Corporate Venture Capital in The TwentyFirst Century An Integral Part of Firms Innovation Toolkit

Corporate Venture Capital in the Twenty-First Century: an Integral Part of Firms'
Innovation Toolkit
Oxford Handbooks Online

Corporate Venture Capital in the Twenty-First Century: an Integral Part of
Firms' Innovation Toolkit
Gary Dushnitsky
The Oxford Handbook of Venture Capital
Edited by Douglas Cumming
Print Publication Date: Apr 2012
Online Publication Date: Sep
2012
Subject: Economics and Finance, Financial Economics

DOI: 10.1093/oxfordhb/9780195391596.013.0006
Abstract and Keywords

This article reviews the academic literature on corporate venture capital (CVC), that is, minority equity investments
by established corporations in privately held entrepreneurial ventures. The article is organized as follow. It starts
with a detailed definition of corporate venture capital, its historical background, and an extensive review of
investment patterns. Next it discusses the corporate venture capital literature, with an emphasis on rigorous
empirical studies published in leading academic journals. It reviews firms' objectives through the governance of
their CVC programs and the relationships with the portfolio companies, and examines the interactions between CVC
investment and other firm activities (e.g., alliances and M&A) as well as other entities (e.g., independent venture
capital funds). The performance of the parent corporations, entrepreneurial ventures, and CVC programs is
summarized next. The article concludes with directions for future research.
Keywords: minority equity investments, CVC programs, corporate venture capital, parent corporations, entrepreneurial ventures
In October 2009 Google Ventures, a part of the search giant Google, led a $15 million investment round in Adimab,
a biotech venture that developed an integrated yeast-based human antibody discovery platform. This observation
raises a number of questions: What is the magnitude of corporations' venture capital investments? Why do industry
incumbents pursue equity investments in small entrepreneurial ventures? And when will entrepreneurs seek
corporate backing?
A year earlier the $150 million BlackBerry Partners Fund started investing in software application ventures. The fund
owes its name as well as part of the capital under management to Research in Motion (RIM), the Canadian company
that develops and sells BlackBerry handheld devices. Interestingly, Apple, the U.S.-based firm that manufacturers
the competing device, iPhone, chose not to follow a similar strategy. Apple decided to forgo investment in iFund, a
$100 million fund (p. 157) launched at the beginning of 2008 by the prominent venture capital (VC) firm Kleiner
Perkins Caufield & Byers. Apple's decision cannot be attributed to lack of familiarity with venture capital
investments. Its Strategic Investment Group was a leading corporate investor in the late 1980s and early 1990s,
with several successful ventures in its portfolio, including PowerPoint (sold to Microsoft) and Sybase. A comparison
of RIM's and Apple's actions raises a couple of questions: Why do some incumbents pursue corporate venture
capital investment while others do not? What are the antecedents and consequences of their actions?
The answers to these questions can advance our understanding of entrepreneurial success, corporate
innovativeness, and economic growth. This chapter reviews the academic literature on corporate venture capital
(CVC), that is, minority equity investments by established corporations in privately held entrepreneurial ventures. It
supplements earlier reviews (Dushnitsky, 2006; Maula, 2007) and adds to prior work on a number of notable
issues. First, it points to investment patterns and programs' longevity, which constitute a qualitative departure from
previous years. Second, the body of scholarly work has grown substantially since my chapter (Dushnitsky, 2006)
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Innovation Toolkit
in the earlier edition of The Oxford Handbook of Venture Capital. Third, building on recent work, the chapter not
only explores CVC activity but also advances our understanding of its interactions with other firm activities.
The chapter is organized as follow. I start with a detailed definition of corporate venture capital, its historical
background, and an extensive review of investment patterns. Next I discuss the corporate venture capital
literature, with an emphasis on rigorous empirical studies published in leading academic journals. I review firms'
objectives through the governance of their CVC programs and the relationships with the portfolio companies and
examine the interactions between CVC investment and other firm activities (e.g., alliances and M&A) as well as
other entities (e.g., independent venture capital funds). The performance of the parent corporations,
entrepreneurial ventures, and CVC programs is summarized next. The chapter concludes with directions for future
research.
Definition
For the purpose of this chapter, corporate venture capital is defined as a minority equity investment by an
established corporation in a privately held entrepreneurial venture. Three factors are common to all corporate
venture capital investments. First, while financial returns are an important consideration, there are often strategic
objectives that motivate corporate venture capital activities. Second, the funded ventures are privately held
considerations and are independent (legally and otherwise) from the investing corporation. Third, the investing firm
receives a minority equity stake in the venture. Below I highlight the main terms in the corporate (p. 158) venture
capital literature and briefly discuss related corporate actions that fall outside the scope of the CVC literature.
Four decades and a similar number of corporate venture capital waves have left the field with many, often
overlapping terms. Panel A of Figure 5.1 summarizes the terminology used in this chapter, which builds on the
terminology of Dushnitsky (2006). The main players include the parent corporation (e.g., Google) that launches a
corporate venture capital program (e.g., Google Ventures), which in turn invests in entrepreneurial ventures (e.g.,
Adimab). Scholars investigate the activities in which these players engage, focusing mainly on governance and
investment relationships. The former refers to the relationship between a parent corporation and its CVC program
(e.g., the relationship between Google and Google Ventures). Study topics include the organizational structure of
the CVC program, its objectives, compensation scheme, and so on. The investment relationships between a CVC
program and its portfolio companies (e.g., Google Ventures and Adimab) are characterized by a certain level of fit.
The issues that fall under this rubric include the monetary and nonpecuniary support provided by the corporation,
the knowledge and information that flows back from the venture, and the level of relatedness between the
products, services, or technologies of the two. Finally, drawing on the succeeding discussion, Panel B of Figure 5.1
accounts for other venturing activities that may interact with a firm's corporate venture capital activity.
Though often used synonymously, the term corporate venture capital differs from both corporate
entrepreneurship and corporate venturing. These terms capture the sum of a company's innovation, strategic
renewal and corporate venturing (Zahra, 1995:227). The practice of corporate venture capital should not be
confused with other corporate activities that are aimed at enhancing firm innovativeness, growing revenues, or
increasing profits. The definition excludes (a) internal corporate venturing, as well as (b) a number of external
venturing activities, such as (b1) spin-outs (i.e., independent businesses started by departing employees) and (b2)
various interorganizational relationships (e.g., strategic alliances, joint ventures, or investments in public
companies).1 In addition, investments by financial firms aimed solely at diversifying their financial portfolios are not
a part of corporate venture capital activities.
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Click to view larger

