crit
eria
]th
atm
atte
r,N
o.1
isth
ete
chno
logy
.Wil
lit
fitso
mew
here
orin
ters
ect
wit
h[t
hepa
rent
]so
me
day?
Tha
t’s
wha
tke
ptus
out
ofdo
t-co
min
vest
ing,
and
we’
reth
ankf
ul.I
nm
any
inst
ance
s,w
eas
kou
rsel
ves
wha
tw
eco
uld
dofo
r[t
hepa
rent
]th
ree
tofo
urye
ars
out.’
Lea
ding
:‘S
trat
egic
ally
our
inte
rest
isin
seei
ngen
ough
earl
y-st
age
inno
vati
onge
tfu
ndin
g.So
we’
retr
ying
tom
ake
clos
eral
lian
ces
wit
hth
efe
wve
ryea
rly-
stag
ein
vest
ors
that
rem
ain
inth
eli
fesc
ienc
es,a
ndw
e’re
tryi
ngto
esta
blis
hso
me
capa
bili
tyfo
rou
rsel
ves
ther
e.’
12 S. Basu, C. C. Phelps, and S. Kotha
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., ••: ••–•• (2015)DOI: 10.1002/sej
Tabl
e5.
Dif
fere
ntia
ting
inte
grat
ion
proc
esse
s
Asp
ect
ofin
tegr
atio
nPr
oces
sA
dopt
ion
byst
rong
perf
orm
ers
Ado
ptio
nby
wea
kpe
rfor
mer
s
Ven
ture
-spe
cific
inte
grat
ion
Dev
elop
men
tof
colla
bora
tive
blue
prin
t
Impr
essi
ve,Q
ualifi
ed,M
omen
tous
,Lea
ding
—Y
esB
oom
ing—
Not
indi
cate
d,A
dvan
ced,
Kno
ckou
t—N
oIm
pres
sive
:‘I
t’s
rela
tive
lyco
mm
onfo
rou
rde
als
toha
vea
busi
ness
agre
emen
tco
mpo
nent
invo
lvin
gth
ebu
sine
ssun
its.
We
gene
rall
ydo
itup
fron
tbe
caus
ew
ekn
oww
e’re
doin
git
.B
ecau
se,q
uite
fran
kly,
your
nego
tiat
ing
posi
tion
once
the
deal
isdo
neis
sign
ifica
ntly
less
than
that
whe
nyo
u’re
into
it.’
Qua
lifie
d:‘O
neof
the
thin
gsth
atth
eve
ntur
egr
oup
did
was
deve
lop
fair
lyde
epre
lati
onsh
ips
wit
hth
eco
mpa
nies
that
we
inve
sted
in.T
hebu
sine
ssde
velo
pmen
tas
pect
ofit
was
impo
rtan
tfo
rus
rega
rdle
ssof
whe
ther
we
mad
eth
ein
vest
men
tor
not.
And
so,g
oing
in,w
ew
ould
beve
ryfo
cuse
don
the
rela
tion
ship
,the
alli
ance
aspe
ctof
it.’
Adv
ance
d:‘N
ow,w
hen
itgo
tin
todo
ing
alli
ance
san
dth
ings
like
that
,we
wer
eve
ryca
refu
lto
draw
ali
ne.
Hav
ing
run
the
alli
ance
func
tion
,Iw
asno
tgo
ing
todi
ctat
eth
at‘b
ecau
sew
edi
dan
inve
stm
ent
we’
llha
vean
alli
ance
.’’
Mom
ento
us:
‘In
man
yin
stan
ces,
the
pros
pect
ive
hold
erof
the
com
mer
cial
agre
emen
tw
ill
beth
ere
leva
ntob
serv
er..
.bec
ause
trac
tion
[has
]to
take
plac
ein
side
and
that
real
lyis
depe
nden
tup
ona
stro
ngre
lati
onsh
ipw
ith
the
busi
ness
unit
s.’
Kno
ckou
t:‘W
e’re
alw
ays
invo
lved
inm
onit
orin
gth
eco
mm
erci
alsi
tuat
ion
beca
use
we
are
resp
onsi
ble
for
[the
firm
’s]
repu
tati
onin
the
spac
e.W
eof
ten
wil
lac
tki
ndof
asan
in-b
etw
een,
and
it’s
cert
ainl
yin
our
best
inte
rest
tom
ake
sure
that
that
com
mer
cial
deal
ispu
lled
off.’
