CVC: current trends and future directions
ABSTRACT
Corporate Venture Capital (CVC) investments consist of minority equity stakes in relatively new, not publicly traded companies that are seeking capital to continue operation. Corporate Venture Capital (CVC) has been recognized as important vehicle for fostering entrepreneurial development. Although there exists already an amount of theoretical as well as empirical studies aiming at explaining, predicting or understanding CVC activity in firms growth, there seems to be a growing dissatisfaction among scholars with the fragmented findings that have emerged to date. In fact CVC activities play an increasingly important role in value creation for both start-ups and the large companies that invest in them, but it remains unclear how both corporate venturers and start-up recipients capture and measure the strategic value of corporate venture capital investments. The current paper intends to present a review of the existing literature. Results present a fragmented literature with a proliferation of different perspectives.
Keywords: CVC, entrepreneurial development, organizational performance
INTRODUCTION
Scholars have long been interested in the components and forms of the ‘knowledge production function’—the process by which innovative inputs are transformed into innovative outputs (Dushnitsky and Lenox, 2005). In the past, the innovation literature has mainly focused on the role of internal R&D on firm innovation (Griliches, 1979),even though internal R&D expenditures play only a limited role in firm innovation rates.Actually, companies pursue innovation mainly by investing in external entrepreneurial ventures.This phenomenon is generally referred to as Corporate Venture Capital (also known as CVC). It represents an equity investment by large corporations in entrepreneurial ventures that originate outside the corporation (Roberts and Berry, 1985).
CVC activities have been playing an increasingly important role in innovation strategy for large corporations across the globe. Figures about recent trends within the venture capital industry point to that, after a period of decline at the end of the dotcom boom between 2000 and 2003, corporations are now responsible for a significant share of venture capital investments. By way of example, in 2009, around 20 per cent of the Fortune 500 companies created a CVC unit (Dushnitsky, 2011).It is therefore not surprising that today CVC is increasingly regarded by organizations as a vital weapon in their entrepreneurial and innovation armory.
CVC has significantly evolved over time. As Chesbrough (2000: 32) contends, ‘the most recent cycle of corporate venturing has utilized venture capital structures to motivate employees to become more entrepreneurial and take more risk’.CVC programs can create value for both start-ups and the large companies that invest in them. Corporate Venture Capitalist can allow access to complementary technologies and a general window on technology developments (Fox 2003; Gompers 2002). Start-ups benefit from, for instance, increased access to markets and customers as well as management advice (McNally 1997; Muller et al., 2004). However, it remains unclear how both corporate venture capitalists and start-up recipients capture and measure the strategic value of corporate venture capital investments (Allen and Hevert 2007).
The heterogeneity of CVC investments and the variety of motives pushing companies to pursue them makes it relevant to understand more in depth how CVC works and performs. This is the aim of the paper, to provide an assessment of the current state of the literature on CVC, and identify issues that deserve further attention. To achieve this aimwe review the existing literature on CVC in an attempt to systematize current research and identify future avenues of investigation.
This paper is organized as follows. In the next section we describe the method for the study. We then present findings. The paper ends with discussing what our findings mean for the community of scholars.
METHOD FOR THE REVIEW
To address our research question, we carry out a literature review.Our review is systematic in nature and narrative in terms of presentation of findings (see also Meglio & Risberg, 2011 for a detailed protocol for a review). Below we describe the protocol we followed in drawing our sample and classifying articles included in the sample.
To identify articles for the review, we searched into EBSCO source complete database. The keyword for the search was Corporate Venture Capital. We delimited our search to the time frame2000-2012, as the number of CVC investments in high-tech industries has been growing dramatically since the beginning of 1990s. We decided to look in to top-tier management journals as well as those focused on knowledge-related topics (Linton,2006), accounting for both American and European perspectives. We therefore focused on the following journals: Academy of Management Journal, Business Strategy Review, California Management Journal, Entrepreneurship Theory & Practice, International Studies of Management and Organization, Journal of Management Studies, Journal of Small Business Management, Organization Science, R&D Management, Research Technology Management, Strategic Management Journal.