Figure 5.1 Corporate venture capital: The CVC Fund, terminology (Panel A). Corporate venture capital: The
CVC Fund in context, terminology (Panel B).
I next briefly expand on the factors in which corporate venture capital differs from each of the other venturing
activities. First, consider internal corporate venturing (also known as corporate entrepreneurship). Internal
venturing refers to a wide array of internally oriented activities, including investment in internal divisions, business
development funds, and so on (for reviews, see Guth and Ginsberg, 1990; Thornhill and Amit, 2001). The origin of
the entrepreneurial team constitutes one differentiating factor: corporate employees are funded by a corporate
venturing initiative, whereas a corporate venture capital unit targets external entrepreneurs who have no
employment relationship with the corporation. Another key distinction is the fact that both the CVC investor and the
entrepreneurial venture are participating in the market for entrepreneurial financing, along with independent VCs
and angel investors. In the case of corporate venturing, in contrast, employees (p. 159) are provided with
corporate funds and do not consider competing sources of capital. Finally, a few CVC programs have been
mandated by their parent corporation to engage in venturing activity, in addition to venture capital investment.
Next, consider an external activity known as a spin-out. The phenomenon refers to individuals who leave their
employer and open an independent, and often related, business (e.g., Klepper, 2001; Agarwal et al., 2004;
Gompers et al., 2004; (p. 160) Chatterji, 2009). The direction of employee mobility marks a key differentiating
actor. Spin-out describe a situation whereby an employee walks away from a corporate position in order to start his
or her own business (i.e., corporate outflow), whereas CVC is interested in harnessing entrepreneurial knowledge
or products (i.e., corporate inflow).
Finally, firms engage in a host of external venturing activities that involve interorganizational relationships,
including strategic alliances, licensing, joint ventures, or investments in public companies. In what follows I focus
on equity alliances, as they have the most in common with CVC activity.2 Alliances and CVC exhibit a key
similarity: both serve as mechanisms for two independent firms to exchange resources. However, they inherently
differ with respect to the nature of the relationship and its organization (Dushnitsky and Lavie, 2010). For a
summary, see Table 5.1. Alliances imply mutual dependence of otherwise (p. 161) independent firms that engage
in interactive coordination of various value chain activities such as joint R&D and marketing initiatives. In alliances
both partners strive toward shared goals and seek to appropriate financial gains from their collaboration. In
contrast, CVC investment entails disparity between an investor and the consumer of monetary funds and involves
a unidirectional flow of financial resources from the investor to the funded venture that independently performs its
value chain activities. Alliances have specific objectives that are negotiated and then pursued by both parties,
whereas CVC agreements pertain to the operations of the funded venture. In contrast, the scope of alliance
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operations is narrowly defined even when involving an equity stake position (Robinson and Stuart, 2007). Moreover
many firms manage alliances and CVC through separate units aimed at either alliance management (Dyer et al.,
2001) or venture capital investment (Chesbrough, 2002; Dushnitsky, 2004). This organizational divide reflects
managers' views of alliances and CVC as distinct activities and is often reflected in distinctive staffing practices
and personnel backgrounds (Block and Ornati, 1987).
Table 5.1 Comparison of Corporate Venture Capital and Strategic Alliances
CVC
Alliances
Definition
A minority equity investment by an