Lea
ding
:‘F
orex
ampl
e,in
the
inve
stm
ents
that
we
mad
ein
heal
thca
reIT
,nea
rly
ever
yon
eof
thos
eco
mpa
nies
had
apr
etty
subs
tant
ial
agre
emen
tw
ith
[the
pare
nt]
imm
edia
tely
...f
orou
rin
vest
men
tsin
rese
arch
tool
s,w
hich
was
very
hot
afe
wye
ars
ago
but
turn
edin
toa
finan
cial
dog,
two
ofth
eth
ree
com
pani
esha
vesi
gnifi
cant
com
mer
cial
agre
emen
tssu
bseq
uent
toou
rve
ntur
eca
pita
lin
vest
men
t.’U
nit-
gene
riin
tegr
atio
nA
void
ance
ofco
mpe
ting
post
ures
Impr
essi
ve,Q
ualifi
ed,M
omen
tous
,Lea
ding
—Y
esB
oom
ing,
Kno
ckou
t—N
o,A
dvan
ced—
Not
indi
cate
dIm
pres
sive
:‘W
eha
vea
smal
lgr
oup
ofpe
ople
from
[the
unit
]w
hoar
eas
sign
edto
the
cent
ral
rese
arch
labs
.Bus
ines
sun
its
typi
call
yha
vea
two
tofo
urye
arho
rizo
non
prod
uct
plan
ning
and
inve
stin
gin
stuf
f,an
dth
ese
guys
have
thre
eto
seve
nye
ars.
’Q
uali
fied:
‘If
the
oppo
rtun
ity
was
com
peti
tive
orso
met
hing
that
[the
firm
]w
ould
wan
tto
get
into
dire
ctly
inth
efu
ture
,the
nit
wou
ldbe
real
lyha
rdto
mak
ein
vest
men
tsou
tsid
eth
atha
da
sim
ilar
agen
da.W
edi
dn’t
need
abu
sine
ssun
itch
eck
off
tom
ake
anin
vest
men
t,bu
tif
the
busi
ness
unit
said
no,t
hen
itbe
cam
ea
poli
tica
lly
uphi
llba
ttle
.’
Boo
min
g:‘H
ere
they
view
edit
asei
ther
thei
rm
oney
orth
eir
tech
nolo
gyor
thei
rpe
ople
.And
we’
den
dup
talk
ing
toth
eex
ecut
ive
vice
pres
iden
tab
out
thin
gsth
athe
orsh
ekn
ewno
thin
gab
out.
Mid
dle
man
agem
ent
wou
ldju
mp
inth
ere
and
wou
ldn’
tle
tgo
ofth
ings
.’M
omen
tous
:‘[
Our
posi
tion
]is
that
you
can’
tdo
ever
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We do add credibility due to our brand. Our venturefriends tend to pick up the phone and show us a lot ofstuff.’
Another universal process adopted by all unitswas to pursue a nurturing orientation toward theirportfolio firms by transferring vital resources fromtheir parent companies. Units using this approachbuilt a reputation as a valuable partner, which againhelped attract a greater volume of investment oppor-tunities. As the manager of Dynamic Venturesremarked:
‘I need to know that a strong connection is made thatwill continue. Then, the small company benefitsbecause it knows somebody’s going to help themexploit their technology while using [the investor’s]customers or market access, whatever we agreed.’
One contingent process that some of our unitspursued was to take a lead investor role in severalinvestments. Different approaches to leading aninvestment involved being the only investor ina round, inviting other investors to form a syndi-cate, and deciding the terms of the deal. A leadinvestor role resulted in greater visibility in theinvestment community and thereby more invitationsto participate in financing other ventures.11 Forexample, the manager of Qualified Venturesremarked:
‘As we had more visibility into the market and betterunderstanding of the product or technology, we tookon more of a colead role. We brought [in] the VCs,helped them understand the opportunity better froma technical and market standpoint, and influencedthe terms of the investment.’
We now highlight two important differentiatingprocesses that appeared to strongly help opportunitygeneration, but which prior research has not exam-ined adequately. This first was to pursue reductionsin deal complexity through efforts to simplify andminimize the terms and conditions of the investmentcontract. Units pursuing this process made invest-ments more quickly, more transparently, and lessrestrictively for the portfolio venture. As the
manager of Impressive Ventures noted, such effortswere of high priority for his unit:
‘We typically heard [from ventures] that our dealprocess is too complex; we have a lot of terms andconditions. I think we’re addressing and getting a lotbetter at [these areas].’
The manager of Momentous Ventures suggestedthat restrictive contractual clauses made potentialportfolio companies reluctant to form relationships.Therefore, the absence of such clauses resulted in aunit becoming more desirable for ventures as apartner. The manager said:
‘Contractual terms like the right to first refusal arerare [for the unit] because they create a financialimpediment to the company and, quite frankly, mostcompanies won’t sign them.’
Table 3 indicates and Table 4 provides further evi-dence that all strongly performing units recognizedthe importance of this process. However, respon-dents from the weakly performing units did not indi-cate that reducing deal complexity was an areaof concern and further remarked that they oftentried to insert contractual rights into a contract (withthe often unintended effect of increasing its com-plexity).
The second differentiating opportunity-generation process was to ensure protection ofventure interests, such that units’ own or parentactivities did not negatively impact a portfolio ven-ture’s prospects. This addressed entrepreneurs’concerns regarding investor opportunistic behaviorand resulted in more entrepreneurial firms seek-ing investment in the future. For example, themanager of Momentous Ventures explained that hetried to protect the portfolio companies’ intellectualproperty before they received funding from hisunit:
‘We don’t want to invest in things that we have con-flict with. We tell people ‘if you don’t have the intel-lectual property [protection] on something yet, [we]don’t want to see it.’ ’
The Qualified Ventures manager describedanother approach used to protect venture interests.He consciously avoided investing in ventures thatdirectly competed with any of the unit’s existingventure partners, signaling the unit’s commitment tothese partners.
