Corporate Venture Capital Investments for Enhancing Innovation: Challenges and Solutions

Article excerpt

Corporate venture capital investments can be a powerful tool for exploring and exploiting innovation opportunities, but in order to reap the full strategic value of venturing activities, companies must be prepared to match practice to strategic goals.

OVERVIEW: Corporate venture capital investments are a powerful tool to explore and exploit innovative opportunities with start-up companies. Successfully implementing a corporate venturing program presents a number of challenges, from setting the right mixture of strategic goals and operational implementation to measuring outcomes and capturing value. Working from a series of nine case studies of corporate venturing units in large corporations, this article examines the challenges and presents practical solutions drawn from detailed analysis of the case studies.

KEY CONCEPTS: Corporate venturing, Corporate venture capital, Open innovation, Value creation, Strategic value

Corporate venture capital (CVC) activities-equity investments by large corporations in entrepreneurial ventures that originate outside the corporation-play an increasingly important role in innovation strategy for large corporations. Recent trends within the venture capital industry show that, after a period of decline at the end of the dotcom boom between 2000 and 2003, corporations are now responsible for a significant proportion of venture capital investments. According to Pricewaterhouse- Coopers and the National Venture Capital Association (2010), CVC units were involved in about 370 deals (13.3 percent of the total number of venture capital deals) in the United States in 2009, investing a total of $17.8 billion (7.4 percent of total U.S. venture capital investments). Perhaps as a result of the general trend toward a more open approach to innovation, large companies seem to see increasing value in external corporate venturing as a strategic tool for enhancing innovation processes (Birkinshaw and Hill 2005; Dushnitsky and Lenox 2006; Gompers 2002; McGrath, Keil, and Tukiainen 2006).

Corporate venture capital programs can create value for both start-ups and the large companies that invest in them. Through corporate venture capital, companies can gain access to complementary technologies and a general window on technology developments (Fox 2003; Gompers 2002). Start-ups in receipt of investment from corporate venture activities benefit through, for instance, increased access to markets and customers as well as management advice (Maula 2001; McNally 1997). However, it remains unclear how both corporate venturers and start-up recipients capture and measure the strategic value of corporate venture capital investments (Allen and Hevert 2007; Rauser 2002).

In this context, we set out to investigate the strategic use and value of corporate venture capital by undertaking case studies of CVC activity at large, multinational companies. Our intent was to develop a conceptual, exploratory framework for corporate venture activities in order to understand how the strategic value of venture activities is captured and measured.

Background

The findings presented here are based on nine in-depth case studies.1 The studies were conducted in two stages. First, three development case studies were completed and a preliminary framework was derived from the data offered by this initial work. Subsequently, six in-depth case studies were conducted to refine and develop the framework.

The case-study participants all had stand-alone corporate venturing teams with strategic goals explicitly focused on value creation, long track records, and established processes for identifying and pursuing venture investments (Table 1). More than 30 managers of the selected corporate venturing units, their portfolio start-ups, and their parent firm's business units were interviewed in 2008 and 2009. Further interviews were conducted with industry experts, other investors, and consultants to provide context and additional information Interview data was enriched by analysis of secondary data, including documentation of the due-diligence activities of the corporate venture units, post-project evaluation of venturing activities, and published data of participant companies, such as press releases and annual reports. …