Content uploaded by Haemin Dennis Park
Author content
All content in this area was uploaded by Haemin Dennis Park on Dec 07, 2015
Content may be subject to copyright.
THE JOURNAL OF PRIVATE EQUIT Y 1
WINTER 2015
Creating Values through Corporate
Venture Capital Programs:
The Choice between Internal
and External Fund Structures
PAUL ASEL, HAEMIN DENNIS PARK,
AND S. RAMAKRISHNA VELAMURI
PAUL ASEL
is a managing partner at
Nokia Growth Partners
in Sunnyvale, CA.
paul.asel@nokiagrowthpartners.
com
HAEMIN DENNIS PARK
is an assistant professor
at the LeBow College of
Business at Drexel Univer-
sity in Philadelphia, PA.
parkhd@drexel.edu
S. RAMAKRISHNA
VELAMURI
is a professor of entre-
preneurship at the China
Europe International
Business School in
Shanghai, China.
rvelamuri@ceibs.edu
As innovation’s center of gravity has
shifted away from large, estab-
lished f irms and toward startups
in recent decades,1 corporations
have increasingly relied on combining internal
and ex t er n a l ventur i n g mechanism s to sou rce
new in nova t ions. Cu r ren t l y, established f ir ms
leverage a combination of four mechanisms
to augment their businesses: build, buy,
partner, and invest. The appropriateness of
these growth alternatives varies depending on
market conditions and the strategic objectives
of the company (see Exhibit 1), yet corpora-
tions increasingly have recognized the value
of having each of these tools in their arsenal.
We distinguish between buying, wherein
the acquirer obtains control over the target
company, and investing, wherein the corpora-
tion becomes a minority shareholder (usu-
ally with a shareholding of less than 20%) in
startups, early-stage companies, and growth-
stage companies by providing capital and
other strategic resources. Corporate venture
capital (CVC) is an extension of investing
that applies a programmatic and systematic
approach, rather than ad hoc approach, to
corporate investment initiatives. CVC is the
subject of our research (Chesbrough [2002],
Dushnitsky [2006]).
According to the National Venture
Capital Association, established firms invested
more than $4 billion in venture businesses
in 2014, representing more than 10% of all
venture capital investments in the United
States during that year. With the growing
popularity of CVC programs, a variety of
structures and practices have emerged,
ref lecting the diverse objectives of corporate
investors. A lthough some focus primarily on
f i nanc ial re t urns, most a l so h ave v a r yi n g stra-
tegic objectives, including having a window
on new technologies (Benson and Ziedonis
[2009]), developing an ecosystem around a
technological standard, reinforcing strategic
partnerships, f illing gaps in product or tech-
nology portfolios, and scouting for acquisi-
tion opportunities. These diverse objectives
affect the nature and role of corporate inves-
tors, resulting in different organizational and
legal structures, employee incentives, invest-
ment criteria, and postinvestment engage-
ments. Aligning corporate objectives with
structured venture approaches is essential
in achieving f inancial and strategic goals
(Gompers and Lerner [2004]).
We explore how different organiza-
tional and legal structures affect personnel
policies and investment practices and ulti-
mately facilitate corporate objectives. Our
research probes the trade-offs between
internally established CVC programs and
external, independent CVC units outside the
firm. Our f indings provide valuable insights
on how established f irms can develop CVC
programs to eff iciently and effectively meet
their overall corporate objectives.
The Journal of Private Equity Downloaded from www.iijournals.com by 129.25.232.80 on 11/23/15.
It is illegal to make unauthorized copies of this article, forward to an unauthorized user or to post electronically without Publisher permission.
2 CREATING VALUES THROUGH CORPORATE VENTUR E CAPITAL PROGR A MS WINTER 2015
ORGANIZATIONAL AND LEGAL
STRUCTURES: INTERNAL VERSUS
EXTERNAL
By internal CVC programs, we refer to corporations’
practice of investing in startups directly from their own
balance sheets instead of through a separate fund. Internal
CVC programs typically staff their investment activities
with a majority of professionals coming from corpo-
rate operational roles. Intel Capital is the most visible
ex ample of a n i n ter n a l C VC, h av i ng i nvested more t han
$11 billion in more than 1,400 startups between 1991
and 2014. External CVC programs, on the other hand,
are separate venture funds with f ixed corporate funding
commitments making independent investment decisions
to achieve a blend of strategic and financial objectives
for the capital provider. These legal entities are separate
from the corporations that fund them, are structured
similar to pure financial venture funds, and typically
are staffed predominantly with professionals with prior
investment experience (Gaba and Meyer [2008]).