11 However, some of our respondents remarked that taking alead investor role may be counterproductive if a corporateinvestor lacks the expertise or credibility to put together aninvestment deal, which might explain the mixed effects of thisprocess.
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‘We would not invest in competitors of our portfoliocompany. We were very loyal to the company that weinvested in. So, that created a reputation of thesecompanies wanting to have us on as an investorversus looking at us as a sort of necessary evil.’
As Tables 3 and 4 indicate, all strong performerstook deliberate steps to protect portfolio companyinterests while the weak performers did not under-take any such specific actions. Moreover, there wereinstances at Booming Ventures when their main-stream units violated a portfolio company’s inter-ests. The average performers were split betweenadopting these two differentiating opportunity-generation processes. Four average performersmade efforts to reduce deal complexity and werealso conscious of protecting venture interests. Thejoint adoption of these processes by some units sug-gests complementarities such that adopting onemakes the other less costly or more valuable.
Our data suggests important reasons why reduc-ing deal complexity and protecting venture interestsresult in the generation of quality investmentopportunities. A common perception of entrepre-neurs is that corporate investors are difficult towork with (Katila et al., 2008), which can dissuadeventures from seeking CVC funding. Our respon-dents often faced similar concerns such as, ‘corpo-rations move too slowly,’ and their ‘deal process istoo complex.’ Potential portfolio companies wereworried that the investor could be ‘looking topotentially buy them,’, ‘infringing on the probabil-ity of raising more money,’ and ‘tainting in someform [through investment].’ Simplifying the termsand conditions in the investment contract helpedventure managers see that the investor had ‘anability to move quickly if necessary,’ was foregoing‘any special rights,’ and keeping investments at‘arm’s-length where the company does not experi-ence a bear hug.’
Further, the threat of intellectual property misap-propriation by corporate investors is a major concernfor entrepreneurial ventures, which can inhibit themfrom accepting CVC investments (Dushnitsky andShaver, 2009). Many of our respondents similarlynoted that their portfolio companies did ‘sometimeshave problems with technological leakage’ andbelieved that their knowledge would be used to ‘fillwhite spaces within the corporation.’ The onus wasusually on the CVC units to ‘go out of [their] way topartner in a meaningful way’ and ‘clarify the intentof the investment model.’
Opportunity selection
The opportunity-selection aspect of search involvesthe development of criteria for evaluating ventures forinvestment. Following standard VC practices, a uni-versal process that all our units tried to implementwas a careful evaluation of venture potential prior tomaking an investment. In particular, they exerciseddue diligence in evaluating the quality of ventures’technology and management, which are often impor-tant predictors of subsequent performance. As ourrespondent from Ultimate Ventures remarked:
‘We often evaluate a technology that’s still trying toprove itself. Clearly their management’s experiencewith that type of business opportunity is going to beimportant to us.’
Another universal process was a focus on broadthematic areas for investment by all units. Such the-matic areas were often identified by considering thecomplementarity or relatedness with the investors’areas of expertise. Some units developed strategicplans to formally identify the sectors they would befocusing on in future. Our respondent from JoyousVentures observed:
‘We seek novel therapies, devices, or technologyplatforms that are strategically aligned with [thefirm’s] areas of focus. We proactively seek invest-ments in such specific areas.’
In contrast to these well-known universal pro-cesses, a relatively novel differentiating selectionprocess involved the commitment to early-stageideas. Units adopting this process invested in ven-tures that possessed potentially valuable knowledgebut which required significant further development,such as recently founded ventures and/or venturesthat had not yet launched a product,. Therefore, theyfocused on the long-term potential of portfolio com-panies as opposed to an immediate route to commer-cialization. The manager of Leading Ventures noted:
‘Strategically our interest is in seeing enough early-stage innovation get funding. So we’re trying tomake closer alliances with the few very early-stageinvestors that remain in the life sciences, and we’retrying to establish some capability for ourselvesthere.’
This process also included commitment to a ven-ture’s development as its early-stage ideas matured.
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One approach that units used to display commitmentwas making follow-on investments in later fundingrounds. Follow-on investments also prevented dilu-tion of ownership in a venture to the point whereaccess to its ideas became difficult for the corporateinvestor. The manager of Impressive Ventures notedhis unit’s committed approach:
‘For a reasonably healthy portion of our deals, wecan look at something and say ‘that thing reallylooks like it has serious long-term potential.’ Andwe’re relatively patient money as long as thecompany is progressing and moving and doing thethings that make sense. We can stick with it.’
