What Is the Real Role of Corporate Venture Capital?

Article excerpt

ABSTRACT

Technological innovation is not exclusive to great industrial groups. Sometimes, innovative and dynamic companies emerge in high-tech sectors and constitute a serious threat for some industry giants. However, the high reactivity of these small companies is generally impaired by problems of financing. Larger firms which want to achieve financial profits and control the most recent innovations often have recourse to corporate venture capital (CVC) as strategic mode of financing. The advantages it brings to every stage of the project (launch, refinancing and project output) compared to financing by venture capital funds will be key factors for future development. In order to gain a better understanding of the role of CVC in the financing of innovating firms, we propose in this article to analyze the various types of CVC on the basis of former studies as well as concrete examples, then to assess what boosts value creation for CVC projects.

JEL Classifications: G24, G32

Keywords: Venture capital; CVC; Capital structure; Start-up; Entrepreneurship; Performance

I. INTRODUCTION

Issues related to innovation are crucial because the latter allows companies to establish or strengthen their competitive advantages by differentiating themselves from their competitors and gaining market share. It can be defined as "any process allowing to extract economic benefits or social knowledge constituted through the development and realization of ideas which improve products, services or process" (Source: Fund for Innovation, Canadian Innovation and Projects Section). Innovation is thus the core of the firms' competitive strategies. It is the source of most century firms and a key factor of economic growth in many countries. In most countries, it is widely approved that the most intensive firms in information and communication technologies (ICT) are also those which innovate more frequently and combine several types of innovation. With the rapid development of ICT since the 1980s, many dynamic small companies have performed a fundamental role for innovation in high tech sector. Then, large enterprises questioned their expensive R&D programs and decided to invest in innovative firms, either directly or through private equity funds. This type of investment, called corporate venture capital (CVC), is not only a means to make profits, but more importantly, a highly strategic way to maintain a control of innovation by acquiring the latest innovations when they start developing. Despite crises, CVC continues to grow in the high-tech sectors, particularly in biotechnology. The advantages it brings at every stage of the project as opposed to financing by venture capital funds will be key factors for its future development. In order to gain a better understanding of the role of CVCs in the financing of innovating firms, we propose in this article to analyze the various types of CVC on the basis of former studies as well as concrete examples, then to assess what boosts value creation for CVC projects.

II. CHARACTERISTICS OF CORPORATE VENTURE CAPITAL

A. Definition of Corporate Venture Capital

In strategy, two types of technological alliances exist: cooperation agreements and capital participation. If the first type is based on a short or medium-term partnership, aiming at sharing certain strategic resources in particular in terms of R&D, the second type of strategic alliance leads to an exchange of capital and thus to strong commitments from each partner.

Along with joint-ventures and partial mergers, corporate venture capital (CVC) today has become one of the most widespread forms of financing for new innovating firms. In fact, CVC is only another form of venture capital. The concept is not recent and first made an appearance at the end of the thirties in the United States. It developed gradually to become a branch of finance specialized in funding innovative SMEs with strong growth potential. …

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