Fund Structure and Investment Focus
With internal CVC practices, corporate spon-
sors fund investments off their balance sheets on a
deal-by-deal basis. This structure has drawbacks and
benefits. Such a practice exposes the CVC program to
more uncertainty and fluctuations based on corporate
operating budgets and business cycles because corporate
sponsors typically invest in startups from discretionary
resources. Although this practice tightly ties internal
CVCs to evolving corporate priorities and gives com-
panies more funding flexibility, it also undermines the
consistency required to support investments through
economic cycles. CVC investments historically have
fluctuated with economic cycles more than indepen-
dent venture (IVC) investments have, and the mortality
rate for CVC programs has been particularly high after
downturns such as those in 2000 and 2008. We have
found that internal CVCs are more subject to the vaga-
ries of economic cycles than external CVCs.
In our interviews, we saw a general preference
among internal CVC programs for later-stage invest-
ments, in which partnerships and strategic benefits were
readily apparent. Corporations specif ically investing to
provide a window on new technology were the excep-
tio n to this ten dency. Int er n al CVC pr og r a ms tend to be
more responsive to evolving corporate strategic interests
as companies evaluate and control funding of invest-
ments on a deal-by-deal basis (see Exhibit 2).
Therefore, this structure is more appropriate when
the primar y objective of the CVC program is strategic
and financial returns are secondary. Indeed, several of our
EXHIBIT 1
Mechanisms Available to Corporations to Be Innovative
The Journal of Private Equity Downloaded from www.iijournals.com by 129.25.232.80 on 11/23/15.
It is illegal to make unauthorized copies of this article, forward to an unauthorized user or to post electronically without Publisher permission.
THE JOURNAL OF PRIVATE EQUIT Y 3
WINTER 2015
interviewees representing internal funds stated that their
financial goal was not to lose money and that they did not
consider f inancial upside to be a key success indicator.
In contrast, external CVC programs generally
operate akin to IVC funds in that they manage a separate
fund with a fixed funding commitment and life expec-
tancy (typically 10 years). This structure allows more
consistent investment management and greater f inan-
cial autonomy with more accountabil it y for investment
per formance. External CVC prog rams tend to be more
focused on f inancial returns, with compensation aligned
with f inancial performance through carried interest in
addition to annual salar y, which enables CVC units to
attract and retain experienced investment professionals.
Given the relative independence and f inancial motiva-
tions of external CVC programs, these programs are
more likely to invest in disruptive businesses that can
ex tend or e ven t hreat e n the c ore bu s i ne s s e s of the i r cor-
porate sponsors. Consequently, external CVC programs
have greater f lexibility to invest in unrelated businesses
and at earlier stages independent of near-term strategic
motives, but ult imat ely t hey more responsive to d i s r up-
tive threats and new business expansion opportunities.
CVC is one of mu lt iple vehicles u sed by larg e cor -
porations to achieve their strategic goals. For more than
20 years, IBM has operated a fund of funds that invests
in venture capital and private equity funds as a limited
partner. This program is managed from IBM’s headquar-
ters and invests in both developed and growth markets.
IBM’s internally structured CVC program, on the other
hand, is decentralized to a variety of regions and coun-
tries and focuses on approximately 120 growth markets.
IBM’s CVC program directly invests in minority stakes
(less than 20%) in early- and growth-stage companies. In
China, for example, IBM invests in ventures to promote
its enterprise middleware and software offerings because
its IVCs are focused primarily in the consumer space.
General Electric (GE) and Google also have two pro-
grams that invest separately in growth- and early-stage
businesses. GE Capital Equity and Google Capital invest
in growth ventures, whereas GE Ventures and Google
Ventures invest in early-stage companies.
EXHIBIT 2
Overlap Between Core Corporate Business and Investee Company Profile
Note: The larger the overlap between the two circles, the more appropriate an internal unit.
The Journal of Private Equity Downloaded from www.iijournals.com by 129.25.232.80 on 11/23/15.
It is illegal to make unauthorized copies of this article, forward to an unauthorized user or to post electronically without Publisher permission.
