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 This report examines corporate venture capital (CVC) as a model of innovation. CVC programs in established corporations invest in and partner with entrepreneurial companies. By doing so, established companies are able to identify and source new emerging technologies from entrepreneurial companies.
CVCs typically make a financial investment and receive a minority equity stake in an entrepreneurial company. CVCs also facilitate investment of in-kind resources into portfolio companies. In return, the parent corporation gains a window on new technologies and strategically complementary companies that could become strategic partners. CVCs generally invest with a combination of financial and strategic objectives. Strategic objectives include leveraging external sources of innovation, bringing new ideas and technologies into the company, and taking “real options” on technologies and business models (by investing in a wider array of technologies or business directions than the company can pursue itself).
Corporate venture capital may be viewed in the broader context of corporate venturing, including both internal and external venturing. Internal venturing programs “go inside” the firm and create entrepreneurial ventures from within the corporation. External venturing programs “go outside” the firm and tap external sources of innovation, whether through research collaborations with universities, strategic alliances with other firms, or partnerships with entrepreneurial companies. Often, the firm’s internal and external venturing efforts are closely related and interact with each other.
CVC programs in established corporations face both inward and outward. They face outward to build relationships with the entrepreneurial venture community, learn about new technology and business directions, and make investments that create new strategic opportunities for the corporation. They face inward to interact with the firm’s R&D and business operating units, in order to identify operating units’ interests and priorities.
CVCs support the corporation’s existing businesses by introducing new technologies and partnerships to its operating groups. At the same time, CVCs help identify technologies and opportunities that fall between or beyond the corporation’s existing businesses.
This report uses industry data and original survey data to describe trends and characteristics of CVC organizations and investments. These data provide insight on a range of issues relating to CVC operations and investments.
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Recent patterns in CVC mission, structure, and investment
This report on corporate venture capital is the product of a collaboration of several institutions, including university, industry, and government organizations.
Authors:
Ian MacMillan, Professor of Management, Wharton School, University of Pennsylvania
Edward Roberts, Professor of Management of Technology, Sloan School of Management, Massachusetts Institute of Technology
Val Livada, Research Fellow, Sloan School of Management, Massachusetts Institute of Technology
Andrew Wang, Economist, Technology Innovation Program, National Institute of Standards and Technology
TABLE OF CONTENTS
1. Investment Trends (1995–2006) ................................................................... 2
CVCs have become a significant part of overall venture capital activity. In the year 2000, at the peak of the most recent venture capital cycle, more than $100 billion in venture capital was invested. About 16 percent of that investment was from CVCs. After 2002, total venture capital investment stabilized at around $20 to $25 billion per year, and CVC investment stabilized at around 6 to 8 percent of total venture capital investment.
2. Strategic and Financial Objectives ............................................................... 6
While an independent venture capital fund’s sole objective is making financial returns, a CVC typically has a combination of financial and strategic objectives. Generally, a CVC has a strategic mission to help “grow the business” of the parent company. It does this by helping the company identify new ideas or technologies, develop new products or processes, and enter new markets or enhance existing businesses.
3. Structure and Organization....................................................................... 10
CVC programs are structured in various forms. Some CVCs are organized as independent subsidiary companies, while others operate as a group within the parent company organization. Some CVCs have a “dedicated” investment fund, where the corporation commits a given amount of capital for investment. Other CVC programs are “discretionary,” in that investment capital is allocated as investment opportunities arise. Most CVC programs have a corporate-wide mission, receive corporate funding, and report to the corporate level.
4. Investment Sourcing and Structure............................................................ 14
CVCs and independent venture capital have developed working relationships that are mutually beneficial. CVCs communicate with independent venture capital to share information about areas of investment interest, and about companies and technologies seeking venture funding. CVCs benefit from access to the investment “deal flow” of independent venture capital, while independent venture capital benefits from strategic insight and technology expertise provided by CVCs. CVCs and independent venture capital also often co-invest in companies through syndicated investments.
5. Interactions with R&D and Business Units .................................................. 18
CVCs interact with the company’s R&D and business units to understand the operating units’ technology directions and business strategies. They then make investments that support or complement those efforts within the company. In screening investment proposals, CVCs draw on technical and business expertise from the operating units. An R&D or business unit may “sponsor” a CVC investment, indicating its support for the investment. CVC portfolio companies benefit from in-kind support and relationships with the parent company’s operating units.
6. Personnel and Incentives .......................................................................... 22
A key issue for personnel management in CVCs is whether the organizational culture will be more similar to the parent company or to independent venture capital firms. For example, a CVC structured as an independent subsidiary company—with a dedicated investment fund and personnel hired from outside the parent company—will have an organizational culture that is more similar to an independent venture capital firm. Personnel compensation, especially the extent of incentive compensation, is a critical aspect of CVC personnel management.
7. Investments and Strategic Value................................................................ 26
CVC investments in venture-backed companies help the parent corporation learn about and access new technologies coming out of new firms. CVC investment in a company facilitates knowledge transfer and interaction between the company and the CVC parent corporation. Collaborations between a CVC portfolio company and operating units of the parent corporation may be established at the time of CVC investment or may develop over time as the portfolio company and parent company have informal contact and ongoing exchanges.
8. Corporate Venturing ................................................................................ 30
CVCs may be embedded in broader corporate venturing efforts and may interact with internal venturing programs. Corporate venturing includes both internal venturing programs and external corporate venture capital. Internal venturing programs give entrepreneurial employees resources and opportunities to create new ventures (e.g., seed funding for R&D or incubation resources to create new businesses). Successful internal ventures may eventually be incorporated into an existing business of the corporation, set up as a new business unit, or spun out as an independent company.
9. Outcomes and Metrics ............................................................................... 34
There is no single “one-size-fits-all” approach to CVC that applies to all corporations. CVC best practices and performance assessment will depend on the CVC’s role in the corporation, its mission, and the corporate environment. Assessing the CVC’s strategic value requires judgments on ultimate outcomes, such as the significance of insights the CVC provides to top management and operating units of the corporation; the importance of referrals, introductions, and external contacts and relationships that the CVC facilitates; and the strategic impact on the corporation of collaborations and partnerships that develop from CVC investments.
ABOUT NVCA
The National Venture Capital Association (NVCA) is the premier trade association that represents the U.S. venture capital industry. It is a member-based organization, consisting of venture capital firms that manage pools of risk equity capital dedicated to be invested in high growth, entrepreneurial companies.
NVCA's mission is to foster greater understanding of the importance of venture capital to the U.S. economy, and support entrepreneurial activity and innovation. The NVCA represents the public policy interests of the venture capital community, strives to maintain high professional standards, provides reliable industry data, sponsors professional development, and facilitates interaction among its members.
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