Corporate venture capital investments for enhancing innovation: challenges and solutions: 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.
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.
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.
The Concept of Corporate Venture Capital
Corporate venture capital (CVC) investments are a specific form of direct, external corporate venturing. CVC is commonly understood to be equity investments by established corporations in innovative, entrepreneurial ventures (Dushnitsky and Lenox 2006, 754). Some of the key characteristics of CVC are similar to those of non-corporate, institutional venture capital investments (Chesbrough and Tucci 2004):
* The start-ups receiving the investments are legally independent of the (corporate) investor and originate externally. This separates CVC from other forms of corporate venturing, such as incubation or spin-outs, in which the venture originates within the parent firm.
* Part of the return on investments is expected to be financial.
* The form of investment in the ventures is equity.
* The corporation has established a process by which to make a series of investments.
CVC investments can be distinguished from the activities of traditional venture capital firms by the following characteristics:
* CVC investments are made by companies (or their subsidiaries) for whom finance is not a core business (e.g., Maula 2001; Rauser 2002).
* Part of the return on investment is expected to be strategic (van de Vrande, Lemmens, and Vanhaverbeke 2006).
In practice, many CVC units use venture capital-type financial targets as baselines to identify commercially solid start-ups that can develop into reliable business partners. The companies then clearly define and communicate both internally and externally additional strategic objectives for the corporation.
Dedicated CVC units such as those that oversee CVC activities in our case-study companies can be either legally independent subsidiaries or integral parts of the corporation. In either case, CVC programs share a common underlying structure with both financial and strategic aspects. Ernst, Witt, and Brachtendorf (2005) provide a basic model for the typical role of CVC units in corporate venture investing (Figure 1). The model illustrates the roles of the three key parties involved in the CVC process: the parent firm, its affiliated CVC unit, and the external start-up companies that are the target of venture investments. This model highlights the characteristic aspects of corporate venture capital investments, distinguishing between the central financial investment process and the additional strategic value gain. Our work focused on the strategic use of such a CVC model to enhance the innovation process.
CVC as a Tool for Enhancing Innovation
CVC investments provide a powerful tool to enhance innovation processes by creating synergies between large corporations and innovative start-ups. Along with other tools, such as corporate incubators, scouting units, or open innovation programs, CVC units can be used as part of a broad, open innovation strategy (Chesbrough 2003). The strategic motivations for running CVC programs may vary from company to company. Whereas some corporations take a balanced approach between exploring and exploiting opportunities, others focus more on the CVC unit as a scouting tool to explore opportunities and don't typically involve it in operational activities to exploit opportunities. The choice of approach largely depends on how CVC activities complement other open innovation activities; companies should be aware of the whole set of opportunities a CVC program can offer and design their programs according to their specific needs.
From the parent firm's perspective, the value of CVC for the innovation process is twofold. First, a CVC program can provide explorative benefits, providing insights into new markets and technologies and offering valuable options through premium access to a portfolio of innovative companies. Through these benefits, the CVC portfolio can help a company to maintain long-term innovativeness. Second, CVC programs can provide new opportunities to exploit specific technology areas by accessing complementary technologies from start-ups or by leveraging existing products and technologies in new markets through start-ups. These exploitational benefits can lead to short-term revenue growth and can help to increase the utilization of the investor company's existing knowledge and capabilities. This combination of benefits can make CVC programs a very valuable part of a company's R&D program, enhancing the innovation process in a number of ways (Figure 2). Distinguishing between explorational and exploitational benefits can help clarify the different explicit and implicit strategic investment goals and returns of the investor corporation.
[FIGURE 1 OMITTED]
It is important to recognize that the strategic value created by CVC investments is not limited to the investing company. Corporate venturing should rather be seen as a synergy between the start-up and the parent firm; as much as the large corporation benefits from the start-up's innovative ideas and technologies, the start-up can leverage its own technologies and benefit from the CVC activity by gaining access to markets as well as to complementary technologies. Furthermore, the investor firm, which will frequently have significant industrial expertise, can provide valuable management advice and operational support. Last, but not least, the start-up may also gain value via the credibility attained by its alliance with the investor firm.