4 CREATING VALUES THROUGH CORPORATE VENTUR E CAPITAL PROGR A MS WINTER 2015
Goals: Financial versus Strategic
Unlike IVC firms whose sole objective is to maxi-
mize financial returns, CVC programs typically fulfill dual
objectives: financial and strategic. Their f inancial objectives
are similar to those of IVC firms in that corporate investors
have a f iduciar y dut y to per for m wel l f in a nci a lly, real i z i ng
capital gains from their investments through the sale of
equity to a strategic buyer or an initial public offering.
In contrast, strategic objectives are more diverse
and complex. Most strategic objectives are designed to
either prot ect or extend the core business e s of t heir cor-
porate sponsors. In terms of extending core businesses,
corporate investments can be an effective tool to develop
a robust ecosystem around a core product. This goal is
particularly important for f irms interested in developing
a technology standard, establishing critical mass, or cre-
ating barriers to entry in today’s networked economy.
For instance, Qualcomm, a producer of wireless chips,
initially set up Qualcomm Ventures—its CVC arm—to
help its code division multiple access (CDMA) tech-
nology become a wireless industry standard. Likewise,
Intel Capital, the CVC unit of Intel, was created to foster
the semiconductor industr y value chain and help Intel
expand industry leadership by increasing demand for
its products. Google’s, Motorola’s, Nokia’s, and Apple’s
programs also are used as a means to establish an eco-
system around their wireless and Web activities. By pro-
tective goals, we refer to the use of CVC programs as a
mechanism to engage with and monitor new, disruptive
products or technologies that potentially could pose a
threat to a corporation’s existing businesses.
Established f irms also operate CVC programs to
supplement internal research and development (R&D)
efforts, exposing firms to new technologies and ideas
that complement future product development efforts.
For example, companies such as IBM and Cisco have
used their CVC programs to scout for possible mergers
and acquisitions (M&A) opportunities. CVC also may
complement internal R&D units by sponsoring incu-
bators that attract innovators outside the firm who
would like to leverage corporate domain and technical
ex pertise as well a s go-to -market r esou rce s. Lever a g i ng
CVC activities as a repository of technical and market
knowledge from portfolio companies could be particu-
larly useful if the CVC unit invests in a wide variety of
technologies that are distant from the core knowledge
stock of the corporate sponsor.
Several CVC fund personnel that we interviewed
indicated that their investment mandates tend to expand
and contract with the business cycle: They invest more
broadly during cyclical highs and more narrowly during
cyclical lows. Dur ing economically buoyant periods,
investment strategies ref lect a more exploratory outlook,
featuring terms such as sector agnostic and stage agnostic, with
investments more loosely aligned with business units.
During periods of economic slowdown, the strategy
shifts to a more defensive one, with CVC activity coor-
dinating closely with business units and the investment
mandate becoming much more tightly aligned to the
existing businesses. Many corporate sponsors stop or
curtail CVC investment during downturns, with a par-
ticularly high mortality rate following the dot-com bust
in 2000. According to data from the National Venture
Capital Association, CVC investments in the United
States fell from close to $16 billion in 2000 to approxi-
mately $ 8 billion in 2001. Corporate sponsors have since
recognized the importance of maintaining CVC activity,
but will adjust objectives over time to fit their strategic
imperatives. Internal CVC programs are more sensitive
to these macroeconomic and industry cycles, whereas
external CVCs have more consistency of purpose.
Measurement of Performance
Financial objectives are readily measurable and
quite consistent across CVC programs. Nevertheless,
objectively measuring f inancial performance of CVC
programs is challenging within quarterly and annual
corporate contexts because meaningful venture f inancial
results require 5–10 years before investments are real-
ized. Corporate venture thus requires steadfastness and
patience. Internal funds that need to justify their perfor-
mance annually to receive continued funding find finan-
cial measures particularly challenging as returns typically
follow a J curve—losses are realized before gains.
Although measuring financial performance may be
challenging in the near term, measuring returns from
strategic objectives can be elusive both in the near and
long terms. Strategic benefits typically are anecdotal and
not readily quantif iable. The following quotes by CVC
professionals provide an indication of these difficulties:
Has the investment exposed us to new clientele or
to opportunity sets? Have we been successful in
closing deals as a result of the investment? There
The Journal of Private Equity Downloaded from www.iijournals.com by 129.25.232.80 on 11/23/15.
It is illegal to make unauthorized copies of this article, forward to an unauthorized user or to post electronically without Publisher permission.