As Tables 3 and 4 indicate, our respondents fromstrongly performing units mentioned a continuingcommitment to ventures’ development while theirearly-stage ideas matured. In contrast, none of ourweak units reported an overriding emphasis on early-stage ideas or a patient approach to nurturing ideas.The former manager of Advanced Venturesexplained that if he did invest in early-stage ven-tures, it was with the intent of increasing financialreturns rather than gaining access to ventures’ ideas.While the former manager of Booming Ventures didinvest in early-stage ventures, he did not usuallymake follow-on investments, indicating a lack ofcontinued commitment. Of the 10 average perform-ers, only five adopted this process, as indicated inTable 3. Three of these five units also adopted boththe differentiating opportunity-generation pro-cesses,12 suggesting some complementarity betweenthe earlier processes and this key opportunity-selection process.
In contrast to prior research that argues for theconditional benefits of making early-stage ideas forboth corporate investors (Markham et al., 2005) andventures (Kann, 2000),13 our results also suggest thatcorporate investors can always benefit from invest-ing in early-stage ideas once they have taken steps toprotect venture interests, as discussed earlier. In suchcases, CVC investments can be used beneficially aslow-cost probes to evaluate uncertain but potentiallyvaluable initiatives before further commitment is
made. Drawing from multiple interviews, ourrespondents mentioned that ‘we use the minorityequity model when we don’t think we know enoughabout what the company has or what the technologycould do for us,’ or that ‘the companies that webring in for investment evaluation have a two- tofive-year horizon in terms of things that mightimpact our business.’ The CVC investment model ismost appropriate when ‘the risk profile of the asset issuch that an equity stake is the most applicable toolfor minimizing risk and maximizing future optionvalue.’
Moreover, continued commitment to early-stageideas in the form of participation in follow-onrounds, or ‘staging’ investments, can help a unitmaintain access to collaborative opportunities withportfolio companies. Many respondents echoedsimilar reasons for staging their investments, such asenabling ‘staying power through at least a couple ofsubsequent value inflection points,’ ensuring thattheir ownership and leverage ‘do not get diluted toobadly’ and signaling their commitment ‘as long asthe portfolio company still has strategic value.’
In sum, we observed that our units adopted fiveopportunity-generation processes, of which twowere universal, one contingent, and two differentiat-ing. We also observed the adoption of threeopportunity-selection processes, of which two wereuniversal and one differentiating. We now move to adiscussion of the integration processes depicted inFigure 1.
Integration processes
Integration refers to the extent to which other orga-nizational units will cooperate and coordinate activi-ties with a CVC unit to help it achieve itsorganizational mission (Lawrence and Lorsch,1967). When integration is ineffective, mainstreamunits may be disinterested in the knowledge gener-ated by a CVC unit or perceive it as a threat (Weberand Weber, 2011). The integration processes ourCVC units adopted helped link both specific ven-tures and overall unit activities with mainstreamunits of the parent firm. Again, these processes werea mix of universal, contingent, and differentiatingprocesses.
Venture-specific integration
Some of the integration practices we observedwere intended to establish effective cooperation and
12 As will be discussed later, these units were deficient in one ormore differentiating integration processes.13 Despite its recognized benefits, the actual adoption of thisprocess is rare since CVC managers tend to be relatively riskaverse, perhaps because compensation structures do not incen-tivize taking risks (Dushnitsky and Shapira, 2010) or because oflimited experience with VC investment processes (Dokko andGaba, 2012).
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coordination between specific ventures and main-stream units and functions. Of these, a universalprocess was the establishment of formal governancemechanisms such as board memberships andobserver roles to monitor venture activities andensure they are aligned with the strategic interests ofunits’ parent firms. We found that all units had insti-tuted such governance mechanisms, which theycomplemented with informal visits and meetings.For example, our respondent from Glorious Venturesremarked:
‘I walk a bit of the gray area when I fill a board rolefor one of these companies. I’m there at the behestand for the care and loyalty of their shareholders. Bythe same token, I sit here as a [parent firm] investor,so I have to navigate both sides of everything.
A contingent process, which was adopted by unitswith varying performance, was to seek mainstreamassistance in selection, either to validate the strategicvalue of a potential partner or to obtain leads forinvestment opportunities. Respondents from theseunits indicated that these efforts made relevant busi-ness units more responsive to portfolio companies’activities.14 As our respondent from Masterful Ven-tures noted:
‘Around 20 percent of our leads are generated fromour external partners in operations and around 20percent are proposed by the business units. We alsouse the expertise of the business units in doing tech-nical evaluations [of potential portfolio companies],though some of our team members also have techni-cal backgrounds.’
In addition to these universal and contingent pro-cesses for venture-specific integration, an importantdifferentiating process that has not been documentedin prior research was the proactive development ofcollaborative blueprints. Managers of units adoptingthis practice outlined plans for collaborationbetween relevant business units and individual port-folio companies, highlighting areas of mutual inter-est and the specific business unit personnelresponsible for furthering this collaboration. As themanager of Qualified Ventures observed:
‘One of the things that the venture group did wasdevelop fairly deep relationships with the companiesthat we invested in. The business development aspectwas important for us regardless of whether we madethe investment or not. And so, going in, we would bevery focused on the relationship, the alliance aspectof it.’