We narrowed our sample by excluding those articles not explicitly addressing CVC issues. Moreover, we left out theoretical article. The final sample comprises 26 articles, each of them featuring an empirical study (Table 1).
Table1. Composition of the Sample
Journal / 2000-2009 / 2010-2012Academy of Management Journal / 2 / 2
Business Strategy Review / - / 1
California Management Review / 1 / -
Entrepreneurship Theory & Practice / 2 / -
International Studies of Management and Organization / - / 1
Journal of Management Studies / 3 / -
Journal of Small Business Management / 1 / -
R&D Management / 2 / -
Research Technology Management / 3 / 3
Strategic Management Journal / 3 / 2
TOTAL / 17 / 9
From the table, it clearly emerges that CVC is a topic that attracts interest from different readerships, within journals with different aims and scopes. Specifically, it interests both more generalist journals, such as Academy of Management Journal, and focused ones, such as Research Technology Management.
From each article, we collected information according to a reading note, organized around different sections. Besides identification information (author, outlet, year of publication), we wrote down the research questions authors investigate. In describing the CVC under analysis, we classified CVC operationsin terms of aims, units of analysis, countries and time span. In the research method section, we categorized studies as quantitative, qualitative or mixed and as relying on secondary and/or primary data. In addition, we noted the theoretical frameworks employed and summarized main findings.
FINDINGS
Our paper focuses on CVC activity, a corporate activity particularly relevant in high-tech industries. Gompers and Lerner (2000) define CVC investments like established industry incumbents’ participation in the private equity market by providing start-ups with funding in return for equity positions (Gompers and Lerner, 2000). Although all CVC investments have financial motivations (Chesbrough, 2002), learning and the gathering of market and technology intelligence are generally recognized as being among the most important objectives of this investment activity (Dushnitsky and Lenox, 2005; Wadhwa and Kotha, 2006), particularly in technology-intensive industries.
Main attention in these articles are high tech firms (ICT, telecommunication, computer software, computer services), as they are active in venture capital operations aimed at developing technological expertise.
As for the research focus, the elaboration of our data shows that literature proceeds from three directions – financial performance of CVC; CVC as a path to develop new technology; and CVC impact on new organization (Table 2).
Table2. Research Focus in CVC Research
Finance / Allen and Hevert (2007); Benson and Ziedonis (2009); Dushnitsky and Lenox (2006); Park and Steensma (2012); Gaba and Meyer (2008)Management of knowledge and innovation / Wadhwa and Kotha (2006); Dushnitsky and Lenox (2005); Keil (2002); Keil (2004); Schildt, Maula and Keil (2005); Keil, Autio and George (2008); Markman et al. (2008); Dushnitsky and Shaver (2009); Dushnitsky and Shapira (2010); Gaba and Meyer (2008); Souitaris et al. (2012); Dokko and Gaba (2012); Weber and Weber (2010)
Strategy and organization / Sykes (1990); Ernst, Witt and Brachtendorf (2005); Engel (2011); Napp and Minshall (2011); Waites and Dies (2006); Chesbroughand Socolof (2000)
Looking into the geographical areas covered by empirical research, our paper shows that the number of CVC studies on countries other than the US is small but appears to be growing. Specifically, the majority of the articles are focused on US and Canada (21), with the remaining studies investigating Europe (three) and Asia (two).
The acquisition of innovation and knowledge is one of the most important result of a CVC activity. Knowledge accumulation and transfer may be critical for the successful operation of the CVC. For these reasons most of the papers typically focus on the CVC programs (Table 3). Knowledge accumulates either through practice or by observing and analyzing competitors’ venturing activities. In doing so, the corporation learns how to organize its CVC program effectively, possibly promoting learning. However the literature analysis shows that a not systematic effort has been devoted to conceptualize and capture this learning.
The “Parent” organization was another important unit of analysis.Studies conducted on "parent-venture relation" typically investigate specific ventures. These studies often examine the intensity of a company’s CV activities, counting the number of CV units created by a corporation.