THE JOURNAL OF PRIVATE EQUIT Y 5
WINTER 2015
has to be broad consensus that strategic goals
have been achieved. Usually there is no dispute
between the investment team and business units,
because the invest ment team pr ides itself on dis-
cipline. We give our investments two to three
ye a r s befo re th e y bea r fruit; i f no be nef i t [is] s e en
in [the] first three years, we are not likely to see
them later. We have had many investments that
were financially successful, but strategic benefits
did not come through in the time frame envis-
aged. ( Director of an internal CVC fund).
On individual investee companies, there is
not always acknowledgement at [the parent com-
pany] that value was delivered. On the whole
invest ment prog ra m, we look n ot jus t a t t he invest-
ments but also to what extent [the parent com-
pany] was able to gain knowledge and insights on
what is happening in the market, often through
discussions with companies in which we do not
end up investing. This takes signif icant effort on
our part and is rarely conclusive. (Director of an
external CVC fund).
Given the challenges of articulating and measuring
strategic contributions, over time, CVC programs tend
to migrate away from strategic goals and rely more on
financial measures of success. For example, an inter-
viewee from an internal CVC fund indicated that its
sole objective was financial returns and its sole stra-
tegic requirement was that its investments be tied to the
core business of the corporation. Never theless, we have
observed that this tendency is neither unidirectional nor
determinate. Corporate objectives evolve as a function
of both organizational and external factors, and internal
funds with long histories have shifted back and forth
between strategic and financial objectives based on the
prerogatives of corporate leadership.
Survival bias also helps explain the predominance of
financial metrics over strategic measures being employed
by well-run CVC programs over time. Because financial
measures are more objective over the long term, suc-
cessful CVC programs tend to focus more on financial
metrics, whereas f inancially nonperforming CVC pro-
grams are unlikely to persist.
Although strategic objectives are hard to measure,
corporate investors leverage strategic resources for the
benefit of both their corporate sponsors and portfolio
companies. In an increasingly competitive venture market,
IVCs need to differentiate their f irms based on investment
track record, industr y expertise, network, timely execu-
tion, and reputation. CVCs can claim industry expertise,
a deep network, and a recognized brand name, but the
opportunity for market insight, partnerships, and access
to sponsor resources are often key differentiators that
only specif ic corporate investors can provide. Examples
of these resources include product testing infrastructure,
strategic partnering and technology integration, manu-
facturing facilities, distribution networks, and customer
service resources. Although IVC firms may act as brokers
and provide some of these resources through their con-
tacts, direct provision of these resources by a corporate
investor can lead to more efficient and effective ways for
investees to access these resources for their technology
commercialization and business development.
Deal Sourcing and Due Diligence
Given the size and reputation of corporate sponsors,
CVC programs generally can offer strategic partnerships
and insights that enable them to readily source deals in
their respective industries. CVC programs engage busi-
ness units and others in their industry network in the
due diligence process. Engaging business units in due
diligence and decision making can slow the process,
leading to missed competitive investment opportunities.
Our research indicates that internal CVC units generally
take longer than external ones but may facilitate greater
strategic alignment with business units prior to invest-
ment. CVC funds, both internal and external, enjoy sig-
nif icant advantages in the due diligence process within
their industry domain relative to IVC funds because of
their ability to leverage corporate and industry knowl-
edge, technical expertise, and extensive networks.
Company Involvement
We observed several differences between internal
and external CVC programs in terms of their involve-
ment with their corporate sponsors. Internal CVC units
generally require approval from their investment com-
mittee, including the relevant business unit, and ongoing
engagement with the business unit after the investment.
This engagement encourages closer strategic alignment
with corporate sponsors, but it can increase potential
conflicts of interest and delays in decision making,
taxing the limited resources of the startup.
The Journal of Private Equity Downloaded from www.iijournals.com by 129.25.232.80 on 11/23/15.
It is illegal to make unauthorized copies of this article, forward to an unauthorized user or to post electronically without Publisher permission.
6 CREATING VALUES THROUGH CORPORATE VENTUR E CAPITAL PROGR A MS WINTER 2015
External CVC programs generally involve the
corporate business unit involvement less extensively in
investment decisions, but this often reduces business unit
engagement after the investment as well. However, external
CVC personnel are f requently more act ive w ith port fol io
companies, more willing to lead investment rounds and
take board seats. Internal CVC units, in contrast, are typi-
cally passive investors, following lead investors in financing
rounds and refraining from taking board seats. Board
membership requires sustained executive-level involve-
ment with portfolio companies, enabling board directors
to inf luence company strateg y in a way that internal CVC
units resist for reasons of legal liability.
