Academic journal article Research-Technology Management

Corporate Research and Venture Capital Can Learn from Each Other: An On-Going Relationship between a Large Corporate Research Organization and a Leading Venture Capital Firm Has Provided Complementary Value to Both Firms

Academic journal article Research-Technology Management

Corporate Research and Venture Capital Can Learn from Each Other: An On-Going Relationship between a Large Corporate Research Organization and a Leading Venture Capital Firm Has Provided Complementary Value to Both Firms

Article excerpt

In his book, Open Innovation, Henry Chesbrough describes a number of ways that modern companies interact with venture capitalists (1). Venture capital-funded "spinouts" are one way of extracting value from corporate research not adopted by the business units within the same corporate group; for instance, Chesbrough details the many companies spun out of Xerox PARC.

Chesbrough also describes how corporate venture funds can be used to extend the corporate strategy in the startup community, using the example of Intel Capital. Cisco has systematically acquired venture funded startups as a way of entering new markets (2, 3). Panasonic, the consumer electronics arm of Matsushita Electric, has built a facility to incubate early-stage startups that could ultimately provide technology components for new Panasonic products (4,5). One of us has proposed a model for representing the types of interactions possible between corporate research and venture capitalists or venture capital-funded companies (6).

What has not been described in the literature are the experiences and results of an on-going relationship between a large central research organization and a major venture capital firm. This paper describes such a relationship, and the value that it can provide for both sides of the relationship.

VC Relationships with a Large Corporation

As a large, multinational company, HP has many different types of relationships with venture capitalists and the companies they fund, stretching all over the world. These range from formal programs to informal contacts with ex-HP'ers now active at both venture capital funds and startups. On the formal side, HP's Strategy and Corporate Development Department has a program to meet regularly and separately with 10 to 20 large venture capital firms to identify technology trends and possible joint business opportunities.

Also, HP's businesses make minority equity investments in, and acquisitions of, venture-funded companies to support HP's business strategies. Before such a deal is completed, HP routinely screens up to two dozen potential targets in a particular space. Selected HP Labs technologies that are not adopted by business units are presented to venture capitalists as the basis for potential spinouts. Finally, the HP pension fund invests a small proportion of its assets in venture capital funds.

Hewlett-Packard Labs is a large corporate research organization that comprises about 5 percent of HP's total R&D spending, an amount equal to $3.5 billion in HP's fiscal year ending Oct. 31, 2005. In 2002, HP Labs identified a set of unique needs related to its role that were not being met by any existing HP program; consequently, in mid-2002, HP Labs embarked on an initiative to select a venture capital firm that would meet these unique needs.

The specific objectives that HP Labs had for this program were:

* Identify the new innovation areas where VCs were considering new investments, as they receive dozens of business proposals each week.

* Compare the areas of VC investment to HP Labs investment areas without learning, or appearing to learn, confidential or proprietary information.

* Determine if those VC investment areas were leading to major paradigm shifts, such as happened in the late 1990s with the expansion of the Internet.

* Gain exposure and knowledge of startups that could be partners, or acquisition targets, for HP businesses.

* Take advantage of the fact that HP Labs headquarters location in Palo Alto, California, is in the center of the world's largest aggregation of venture capital firms.

* Establish a forum to receive feedback on selected HP Labs projects from experienced venture capitalists.

Overall, we were hoping to lay the foundation for a dialogue on technology trends rather than "drill down" to the proprietary solutions pursued by individual companies. …

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