As an important aspect of a collaboration blue-print, units often requested that key business unitpersonnel work closely with a venture. For example,the manager of Momentous Ventures assigned suchindividuals to board observer roles in his portfoliofirms.
‘In many instances the prospective holder of thecommercial agreement will be the relevant observer. . . because traction [has] to take place inside andthat really is dependent upon a strong relationshipwith the business units.’
Tables 3 and 5 indicate that all strong performersemphasized such blueprints and made business unitpersonnel responsible for implementation. None ofthe weak performers developed collaborative plansat the time of investment, but attempted to forgeinformal post-investment communication between aportfolio company and relevant business units. Asthe quote from the manager of Knockout Venturessuggests, these unit managers hoped that informalcommunication would translate to subsequent col-laborative activities, which did not often happen. Ofthe average performers, only three units tried todevelop collaborative blueprints (see Table 3). Noneof these three units adopted more than one differen-tiating search process. A relative weakness in search,therefore, may have prevented them from extractingthe full benefits of this venture-specific integrationprocess.
Our data from multiple interviews suggested whysuch blueprints helped in venture-specific integra-tion. Our respondents noted that the success of aninvestment is often determined by ‘whether it endsup being a joint collaboration eventually,’ when it is‘necessary to find opportunities for interactionswithin the organization.’ ‘Getting the business to buyin’ to a venture is usually ‘[a unit’s] first work,’ as isfiguring out ‘the right time for [the venture] to havea conversation with key scientists in licensing andresearch groups.’ Collaborative blueprints helped in‘identifying maps of how [the parent and theventure] are going to collaborate,’ generate ‘tractionthat is dependent on a strong relationship with the
14 However, excessive mainstream involvement in ventureselection might have an adverse side effect of resulting in con-flicts with the interests of portfolio companies. Some of ourrespondents pointed out that it was necessary to create a‘firewall’ between their portfolio companies and parent firms,which was not possible when such mainstream involvementwas sought. This is perhaps one of the reasons why adoption ofthis process did not benefit all units strongly.
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business units,’ and ensure ‘some element of coop-eration is built into the relationship.’
Unit-generic integration
The remaining integration practices were intended toestablish effective cooperation and coordinationbetween the generic activities of a CVC unit, inde-pendent of particular external ventures, and main-stream units. Through these practices, CVC unitstried to reduce the resistance and hostility of power-ful mainstream units that might perceive externalventuring as a threat to their activities (Chesbroughand Rosenbloom, 2002). As an example of a univer-sal process in this regard, all units adopted an advi-sory role to parent management to highlight theirpotential value to the mainstream organizations. Unitmanagers tried to regularly inform parent firm’s topmanagement of technological and market trends thatthey gleaned from their partnerships with externalventures. As the manager of Ultimate Venturesnoted:
‘We give [the top management] updates severaltimes a year [on] some of the trends in the market-place and our portfolio companies, as well as thecompanies we didn’t invest in.’
A contingent process pursued by some units wasthe exclusive recruitment of internal personnel fromwithin the parent organization, either through trans-fers or rotation of individuals working in businessunits. In doing so, these units expected unit membersto use their social ties with mainstream personnel toavoid any hostility from, and build bridges with,mainstream divisions.15 For example, our respondentfrom Glorious Ventures noted:
‘For the most part, we have found that having some-body who has lived the business gives [the unit] morepower both in terms of credibility and the ability toinfluence the businesses.’
One important and yet little-explored differentiat-ing practice through which units mitigated main-stream resistance was the deliberate avoidance ofcompetitive postures with mainstream activities.
These units consciously fought perceptions that theiractivities were substitutes for mainstream initiativesby constantly emphasizing that their primary rolewas to complement and assist mainstream divisions.Some units made considerable efforts to understandcurrent and future parent initiatives to avoid compet-ing with these initiatives. The manager of QualifiedVentures stated:
‘If the opportunity was competitive or something that[the firm] would want to get into directly in thefuture, then it would be really hard to make invest-ments outside that had a similar agenda. We didn’tneed a business unit check off to make an investment,but if the business unit said no, then it became apolitically uphill battle.’
Some units also downplayed any competitivethreat by understating their relative size in terms ofbudgets and/or returns in comparison to mainstreamdivisions. For instance, the manager of Leading Ven-tures continuously emphasized that his CVC unitwould never match the scale and scope of main-stream units and, therefore, should not be considereda threat:
‘I literally sat down the five heads of all researchincluding their boss, and went through Accounting101 for them. [I] explained the difference betweenopex and capex and said ‘look guys, what I’m spend-ing is capex.’ Because [the parent] has such a strongbalance sheet, the capex constraints on these guysare relatively minimal. Opex constraints on them arevery real, but my opex is about $1.7 million; I mean,it’s a rounding error. It’s taken five and a half years,but that argument has thankfully just gone away.’