Researchers have also invoked numerous theories, discussing their theoretical preferences and the research questions pursued. An analyses into the theories used in prior studies suggests that no single, dominant theoretical approach seems to have guided past empirical analyses (Narayan et al., 2009).
Table 3. Level of analysis employed in the CVC literature
Relation between parent and venture / Chesbroughand Socolof (2000); Chesbrough(2000); Ernst, Witt and Brachtendorf (2005); Waites and Dies (2006); Dushnitsky and Lenox (2006); Keil et al. 2008; Keil Weber and Weber (2010);Program / Dushnitsky and Lenox (2005); Wadhwa and Kotha (2006); Gaba and Meyer (2008); Keil et al. (2008); Dushnitsky and Shapira (2010);Dushnitsky and Shaver (2009); Napp and Minshall (2011); Dokko and Gaba (2012); Park and Steensma (2012); Souitaris et al. (2012)
In the sample of articles, a branch of studies focus attention on financial aspect of CVC activity. Allen and Hevert (2007) develop a paper on financial returns and strategic benefits of Venture Capital investments in information technology companies. They evaluate direct returns of programs of U.S. IT companies during 1990–2002 concluding that‘Direct gains (losses) were widely dispersed and bi modally distributed, based on IRR and net cash flow metrics. Timing of initiation within the venture capital cycle; program scale; and annual investment, write-down, and harvest behavior were associated with differences in returns’ (Allen and Hevert, 2007: 262).
Another important study is the one conducted by Benson and Ziedonis (2009). They build on previous studies that suggest that information gained through CVC-related activities can improve the internal R&D productivity of established firms, and investigate an alternative means by which information gained through CVC investing could improve firm performance—by increasing the returns to corporate investors when acquiring startups.They conduct an event study of the returns to 34 corporate investors from acquiring 242 technology startups. Results confirm predictions drawn from the absorptive capacity literature and point to that the effect of CVC investing on acquisition performance hinges critically on the strength of the acquirer’s internal knowledge base. ‘CVC investments increase relative to an acquirer’s total R&D expenditures, acquisition performance improves at a diminishing rate. We also find that firms consistently engaged in venture financing earn greater returns when acquiring startups than do firms with more sporadic patterns of investing, even controlling for firm profitability, size, and acquisition experience’ (Benson and Ziedonis, 2009: 329).
Dushnitsky and Lenox (2006) develop a paper using a panel of CVC investments. Scholars suggest that established firms face underlying challenges when investing CVC. Namely, structural deficiencies inherent in corporate venture capital may inhibit financial gains, but they find ‘that corporate venture capital investment will create greater firm value when firms explicitly pursue corporate venture capital to harness novel technology’(Dushnitsky and Lenox, 2006: 753).
Park and Steensma (2012) address the question ‘When does Corporate Venture Capital Add Value for New Ventures?’ , and explore conditions under which CVC funding is beneficial to new ventures. They use a sample of 198 wireless communications service, 111 computer hardware, and 199 semiconductor 3111//3112) ventures founded in the United States that received their first round of funding from CVC and/or IVC funds between 1990 and 2003. They results show that CVC activities became prevalent after 1990 (Gaba and Meyer, 2008). This research shows that CVC funding presents both advantages and disadvantages for new ventures. Authors explored conditions under which CVC funding may be particularly beneficial to new ventures’ performance. They conclude that‘the tight relationship between new ventures and corporate investors is particularly beneficial in attaining specialized complementary assets. Such equity relationships can mitigate potential opportunistic behavior between new ventures and the providers of specialized complementary assets. It appears that when new ventures require specialized complementary assets, the benefits of corporate investor ties outweigh the ability to access the open market. In contrast, we found that the benefits of CVC funding to new venture performance was relatively limited for those new ventures that merely required generic complementary assets, and the benefits of an equity tie with a corporate investor were minimal is such situations’ (Park and Steensma, 2012: 17).