Maximizing the Innovation-Enhancing Value of the CVC Programs
As discussed in the previous section, CVC activities can provide a wide range of strategic benefits for the parent firm. To capture those benefits successfully, however, it is crucial that parent firms clearly define roles and responsibilities for venturing operations. In practice, CVC investments are usually undertaken by dedicated units, which--besides managing the financial side of the investment--play an important strategic role, as well. The CVC unit provides the channels through which the strategic value of the venturing activity is captured (Figure 3).
Across the nine case-study companies, interviewees identified clear responsibilities for each party involved in a CVC program:
* It is the responsibility of the CVC unit to generate and communicate explorational benefits to the parent firm. For example FVC regularly exchanges information about markets and technologies with Foxtrot Co.'s business development group. Similarly, JVC engages with the middle management of Juliet Co.'s business units to provide them with insights from their scouting activities in the start-up scene. BVC sends out companywide newsletters with news from the startups. In these cases, the CVC unit serves as a scouting unit, effectively providing market and technology intelligence, at the same time that it serves as direct advisor to the start-ups, providing management expertise and operational support. This happens formally, through CVC managers taking observer seats on the boards of start-ups (a practice noted in all nine case studies), but also informally, through regular meetings between the CVC unit and the start-up management. Additional approaches were also observed; for instance, CAP organizes dedicated coaching sessions for their portfolio companies on topics such as how to build a strong team, how to run a business, or how to work with a large company.
* The relevant business units of the parent firm and the start-ups are expected to engage directly with each other to generate and capture exploitational benefits, for instance through joint development agreements or project-level collaborations, without the involvement of the CVC unit. For example, at DVP the responsibility to execute strategic alliances is formally handed over to the "business unit catalyst," who comes from a business unit with interest in the start-up. The business unit catalyst reports back to DVP and receives coaching and training from DVP, but the catalyst owns the strategic projects within the relevant business unit, allowing DVP to focus resources on their general scouting and portfolio development activities rather than getting involved in the operational business of strategic partnerships.
* One of the CVC unit's key roles is that of matchmaker, pairing start-ups and operational business units. As a BVC manager told us, "BVC has a broker function and brings the relevant people from start-up and business unit together and escorts them during the elaboration of the cooperation. As soon as that is established, it runs independently."
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Across the majority of the case studies, the effectiveness of the matchmaking process was independently identified as crucial for the strategic success of CVC programs. AVG describes its own role as "umbrella engagement manager" and "critical node in facilitating and fostering direct exchange of value between the start-up and the business units." Similarly, CAP's key responsibility has been described to us as being "to broaden the pipe between the business unit and the start-up." Companies thus should put high emphasis on making this matchmaking process work; the CVC team should have the capabilities as well as the resources and the support to foster independent relationships between start-ups and business units. Case-study companies ensured the effectiveness of CVC activity in a number of ways:
* Several companies (ETV, FVC, and JVC) reported creating a CVC management team with members who had a mixture of experiences, both internal corporate managers and external venture capital experts to blend relevant understanding of the parent firm's structure with understanding of venture capital.
* Many companies formalized the involvement of business units in the due diligence process for selecting start-ups in order to allow for adequate consideration of future business opportunities between the start-up and the parent firm. To match the CVC search and scouting areas with the future strategic interest of the parent firm, the majority of case companies reported strong links between the CVC unit and business development units of the parent firm. Once potentially interesting start-ups are identified, most case companies involve business units early in the selection and evaluation process to assure the start-ups' technologies are relevant for the parent firm's business. Technical expertise and advice from business units is seen as particularly significant input to the due diligence process. Some companies even require official business unit sponsorship (for instance, official approval of the start-up's potential for strategic value addition, observed at Charlie Co., which outlines the strategic value proposition in an "engagement proposal") or the closure of strategic agreements (such as joint development agreements, observed at Delta Co.) before a deal is approved by the investment committee.