Corporate investors both external and internal need
to be mindful of perceptions of inf luence and control
over portfolio companies. Perceived undue inf luence
could make the corporate sponsor liable for portfolio
company a c t iv it y even thoug h it e xert s no direct control.
Likewise, both internal and external CVCs typically
prefer minority equity stakes below 20% in portfolio
companies to avoid perceived inf luence that would
require consolidating an investee’s financial statements
in the corporate consolidated financial statements.
CVC Personnel and Compensation
Internal and external CVC units have pronounced
differences in the way they recruit and compensate
investment managers. Internal CVC units typically
source the majority of their investment managers from
their own business units, choosing people with deep
knowledge of the company’s products, strategy, and
procedures. Corporate managers have well-developed
internal networks that reinforce strategic prerogatives
and facilitate deeper engagement with business units.
Leaders of internal venture groups typically have prior
executive experience with corporate sponsors and are
responsible for fulfilling corporate strategic interests.
External CVCs rely less on staff with prior corporate
experience and instead tend to recruit investment profes-
sionals with prior financial and investment experience.
Internal CVC units typically compensate personnel
through a salary and bonuses linked to the overall cor-
porate compensation structure. Linking compensation
to investment performance through annual bonuses is
particularly challenging because strategic value is dif-
ficult to measure and financial performance typically
is not ascertainable until many years after the initial
investment. Compensation for external CVCs gen-
erally follows venture industry convention, with an
annual salary and bonus, plus carried interest explicitly
linked to the financial performance of the investments
in which personnel receive a fixed percentage of the
capital gains—or partial responsibility for losses—when
investment returns are realized.
Our research indicates that turnover is higher at
internal CVCs than at external CVCs. Based on our
review of the CVCs in our survey over a four-year
period, internal CVCs on average had a nearly 30%
higher turnover rate, and external CVC personnel on
average had a 17% longer tenure (see Exhibit 3). In our
interviews, internal CVCs cited two primary challenges
in retaining key personnel. First, since compensation
was tied to corporate rather than venture pay structures,
high-performing investors often left for independent
venture firms, particularly during buoyant economic
periods. Second, internal CVC personnel were viewed
as corporate staff who may rotate among corporate posts,
although more-established corporate venture programs
now recognize investing as a separate discipline that
requires specialization and continuity. Employee turn-
over created particular challenges, according to intervie-
wees, as it was common for investment champions either
at the CVC or the business unit to migrate to another
post before strategic objectives were realized. Both
external and internal CVCs cited business unit turnover
as an issue, but turnover within internal CVCs com-
pounded the challenge in realizing strategic objectives.
Exit Considerations
External CVCs generally are structured with a
10-year fund life, similar to IVCs. Although portfolio
companies tend to achieve orderly exits within this
time frame, the average life of a venture investment has
EXHIBIT 3
Comparison of Personnel Experience and Turnover
among Internal and External CVCs
The Journal of Private Equity Downloaded from www.iijournals.com by 129.25.232.80 on 11/23/15.
It is illegal to make unauthorized copies of this article, forward to an unauthorized user or to post electronically without Publisher permission.
THE JOURNAL OF PRIVATE EQUIT Y 7
WINTER 2015
increased to more than seven years across the venture
industr y. A secondary market for venture investments
has arisen to allow funds to exit investments selling to
new investors even as the investee company continues
its operations as an independent entity. Internal CVCs
have unlimited time horizons, so they can maintain their
investments over a longer period than external CVCs
and continue to realize financial and strategic benefits
from the association with the investee company.
Several internal CVC funds view corporate
investi n g a s a window to possible ac qu i s ition . Both IBM
and Cisco cite acquisitions as one of their stated interests
and view investments as a way to monitor company prog-
ress and reduce acquisition risk for those they pursue.
In China, where the market in each Internet vertical
is highly concentrated among the three giants—Baidu,
Alibaba, and Tencent—with others such as Ctrip and
JD.com more focused on individual verticals, investing
as a n o pt ion for an eventua l ta keover is a more p revalent
phenomenon. Where acquisition is a stated prerogative,
CVCs may seek to include special investment terms that
give them the right of f irst offer or refusal for acquisition,
although promising companies are loath to accept such
terms because they can create conf licts of interest and
limit future exit options.