As seen in Table 5, all strong performers avoidedinvesting in areas that overlapped or competed withmainstream unit activities. While all of the weakperformers were confronted with mainstream indif-ference and hostility, they failed to formulate anapproach to counter such resistance. The managersof some of the units seemed resigned to these nega-tive attitudes, as the quote from the manager ofKnockout Ventures indicates. Moreover, as shown inTable 3, six of the 10 average performers avoidedcompetitive postures with the mainstream units. Twoof the three units that developed collaborative blue-prints were also able to avoid competitive postures,suggesting some complementarity among venture-specific and unit-generic integration processes.
Data from multiple interviews indicate why avoid-ing competitive postures was an important practice
15 However, as prior research suggests (Dokko and Gaba, 2012)and some of our respondents noted, the network contacts thatexternal recruits possess and their experience with beneficialVC practices might often be more valuable than the integrationadvantages of having purely internal members. This is perhapswhy not all units adopting this process experienced strong per-formance benefits.
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in building acceptability for the CVC unit. A unit’sactivities of ‘bringing learning into the organization’were ‘dependent on the goodwill of all the otherfolks in [the parent]’ and ‘the real hurdle is alwaysmore internal.’ ‘There had to be a linkage within theorganization . . . both in terms of credibility andability to influence the business.’ ‘Strategic align-ment had to be managed prudently and proactively’by ‘maintaining close relationships with the variousoperating groups.’
CVC units avoided a competitive posture by‘asking business units for those things that will beimpacting them in a two- to five-year time horizon.’This prevented a ‘politically uphill battle if a busi-ness unit said no [to their investments].’ Units‘avoided the likelihood of conflict’ by not makinginvestments ‘in pathways where [the parent] cur-rently has an active R&D program’ and ‘flying alittle bit below the radar because of the group’s smallsize and newness.’
In sum, our units adopted three processes relatingto venture-specific integration, of which one wasuniversal, one contingent, and one differentiating.We also observed three processes relating to unit-generic integration, of which one was universal, onecontingent, and one differentiating. We now discusshow some of these processes may have multipleinfluences on different aspects of search and/orintegration.
Interdependencies between processes
In the interest of parsimony, we categorized first-order processes based on their primary utility inhelping a particular aspect of search or integration.However, as our interviews revealed, some processeshad weaker secondary effects (sometimes negative)on other aspects of search and integration.16 Wediscuss these relationships to better understand thedifferent ways in which a process can benefit orimpede CVC unit performance.
Interdependencies within search or integration
From our interviews, it appeared that someopportunity-generation processes had secondaryrelationships with opportunity selection, since theseprocesses often resulted in the creation of relevantselection criteria. For example, units usually selecteda venture for investment if the invitation was
extended by a prominent syndication partner. Unitsthat sought to protect venture interests typicallyavoided selection of investments where the potentialfor violation of venture interests existed (such aswith ventures that lacked adequate intellectual prop-erty protection). Opportunity-selection processesmay, in turn, have had a favorable secondary impacton opportunity generation. As a unit focused on the-matic sectors and early-stage ideas, it gained a repu-tation for being a valuable partner to relatively youngventures in these sectors, resulting in increasedinvestment opportunities.
There were similar secondary relationshipsbetween venture-specific and unit-generic integra-tion processes. The legitimacy of the CVC unitincreased as more individual ventures were success-fully integrated (through developing collaborativeblueprints and establishment of governance mecha-nisms), causing the unit’s positive performance to bemore visible to mainstream units. Moreover, as unitmanagers advised parent management on externaldevelopments and their units’ complementary activi-ties, interest was often generated in specific venturesfrom which valuable knowledge could be accessed.
Interdependencies between search and integration
We also observed instances of positive and negativeinterdependencies between search and integrationprocesses. First, while the process of nurturingportfolio ventures was primarily related to opportu-nity generation, we found it had a secondary linkwith venture-specific integration. As CVC unitsapproached relevant business units for criticalresources to support portfolio ventures, this resultedin a greater understanding and appreciation of ven-tures’ activities within the mainstream organization.Second, the unit-generic integration process ofavoiding competitive positions with the mainstreamappeared to be secondarily related to selection—units adopting this process selected only those ven-tures for investment that did not potentially competewith mainstream units. This process also had a sec-ondary effect on opportunity generation since theCVC unit better protected a venture’s interests whenthe venture did not compete with the mainstream.Third, the venture-specific integration process ofdeveloping collaborative blueprints had a secondaryeffect on opportunity generation and selection.Greater collaboration with ventures helped createa favorable reputation for a unit as a reliableinvestor and, thereby, resulted in greater investment
16 We thank an anonymous reviewer for pointing us in thisdirection.
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opportunities. It also served as a selection mecha-nism since units adopting the process formed rela-tionships only with ventures that were agreeable tosuch collaborative blueprints. Fourth, the venture-specific integration process of soliciting mainstreamassistance also impacted opportunity selection byestablishing mainstream involvement as a criticalpart of the selection process. However, as discussedearlier, this process may negatively impact opportu-nity generation since venture interests were harder toprotect when the mainstream was closely involved inselection. Similarly, the unit-generic integrationprocess of recruiting internal employees may nega-tively impact opportunity generation, as internalemployees lack external networks that help generateinvestment opportunities.