* Two companies (BVC and JVG) reported generating interest in start-ups and CVC programs through "technology road shows" and workshops in which startups presented their technologies to the parent firm's business units.
* A number of companies focused on involving dedicated business unit members at all stages of the investment process, from alignment of scouting fields to due diligence and evaluation processes as well as in the business planning process, to help create ownership of relationships to start-ups within the business units; FVC and DVC were particularly attentive to this element.
* All of the case companies place a member of the CVC unit or the business units on the board of the portfolio companies to give advice to the start-up and to track the strategic direction of the start-up's business. This helps with the identification of potential future strategic overlap and gives the opportunity to align the strategic interests of the parent firm and the start-ups.
* One participant (JVG) set up dedicated CVC funds tailored to individual business units to allow a sharp focus on relevant technological areas and align interests to maximize the start-up's value and thus help them to build valuable business cases. This practice made each business unit a sole investor in a focused CVC fund, generating strong incentives for the business unit to help make the CVC investments successful.
Once the matchmaking is done and ownership of the relationship is assigned to a business unit, most CVC units hand over responsibility for the relationship to business unit management. Subsequently, in many participating companies, CVC units often monitor the relationships between the start-up companies and the parent firm.
Evaluating the Innovation-Enhancing Value of CVC
When CVC programs are established as part of a tool set for implementing a broad open innovation strategy, it is important for companies to track the performance of these programs against open-innovation success metrics. As with other open-innovation activities, measuring the strategic, innovation-enhancing value of specific CVC activities is a challenging task. Case-study companies used a range of very different metrics, including qualitative measures as well as both financial and nonfinancial quantitative measures, to monitor the strategic performance of CVC investments in each of the channels through which strategic value may be captured (Figure 4). The different metrics and performance indicators are grouped by the type of value that they represent (explorational value or exploitational value for the parent firm, value for the start-up firm, synergistic value for both the start-up and the parent firm) and by the relationship that is being monitored by the given metric (between start-up and parent firm, between CVC unit and parent firm, and between CVC unit and start-up).
The approaches of our case-study participants offer a number of solutions for challenges regarding metrics. These should be considered by companies exploring metrics to capture the innovation-enhancing value of CVC programs:
* Types of metrics: A range of "soft," qualitative metrics (such as case-based success stories and examples); quantifiable, nonmonetary metrics (such as counts of the frequency of particular events, activities, or occurrences); and quantifiable, monetary metrics (financial data that indicate value creation) can be used for the evaluation of CVC programs. Companies should aim for a broad range of different metrics to reflect the different strategic interests of all involved players and capture the full range of value generated by CVC activities.
* Metrics for exploitational benefits: The largest set of metrics focuses on strategic value related to specific projects undertaken directly between the parent firm and the start-up (exploitational benefits). These projects typically aim to exploit specific technologies and products, and performance can be measured fairly easily using revenue and pre-revenue indicators.
* Metrics for explorational benefits: Our case-study participants used no quantitative metrics to capture explorational value of CVC activities, such as market knowledge or improved understanding of technological trends. Instead, explorational value is demonstrated only indirectly by tracking the general investment activity of the CVC unit (number of investments) and by demonstrating that investments have reduced risks and that business units are satisfied with CVC services.
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For dimensions where the generated value cannot be measured directly, measuring the activity level (in terms, for instance, of number of contacts made or number of events held) can give an indirect indication of added value.
It should be noted that none of the case companies had tied metrics together into a single monetary evaluation of the strategic value of their CVC program. Instead, the majority of case companies emphasized the importance of success stories--short stories to illustrate where CVC activities had lead to a specific relationship, useful synergies, or reduced risks--for securing top-level as well as business-unit-level management support. Such success stories were often found to be more effective for demonstrating value creation than complex metric systems. The metrics identified here should thus be seen as important individual measures for monitoring ongoing processes rather than as measures to put an overall strategic value on investments.