Many corporations are reluctant to acquire CVC
portfolio companies for two reasons. First, corporate
sponsors are concerned about conf licts of interest that
ca n lead to over pay ing f or ve nt u re s seen a s t he “p et proj-
ects” of their CVC managers. Second, if corporate inves-
tors already enjoy strategic benefits as minority equity
holders in their investees, the control premium required
to acquire the business may be difficult to justify unless
the portfolio company is in danger of being acquired
by a competitor. Empirical evidence from other studies
shows that corporate investors acquire only 3% –5% of
the portfolio companies of CVC funds.
CONSIDERATIONS FOR STARTUPS
Successful CVC programs must develop mutu-
ally beneficial relationships with the startups that receive
funding from them. Given the diverse sources of venture
financing available today, startups are increasingly savvy
about the benefits and risks associated with corporate inves-
tors. Entrepreneurs want the benefits that can be derived
from a strategic investment so long as the investment does
not limit future strategic, partnership, or exit alternatives.
There are three primary motivations for startups to
seek CVC investments: 1) capital funding, 2) endorse-
ment from a reputable corporate investor, and 3) part-
ner ships in var ious forms. Althoug h reput able IVCs can
respond to the f irst two requirements, complementary
assets are unique resources that only corporate inves-
tors can provide (Gompers and Lerner [2004], Park
and Steensma [2012]), including product testing infra-
structure, manufacturing facilities, and distribution and
customer service activities. These resources are often
prohibitively expensive and time consuming for a startup
to build on its own. We find that the most successful
corporate investor–investee relationships are those that
help both parties develop co-specialized, relationship-
specific, mutually beneficial assets over time (Teece
[1986]).
Typically, CVC funds will invest later than IVC
funds. In one illustrative case, a firm in the payments
bu s i ne s s rece ived four rou nd s of fundi n g f rom IVC fu nds
before approaching CVC funds. When we interviewed
the CEO, there were five CVC investors in the share-
holding structure, together accounting for approxi-
mately 30% of the equity. The CEO opined that no
single CVC investor should have a large enough stake
that it can be seen by other potential investors or part-
ners as dictating the strategy. He attributed the success
of this CVC partnership to approaching the CVC fund
at the right time and from a position of strength (i.e.,
after having achieved significant product development
milestones) and drawing up a detailed road map of how
the two would work together.
From the perspective of many startups or early-
stage ventures, a CVC investor that is in explorator y
mode and wanting to invest away from its core is no
different from an IVC fund because it is unlikely to be
able to add much value beyond the capital it brings in.
Few entrepreneurs that we interviewed understood the
differences between internal and external CVCs, though
they did understand the differences once explained.
From a startup’s perspective, an internal CVC unit
may more readily tap corporate resources (Park and
Steensma [2013]), but external CVCs may have fewer
encumbrances involving potential corporate conf licts
of interest. Entrepreneurs are aware that internal corpo-
rate funds may not be able to participate in subsequent
investment rounds if the corporation is not doing well.
Ultimately, investor reputations and the track record
for delivering strategic and financial returns established
The Journal of Private Equity Downloaded from www.iijournals.com by 129.25.232.80 on 11/23/15.
It is illegal to make unauthorized copies of this article, forward to an unauthorized user or to post electronically without Publisher permission.
8 CREATING VALUES THROUGH CORPORATE VENTUR E CAPITAL PROGR A MS WINTER 2015
over time are paramount for entrepreneurs, whether a
venture initiative is cloaked as an IVC or an internal or
external CVC.
PRESCRIPTIONS TO ESTABLISHED FIRMS
OPERATING CVC PROGRAMS
Based on our research, we would prescribe four
recommendations for companies establishing CVC pro-
grams. First, the choice between an internal and external
CVC is a vital consideration that should be based on the
strategic and f inancial goals of the CVC program. In
general, internal units are more conducive to strategic
investments that are supportive of the existing core busi-
ness of the corporate sponsor, whereas external units are
more nimble and autonomous in exploring investments
into new business areas or innovations that are poten-
tially disruptive to the core business. Internal units may
be more useful as a way of consolidating and growing
the core business, whereas external units might be more
appropriate for mitigating competitive threats that may
emanate from noncore areas and for creating new growth
engines in less related areas. One implication of this dif-
ference is that external units may be better suited for
early-stage investments in which relevance to the core is
sometimes unclear and there is much uncertainty related
to strateg y and direction of the startup.