In sum, the presence of interdependenciesbetween processes suggests that there are often mul-tiple and indirect ways to implement the differentaspects of search and integration other than thedirect relationships we highlighted in our frame-work. Moreover, while search and integrationsometimes impede each other and are, therefore, dif-ficult to implement concurrently, there are alsoseveral conditions where they could complementeach other. As our findings highlight, this was par-ticularly true of the differentiating processes weidentified.
DISCUSSION
To examine how external venturing units generatevaluable knowledge for their corporate parents, westudied how CVC units engaged in search and inte-gration activities and the efficacy of their specificpractices. Previous research on external venturingprovides little insight into this important questionand has, thus, overlooked the potential entrepreneur-ial role that unit managers may play in achievingeffective search and integration. We identified anddescribed a set of four universal practices that allsample CVC units used to facilitate the two compo-nents of their search mission—the generation andselection of new venture investment opportunities—and two universal practices used to achieve integra-tion with mainstream units. We also identified threewidely adopted practices that did not have a discern-ible relationship with unit performance, possiblybecause their influence was contingent on unob-served factors.
Differentiating processes
In addition to these well-known and widely adoptedpractices, we uncovered a set of five novel practicesthat varied in use across CVC units and were relatedto observed differences in the efficacy of unit searchand integration. Specifically, units that focused onreducing deal complexity and protecting ventures’interests improved their reputation as attractiveinvestors among start-ups and VCs, thereby increas-ing the number and quality of partnering opportuni-ties, a primary component of search. Units thatevaluated and selected ventures based on an earlystage of development increased the search benefitsthey offered their parent firms by helping them probepotentially useful, but uncertain, technologies,markets, or business models before rivals. In termsof integration efficacy, CVC units that helpeddevelop explicit collaborative blueprints betweenspecific venture partners and mainstream businessescreated social contracts between the parties, therebyincreasing venture-specific integration. Finally, CVCunits that sought to avoid a competitive posture rela-tive to mainstream units and frame their role ascomplementary reduced internal political resistanceto their activities, resulting in more effective unitintegration.
Contributions and implications
Our study makes important contributions to theexternal corporate venturing literature. We extendand elaborate substantive theory of CVC by docu-menting the five differentiating unit practices wefound to be valuable in improving the efficacy ofunits’ search for external venture partners and inte-gration with mainstream organizational units. Priorresearch has examined some of the universal andcontingent practices we identified (Hill et al., 2009;Maula et al., 2013; Wadhwa and Basu, 2013), buthas not highlighted the importance of our differenti-ating processes in much detail. We contribute to theexternal venturing literature by drawing from ourdata to provide detailed explanations for how andwhy these practices influence the efficacy of CVCunit search and integration. In doing so, we showhow CVC units attempt to manage the trade-offsbetween achieving effective search and integrationand accomplish both. Although studies show CVCinvesting can enhance a corporate investor’sinnovativeness by learning from its portfolio firms(Maula et al., 2013; Wadhwa and Kotha 2006), the
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conditions under which this happens are poorlyunderstood (Dushnitsky, 2012). Our results suggestthat an important source of heterogeneity in theeffects of CVC investing on firm-level innovation isthe efficacy of CVC units’ search and integrationmechanisms.
We further extend substantive theory of CVC byidentifying and explaining complementaritiesamong the observed CVC unit practices. Our analy-sis suggested the five differentiating practicescomplement each other and are, therefore, moreeffective when adopted as a bundle rather than asindividual processes in isolation. Our analysis alsoindicated that the differentiating practices comple-ment universal processes by enhancing the benefitsof these processes. For example, syndication andnurturing portfolio companies (both universal pro-cesses) are more effective in stimulating opportunitygeneration when the investor’s reputation isenhanced through protecting venture interests andreducing deal complexity. Similarly, the universalselection processes of venture evaluation and focuson thematic areas are more effective when comple-mented by a commitment to early-stage ideas. Boardmembership or observation rights work better atintegrating particular ventures when collaborativeplans with a mainstream unit have been developed;and an advisory role to parent management is morebeneficial in integrating a CVC unit when competi-tive postures are avoided. In sum, our analysis sug-gests that an organizational configuration approach,in which variations in particular bundles of practicesexplain organizational outcomes (Miller, 1996), con-tributes to a better understanding of CVC unit per-formance relative to examining individual practicesin isolation.