One somewhat surprising finding from the study was the observation that companies did not seem to monitor the activity of their CVC units with regard to matchmaking processes--that is, the process of establishing and facilitating relationships between the parent firm's business units and the start-ups in the portfolio. This stands in contrast to the observation that most case companies viewed these facilitation processes as crucial for the future success of CVC activities. Future efforts in developing metrics and performance indicators could thus focus on introducing systems for monitoring the matchmaking processes.
Overcoming Challenges for Corporate Venturing to Support Innovation
Throughout the case studies we have observed a pattern of common challenges companies faced in making their CVC programs support their innovation activities (Table 2). Case-study companies also provided examples of a range of effective, implementable solutions to address those issues.
The main challenges for successfully implementing strategic corporate-venturing programs seem to be related to capturing the full strategic value of the investments. An underlying pattern can be observed regarding the solutions for those issues. Successful CVC programs clearly define objectives, roles, and responsibilities and involve a wide range of business functions across hierarchies and business units in the corporate venturing process. Maximizing exposure of the company to venturing activities helps the company to capture the full strategic value of these companies, while clear communication of objectives and responsibilities makes the venturing effort more targeted and thus more likely to succeed.
Our case studies show that CVC investments--strategic venture capital investments by large corporations in external start-ups--can be a powerful tool to enhance and support the parent company's R&D functions through explorational and exploitational benefits.
From of the diversity of the companies we studied, it becomes clear that there is no one-size-fits-all solution for corporate venturing. Instead, companies setting up a venturing program should:
1. Set out clear objectives for the CVC program, including the balance between financial and strategic objectives and whether to focus on explorational or exploitational value creation.
2. Set up structures appropriate for focusing on explorational and/or exploitational value creation. Establish strong links between the CVC unit and the parent firm's management across different business units and functions to maximize value creation. Facilitate strong, independent links between the start-ups and the business units to capture exploitational value.
3. Use the metrics tools described here to tailor a metrics system around the program's particular objectives and to monitor and evaluate the output of CVC activities in the context of the program's goals.
Our findings regarding corporate venturing can be applied to the broader context of open innovation initiatives within a firm, as the underlying challenges are similar when building other links to external organizations such as suppliers, customers, competitors, or universities. The key question for those activities, as for corporate venturing, is whether the company undertakes those activities to generate insights into new market and technologies, or whether they seek to exploit particular technologies together with a partner. The strategic purpose of the relationship should be set out clearly and the appropriate operational links and metrics should be specifically designed to fit those targets.
A key take-away from this article is that within corporate venturing in particular--as well as within open innovation scenarios in general--the internal matchmaking between potentially relevant individuals is as important as the identification of relevant external partners for cooperation. Thus particular emphasis should be placed on establishing a series of processes to enable such internal matchmaking and to put people with the right interpersonal skills in place to maximize the strategic value from corporate venturing specifically, and open innovation activities more generally.
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(1) Although a detailed presentation of all nine cases is beyond the scope of this article, detailed, anonymized case studies can be made available upon request. Please contact the authors for more information.