A second branch of studies focus on management of innovation (learning and the gathering of market and technology intelligence. Wadhwa and Kotha (2006), using longitudinal data on 36 firms in the telecommunications equipment manufacturing industry during the period 1989–99, investigate the conditions under which CVC investments affect knowledge creation for corporate investors. Results indicate that there is an optimum point beyond which the contribution of CVC investments to investor knowledge creation declines. Results also suggest that when a corporate investor is highly involved with portfolio firms, it may be possible to reverse this decline. They contend that ‘greater involvement with portfolio firms has a positive effect on the inverted U-shaped relationship between corporate venture capital investment and investors’ knowledge creation. No such effect was found for investors’ technological knowledge diversity’ (Wadhwa and Kotha, 2006: 820).
Dushnitsky and Lenox (2005) find that firms realize ‘corporate venture capital’ activities in industries with weak intellectual property protection and, to some extent, in industries with high technological ferment and where complementary distribution capability is important. They find that firm’s cash flow combined with absorptive capacity makes the investment e likely (Dushnitsky and Lenox, 2005).
As innovative start-ups often operate in domains of emergent industry practice, CVC investment provides a valuable mechanism through which incumbents can develop cognizance of future capability needs (Keil, 2002). Keil (2004) studies the important role that initial conditions and knowledge management practices play in determining the direction and effectiveness of specific learning processes that lead to an external corporate venturing capability. He aims to answer two questions. Specifically,: ‘Through what processes do firms develop new competencies? What factors govern processes of competence development?’. In his study he develops a model that explains the learning processes through which firms develop an external corporate venturing capability. This model describes how firms develop a capability to create and develop ventures through corporate venture capital, alliances, and acquisition. In his model, external corporate venturing capability is the outcome of learning processes. Specifically, he finds out forms of learning-by-doing (Levitt and March, 1988) and experiential learning (Huber, 1991) as well. However, the organization also learns outside such external corporate venturing relationships by relying, for instance, on new employees or consultants (Keil, 2004).
In addition, Schildt, Maula and Keil (2005) compare different forms of external corporate venturing, namely corporate venture capital investments, alliances, joint ventures, and acquisitions, as alternative means for inter-organizational learning. They examine the antecedents of explorative and exploitative learning of technological knowledge from external corporate ventures. Their empirical analysis is based on 110 largest public U.S. corporations operating in four sectors of ICT industries. They find that technological relatedness and downstream vertical relatedness together decrease the likelihood of explorative learning. This implies that companies aimed atenhancing their explorative learning need to seek partners with dissimilar technologies and beyond their customers. Contrary to their expectations, empirical results do not support any kind of relationship between industry relatedness and explorative learning (Schildt, Maula and Keil, 2005).
Keil, Autio and George (2008) examine how firms engender cognizance of their future capability needs in situations characterized by high decision-making uncertainty. They develop a theoretical account of how firms use investments in start-ups to actively engage in experimentation outside organizational boundaries, a learning process which we term as disembodied experimentation. Disembodied experimentation, they argue, is a form of experimental learning whose aim is to understand action-outcome relationships (Keil, Autio and George, 2008). They find two factors influencing the relationship between disembodied experimentation and capability building decisions: a knowledge-brokering role or strategy seems to be a critical positive moderator of the likelihood of internalization,… Second, simultaneous changes in technology and business models determine adaptation complexity that reduces the likelihood of disembodied experimentation affecting capability building decisions (Keil, Autio and George, 2008).
Another branch of studies analyze aspect linked on strategy and organization.Keil and colleagues (2008)examine how different governance modes for external business development activities and venture relatedness affect a firm’s innovative performance. Based on idea that interorganizational relationships enhance the innovative performance of firm, they analyze a panel of the largest firms in four ICT sectors. Results extend past studies by examining how the relationship between various external business development activities and innovative performance depends on venture relatedness. Specifically, their study shows that alliances, joint ventures, and CVC investments in related industries have a significantly positive correlation with innovative performance> (Keil et al., 2008).