We also extend research on external corporateventuring by moving beyond its focus on top man-agement in creating the structural context thatenables and constrains program execution (e.g.,Dushnitsky and Shapira, 2010). We instead focusattention on the role of CVC unit managers as entre-preneurial agents in pursuit of effective search andintegration. Our results show how effective unitmanagers strive to increase the value of search ini-tiatives for mainstream units by building bridgesbetween specific ventures and relevant mainstreamunits and increasing the internal legitimacy andacceptance of their units’ overall activities. Becausethey lack authority over many needed resources,CVC managers are involved in a variety of politicalprocesses that anticipate resistance from mainstream
units and seek to mitigate it through social influence.For example, our analysis suggests that CVC unitmanagers who pursued the practice of collaborativeblueprinting facilitated a social exchange relation-ship (Starr and MacMillan, 1990) between a particu-lar mainstream unit and a particular venture bycreating a social obligation between them. The obli-gation is created when a mainstream unit manageragrees to pursue collaboration with a venture oragrees to participate as a board member or observerfor the venture (Homans, 1958). Moreover, unitmanagers who pursued the avoidance of competitivepostures focused much of their efforts on a politicalprocess of meaning construction (Kaplan, 2008).These managers acknowledged the potential formainstream units to frame CVC programs as athreat, which would result in hostility and resistancetoward their activities. However, they worked toreplace the threat framing with an opportunityframing by mobilizing mainstream personnel aroundthe complementary and value-enhancing nature ofthe CVC program. Similar to the case of effectiveventure integration, CVC unit managers thatachieved effective unit integration were politicallyskilled organizational operatives.
Possible alternative explanations
We considered two characteristics of our sampleCVC units as possible alternative explanations forthe relationship between the five differentiatingpractices and the efficacy of CVC unit search andintegration. First, we considered if the differentobjectives pursued by the units drove both the choiceof practices and unit performance. To recall, ourunits had diverse and often multiple strategic objec-tives involving horizon scanning, ecosystem build-ing, and gap filling. Next, we considered if the parentfirm’s primary industry generated the choice of prac-tices and unit performance. Both of these argumentsare inconsistent with the data (see Tables 1 and 3).Units that pursued the same objectives varied withrespect to their adoption of differentiating practicesand their performance. Similarly, CVC units ofparent firms in the same primary industries variedwith respect to both practices and performance.Therefore, we concluded that unit objectives andparent firm industry could not fully explain the rela-tionships between the differentiating practices andunit performance.
We also considered the possibility that the causaldirection of our results is the opposite of what we
Search and Integration in External Venturing 21
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., ••: ••–•• (2015)DOI: 10.1002/sej
inducted from our data17—i.e., do differences inCVC unit performance (in terms of their search andintegration effectiveness) cause differences in theiruse of the five differentiating practices? While lon-gitudinal data on practice adoption and unit perfor-mance and/or some source of exogenous variation inpractice choice would help us investigate this possi-bility, we lack such data. However, we know fromour data that some of the high performing unitsadopted some of the differentiating practices at thetime their units were established. Consequently,these choices could not have been made in responseto feedback about unit performance. Similarly, weknow that one of our low performing units had neverused any of the five differentiating practices, whichsuggests they did not abandon them in response topoor performance. Therefore, we concluded that unitperformance did not cause the adoption of any dif-ferentiating practice.
Limitations and future research
An interesting follow-up question to our study iswhy more external venturing units did not adopt thedifferentiating processes identified here. Unit man-agers may not be aware of the nuanced interactionspossible among these processes. Understanding suchbarriers to adoption would be a valuable endeavorfor future research. While identifying differentiatingprocesses by contrasting strong and weak perform-ing units, we found interesting differences in theadoption of these processes by average performingunits. Given the scope of this study, we did notexplore the reasons for, or implications of, thesedifferences. Neither did we fully examine the condi-tions under which the identified contingent processespositively impact unit performance. We believethese are also interesting opportunities for futureresearchers.
Our findings suggest that through effective inte-gration, CVC units can often transform unfavorablecorporate environments to become more receptive totheir activities. Future research could dynamicallyexamine if changes in corporate context alter therelative importance of the differentiating processeswe identified. Finally, future research could examinewhether our findings are relevant to other types oforganizational units, such as internal venturing
groups, to build more general theory on how autono-mous units can help parent firms become ‘ambidex-trous’ in balancing exploration and exploitation(Tushman and O’Reilly, 1996).
CONCLUSION
How can external corporate venturing units effec-tively search for valuable external venture partners,leverage the resources of internal mainstream unitsin the process, and facilitate learning between thesetwo audiences, thereby contributing to corporaterenewal and resilience? We investigated this impor-tant, yet largely unexplored, question through aninductive study of 17 corporate venture capital units.We documented a set of five practices that influencethe efficacy of a unit’s external search and internalintegration. We also identified complementaritiesbetween these five practices and other, morecommon, practices used by all sample CVC units.This study contributes to external venturing researchby showing how unit managers can achieve botheffective search and integration via entrepreneurialand politically savvy practices, and it providesinsight into why some corporate investors are betterat learning from external start-ups than others.
ACKNOWLEDGEMENTS
We acknowledge generous financial support for thisresearch from the Ewing Marion Kauffman Foundationthrough a dissertation fellowship awarded to the firstauthor. We thank all our respondents for their valuabletime and forthright insights.
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