Second, and related to our first recommendation,
we suggest that internal units are preferable when near-
term strategic goals are clear and require strategic invest-
ments to further these interests or where the external
environment is unfavorable and the need for tight con-
trol of investment activity is paramount. In such cases,
strategic considerations might override f inancial ones.
On the other hand, when there is less current stra-
tegic overlap or complementarity between investor and
investee, measuring the outcome of the CVC program
using financial gains might be more appropriate. This
is more easily done through an external unit.
Third, the most successful CVC programs are those
that can take advantage of the existing resources of their
corporate sponsors as a key differentiator for the CVC
investment progra m . It i s ver y d i f fic u lt t o comp ete aga i n st
IVC firms with greater experience and incentives for their
managers if they focus solely on f inancial objectives. Indeed,
a close examination of synergistic opportunities and rou-
tines for technology transfer between corporate sponsors
and investees could create value for both parties.
Finally, CVC programs are excellent tools when
they are used in conjunction with other tools (such as in-
house R&D, M&As, and strategic alliances) to develop
an ecosystem to create proprietary partner networks or
value chains without the burden of integrating part-
ners into the corporate sponsor’s existing operations
while allowing the sponsor to retain inf luence through
minority equity ownership.
CONCLUSION
In a world where established f irms increasingly
rely on external sources for innovation, CVC programs
can play an important role in accessing new technolo-
gies and supporting startups that complement existing
core businesses. We advocate that established firms care-
fully assess their corporate goals to set up appropriate
organizational, legal, and personnel structures for their
CVC programs that are congruent with their overall
corporate objectives.
Our in-depth interviews with investors and
investees in the United States, Europe, and Asia suggest
that although internal CVC units are more conducive
to meeting strategic objectives, they are often slower in
decision making and subject to greater f luctuation in
strategic direction and resource endowments according
to the corporate sponsor’s financial health. External CVC
units can be more agile in decision making, attract expe-
rienced investment managers, and deliver strong f inancial
returns and strategic benef its to the corporate sponsor.
Nonetheless, many interesting issues require fur-
ther exploration. The CVC venture model is still devel-
oping and is less mature than IVC programs. IVC firms
took decades to establish their reputation and know-how
for nurturing startups. Therefore, we need more time
to observe how different CVC programs fine-tune their
structures to meet their overall f inancial and strategic
objectives. Indeed, as more CVC programs have moved
from internal to external units in recent years, it is pre-
mature to draw conclusions about the performance
effects of external CVC units. As new entrants typi-
cally adopt established industry norms, it often takes a
number of years for newly established CVC programs
to evaluate their organizational structure and f ind the
optimal structure that fits with their organizational char-
acteristics, resources, and objectives. The dual objectives
of CVC programs—strategic and financial—offer more
structuring options than are needed for IVC firms. It is
The Journal of Private Equity Downloaded from www.iijournals.com by 129.25.232.80 on 11/23/15.
It is illegal to make unauthorized copies of this article, forward to an unauthorized user or to post electronically without Publisher permission.
THE JOURNAL OF PRIVATE EQUIT Y 9
WINTER 2015
therefore important for corporations to align their pri-
orities with the appropriate structure. We believe that
our research can provide valuable insights to them in
making this choice.
APPENDIX A
LIST OF CVC INVESTORS AND
ENTREPRENEURS INTERVIEWED
APPENDIX B
RESEARCH METHODOLOGY
We interviewed 28 subjects over a 3.5-year period. Our
aim was to explore the trade-of fs in structuring a corpo-
rate venture capital (CVC) fund as an external rather than
an internal fund. We conducted in-depth interviews lasting
between 30 and 45 minutes and relied on the authors’ network
to access most of the subjects. Our interviewees have accu-
mulated vast experience in CVC investing. We interviewed
13 investment professionals from internal CVC funds and 10
fr om ex tern a l funds. We als o i nter viewed f ive entrepreneu r s
who had received investments from both independent venture
capital (IVC) funds and CVC funds.
We followed a semistructured inter view format. In the
case of CVC professionals, our research team obtained as
much factual information about the fund as possible before
the inter views. This allowed us to optimize the limited inter-
vie w t i me by focusi ng o n the t opic s that were r e leva nt for o u r
study. In the interviews, we covered four sections: the fund’s
background and objectives, investment decision-making
process, postinvestment role with portfolio companies, and
performance. We knew beforehand that CVC funds (and IVC
funds) are very particular about the conf identiality of their
data. We thus focused on obtaining a qualitative assessment
of the fund’s performance.