Johann Jakob Napp is a research associate at the Centre for Technology Management, University of Cambridge. He has a PhD in engineering from the University of Cambridge. This article draws on findings from his research on the strategic value of corporate venture capital investments. Further research interests include open innovation and value creation, www.ifm.eng.cam. ac.uk/people/jjn28; firstname.lastname@example.org
Tim Minshall is a senior lecturer at the Centre for Technology Management, University of Cambridge, and a non-executive director of St John's Innovation Centre, Cambridge. He researches, teaches, writes, and consults on the topics of technology enterprise, open innovation, the funding of innovation, and university-industry knowledge exchange. He has a B.Eng. from Aston University and a PhD in engineering from Cambridge University. www.ifm.eng.cam.ac.uk/people/thwm100; email@example.com
Table 1.--Overview of case study findings Company * Method and Value-Maximi- Metrics / Strategy of CVC zing Factors Performance Indicators Parent firm: ** Investments ** Due ** Special Alpha Co. in start-ups at diligence relationships an expansion together with secured through stage business unit's the investment technology + ** Investment commercial team ** Amount of Industry: of $3m-$5m per revenue coming Telco & IT start-up with ** Exchange of to AVG from a portfolio of insights about start-up -50 start-ups emerging start- customers CVC unit: ups and Alpha Ventures ** Strategic technologies ** Amount of Group (AVG) purpose: between start-up expanding business units revenue paid technology of the parent by AVG options; firm and the accessing CVC unit ** Amount of complementary cost saving technologies ** Venture gained through group has the matchmaker role collaboration to foster with the relationship start-up between business units ** Amount of and start-ups revenue gained from newly introduced products or services Parent firm: ** Investments ** Report on ** Revenue of Bravo Co. in start-ups at market trends start-up with early stage and to advisory parent firm expansion board Industry: stage; further Industrial growth capital ** Delivering ** Input of the conglomerate insights to the start-up to ** Investment parent firm's BVC's CVC unit: of $0.5m-$5m management and development Bravo Venture per start-up the business process Capital (BVC) with a units about portfolio of emerging -40 start-ups markets, technologies, ** Number of ** Strategic and competition customers to purpose: whom BVC has Gaining window ** Circle sold solutions on technology; events: two-day together with expanding workshops with start-up technology business units, options; start-ups, and ** Revenue of accessing investors to startup with complementary generate BVC's customers technologies interest in start-ups within the parent firm ** Road show: Exposing start- ups to business units ** Venture unit as moderator for relationships between business units and start-ups Parent firm: ** Investments ** Distributing ** Use of an Charlie Co. in start-ups at insights into alliance expansion markets + performance state, technologies metric that Industry: occasionally rates aspects Imaging early stage ** Direct such as technologies operational deliverables, & services ** Investment contacts economic value, of $lm-$3m per between resource CVC unit: start-up with business unit leverage, and Charlie a portfolio of and start-up risk on a Alliance -30 start-ups functions scale of 1-5 Partners (marketing, (CAP) ** Strategic R&D, etc.) is purpose: primary conduit Gaining market for strategic knowledge; value, in window on particular technology; exploitational options; value accessing complementary ** CAP provides technologies training for business units and start-ups to bridge the cultural gap ** Ongoing relationship management by CAP Parent firm: ** Investments ** Iterative ** Milestone- Delta Co. in start-ups and bidirect- based metrics at an ional for tracking Industry: expansion stage relationship alliance Chemicals & between CVC performance materials ** Investment unit and DVP of $2m-$4m per ** Number-based CVC unit: start-up ** Cross- tracking of Delta Venture functional and open innovation Partners ** Strategic cross- events and (DVP) purpose: hierarchical activities Gaining window involvement of on technology; people to expanding improve technology acceptance of options; start-ups accessing complementary ** Business technologies; unit catalyst leveraging own as dedicated technologies role to bridge potential gaps and to create ownership for collaboration between business units and start-ups ** Tying the investment decision to the establishment of a strategic partnership Parent firm: ** Investments ** Pro-active ** Pre-revenue Echo Co. in start-ups and indicators at early stage bidirectional demonstrate Industry: and expansion relationship performance of Transportation stage between start-up products corporate ** Investment venture unit ** Informal, CVC unit: of $lm-$2m per and company "soft" Echo