In the case of the entrepreneurs, we asked questions about
entrepreneurs’ background and ventures (as a conversation
starter) and then asked about the investors in the company, their
motives and expectations in seeking CVC funding, whether
these expectations had been met, how CVCs differed in their
behaviors from IVCs, and what advice about CVC funds they
would give to other entrepreneurs seeking funding. Most of
the interviews were taped with the permission of the inter-
viewees. Our research team then took detailed notes from the
tapes. We had nearly 100 pages of typewritten notes from our
interviews.
In add ition to thi s primary data, we rel ied on access to
the database of Global Corporate Venturing to observe trends
on the number of CVC investments, deal sizes, geographic
distribution of the investments, source industries of the inves-
tors, and destination industries of the investments.
For our data analysis, we created two folders repre-
senting internal and external funds and created buckets of data
wit hin eac h folder c or respon d i n g to the sectio n s i n the m a n u-
scripts. We collected text chunks from our interviews and put
them in the corresponding buckets (e.g., we collected all the
internal fund managers’ comments related to fund structure
and investment focus into a bucket, then did the same with
financial versus strateg ic goals, etc.). Once both folders were
full, we analyzed the key similar ities and differences between
the same bucket in the internal and the exter nal folders to
identify patterns. We distilled our key f indings from the simi-
larities and, more importantly, the differences.
ENDNOTES
We thank Kathi Zee, David Jiang, Sof ia Galante, Leo-
pold Kang, Johnny Kim and Siva Sakthiraj Rajamani for
research support at different stages of this project.
The Journal of Private Equity Downloaded from www.iijournals.com by 129.25.232.80 on 11/23/15.
It is illegal to make unauthorized copies of this article, forward to an unauthorized user or to post electronically without Publisher permission.
10 CREATING VALUES THROUGH CORPOR ATE VENTURE CAPITAL PROGRA MS WINTER 2015
1According to Robert Ackerman, founder and man-
aging director of A llegis Capital, the share of large (more
than 250,000 employees) U.S. corporations’ national R&D
expenditure fell from 71% in 1981 to 37% in 2005. In the
same period, the R&D share done by companies with fewer
than 5,000 employees went up from 10% to 40 % .
REFERENCES
Benson, D., and R.H. Ziedonis. “Corporate Venture Capital
as a Window on New Technologies: Implications for the Per-
formance of Corporate Investors When Acquiring Startups.”
Organization Science, Vol. 20, No. 2 (2009), pp. 329-351.
Chesbrough, H. “Making Sense of Corporate Venture Cap-
ital.” Harvard Business Review, Vol. 80, No. 3 (2002), pp.
90-99.
Dushnitsky, G. “Corporate Venture Capital: Past Evidence
and Future Directions.” In Oxford Handbook of Entrepreneurship,
edited by M. Casson, B. Young, A. Basu, and N. Wadeson,
pp. 387-431. Oxford: Oxford University Press, 2006.
Gaba, V., and A.D. Meyer. “Crossing the Organizational
Species Barrier: How Venture Capital Practices Inf iltrated
the Information Technology Sector.” Academy of Management
Journal, Vol. 51, No. 5 (2008), pp. 976-998.
Gompers, P.A., and J. Lerner. The Venture Capital Cycle, 2nd
ed. Cambridge, MA: MIT Press, 2004.
Park, H.D., and H.K. Steensma. “When Does Corporate
Venture Capital Add Value for New Ventures?” Strategic Man-
agement Journal, Vol. 32, No. 1 (2012), pp. 1-22.
——. “The Selection and Nurturing Effects of Corporate
Investors on New Venture Innovativeness.” Strategic Entrepre-
neurship Journal, Vol. 7, No. 4 (2013), pp. 311-330.
Teece, D.J. “ P rof iti ng f rom Tech nologica l Inno vatio n : I mpli-
cations for Integration, Collaborating, Licensing and Public
Policy.” Research Policy, Vol. 15, No. 6 (1986), pp. 285-305.
To order reprints of this article, please contact Dewey Palmieri
at dpalmieri@ iijournals.com or 212-224-3675.
The Journal of Private Equity Downloaded from www.iijournals.com by 129.25.232.80 on 11/23/15.
It is illegal to make unauthorized copies of this article, forward to an unauthorized user or to post electronically without Publisher permission.