Technology start-up reporting of Ventures ** Cross- strategic value (ETV) ** Strategic functional purpose: involvement in Gaining window due-diligence on technology; process expanding technology options; technologies Parent firm: ** Investments ** Bidirectio- ** Equity Foxtrot Co. in start-ups at nal collabora- payments in early stage and tion between return for Industry: expansion stage corporate engineering Chemicals venture unit services ** Investment and business quantify value CVC unit: Fo ** of $0.5m-$5m development provided by Foxtrot Co. per start-up group parent firm Capital (FVC) ** Strategic ** Combination ** Qualitative purpose: of focal success stories Gaining market contact points demonstrate knowledge; within business value window on units + top- technology; management technology support of options unit to gain access and trust Parent firm: ** Investments ** Bidirectio- ** Qualitative Juliet Co. in start-ups nal flow of synergy report at early stage information to demonstrate Industry: and expansion between value on a Telco & IT stage business unit case-by-case Services and corporate basis ** Investment venture unit CVC Unit: of O.5m and start-up Juliet Venture [euro]-5m and corporate Group (JVG) [euro] per venture unit start-up ** Importance of company's ** Strategic middle purpose: management for Gaining market capturing value knowledge; from corporate window on venture technology; investments expanding technology options; accessing complementary technologies Parent firm: ** Investments ** Newsletters ** Number of Romeo Co. in start-ups and "breakfast start-ups that at early stage meetings" to have contracts Industry: and expansion capture with parent Telco stage explorational firm as operations value and indicator of ** Investment facilitate portfolio CVC unit: ** of 2m [euro]-3m further relevance Romeo Venture [euro] per exchange Capital (RVC) start-up between start-up and ** Strategic RVC purpose: Gaining market ** Dedicated knowledge; business window on development technology; team within accessing CVC unit to complementary facilitate technologies; strategic leveraging own value capture technologies Parent firm: ** Investments ** Cross- ** Case-by-case Sierra Co. in start-ups hierarchical success stories at an expansion involvement of to demonstrate Industry: stage company to long-term Wireless capture strategic telco R&D ** Investment explorational value creation of $0.5m-$1Om value CVC unit: per start-up ** Benchmarking Sierra Venture against case Partners (SVP) ** Strategic specific purpose: targets to Gaining market demonstrate knowledge; short-term window on progress technology; technology options * Company names are fictionalized to maintain anonymity of participants. Table 2.--Challenges and solutions for corporate venturing to support innovation Observed Challenge Observed Solution How can parent firms * Use financial targets as baseline to balance financial vs. identify commercially solid start-ups that strategic objectives? can develop into reliable business partners. * Clearly define and communicate additional strategic objectives internally and externally. How can parent firms * Use the CVC unit as a scouring unit for capture explorational external technologies and markets. value (e.g., market and technology * Make it the unit's responsibility to insights)? distribute information specifically (e.g., through presentations) as well as generally (e.g., through companywide newsletters). How can parent firms * Make it the responsibility of the business capture exploitational units to organize collaborations with value (e.g., access start-ups. to complementary technologies)? * Use the CVC unit as a matchmaker to introduce start-ups to appropriate business units. How can CVC units do * Bring relevant understanding of the parent successful matchmaking firm's structure into the CVC unit by setting between start-ups and up a team consisting of members with both business units? internal corporate and external venture capital experts. * Generate general interest through "technology road shows" in which start-ups present their technologies to interested business units. * Involve dedicated business unit members across all stages of the investment process to foster project ownership. * Consider setting up dedicated CVC funds tailored at individual business units as investors to focus on relevant technological areas and align interests. How can parent firms * Use a wide range of different metrics: soft measure the metrics; quantifiable, nonmonetary metrics; innovation-enhancing and quantifiable, monetary metrics. value of CVC programs? * Tailor metrics to the individual dimensions of value rather than using one metric set for all types of value. * Use success stories rather than complex metric systems to secure top-management support and demonstrate long-term value creation.
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|Author:||Napp, Johann Jakob; Minshall, Tiro|
|Date:||Mar 1, 2011|
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