established firm in an entrepreneurial
venture that seeks capital for growing
its operations.
A voluntary arrangement between independent

firms that share and exchange resources in the
codevelopment or provision of products, services,
or technologies.
Main
Objectives
Sponsoring an emerging or
complementary technology.
Cost sharing, joint development, resource

access, and market entry, among others.
Scope
The agreement covers the whole

operations of the funded venture and
none of the established firm's
operations.
The agreement covers joint operations whose

specific scope is limited relative t the partners'
independent operations.
Activities
The funded venture performs value

chain activities on a standalone basis.
Value chain activities are performed interactively

by both partners.
Funding
Only the established firm makes the

financial investment.
Both partners may make financial investments.
Ownership
The established firm buys a minority

equity stake in the funded venture and
may exert influence on its corporate
decisions.
Most alliances do not involve equity, with joint

ventures drawing major equity stakes from the
partners that directly influence the operations of
the new venture.
Timing
The relationship is established during

specific investment rounds, often early
in the life cycle of the privately held
funded venture.
The relationship can be initiated throughout the

life cycles of both partners.
Setting
The established firm is typically joined

by independent VC funds that also
invest in the funded venture as part of
the syndication.
Most alliances are dyadic and do not involve

independent VC funds.
Role
Asymmetry
A clear distinction between the

investor and the recipient of funds.
Both partners invest resources and expect

monetary returns on their investments.
Governance
The established firm manages CVC

via a dedicated VC arm or a corporate
business development unit.
Alliances are managed by a dedicated alliance

function or by business units of the respective
partners.
Source: Adopted from Dushnitsky and Lavie (2010).
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Historical Background
Historically, corporate venture capital investment has been highly cyclical. To date we have witnessed three
waves of corporate venture capital and are currently in the midst of a fourth wave. As a collective, established
corporations are regarded as an important source of funding in the markets for entrepreneurial financing. They are
second only to independent VC funds in dollar amount invested and lead other (p. 162) investor groups, such as
Small Business Investment Corporations (SBICs; Prowse, 1998; Timmons, 1994).3
Past Waves of Corporate Venture Capital

The first wave of corporate venture capital started in the mid-1960s and can be traced to three major trends of the
time. The allocation of corporate funding toward new ventures was part of the overall trend of corporate
diversification in the 1960s. Relatedly CVC activities were funded by excess cash flow accrued by many of the
investing firms (Fast, 1978). The financial success of pioneering independent venture capital funds and the stellar
performance of their portfolio companies constitute the third driving factor (Gompers and Lerner, 1998).4
About a quarter of the Fortune 500 firms experimented with venturing programs during that period, including such
firms as American Standard, Boeing, Dow, Exxon, Heinz, Monsanto, and W.R. Grace. The programs invested in
either external start-ups, employee-based ventures, or both. Externally focused programs funded start-ups with the
goal of addressing or extending corporate needs. They pursued venture capital investments either directly (e.g.,
GE's Business Development Services) or indirectly through independent venture capital funds (Gompers, 2002). A
few firms attempted to reinvent their business by encouraging employees, mostly those in technical roles, to start
new ventures. These efforts were supported by parent corporations (e.g., DuPont's Development Department and
Purina's New Venture Division), which provided funding as well as nonmonetary support (Gompers, 2002). During
these early days many corporate venture capital programs invested in external as well as internal ventures. For
example, Exxon Enterprises, an affiliate of Exxon Corporation, initiated and funded some thirty-seven high-tech
ventures during the 1970s. About half of these ventures were internally grown ventures, while the other half were
external ventures (Sykes, 1986).
The collapse of the market for IPOs in 1973 brought an end to the prosperity in the venture capital market, and with
it the first wave of corporate venture capital (Gompers and Lerner, 1998). The oil shock and related
macroeconomic changes meant that many of the investing corporations no longer earned excess cash flows, thus
further halting investment activities. Finally, frictions within the CVC programs and between the programs and their
parent corporations resulted in inferior financial and strategic performance, ultimately leading to the termination of
CVC efforts.
The early 1980s saw the second wave of corporate venture capital. Changes in legislation, significant growth in
technology-driven commercial opportunities, and favorable public markets stimulated the venture capital market as
a whole.5 Again many leading firms in the chemical and metal industries launched corporate venture capital
programs. Technology firms (e.g., Analog Devices, Control Data Systems, and Hewlett-Packard) and
pharmaceutical companies (e.g., (p. 163) Johnson & Johnson) also initiated new venture financing efforts. The
market crash of 1987 led to a sharp decline in independent as well as corporate venture capital activity.
The third wave took place during the 1990s. The period was characterized by technological advancement,
explosion in Internet-related new venture creation, and a surge in venture capital investing. The number of CVC
programs soared to more than four hundred. Diverse multinational corporations such as News Corp. (E-Partners),
Glaxo Smith Kline (S.R. One), Texas Instrument (TI Ventures), Dell (Dell Ventures), and Novell (Novell Ventures)
established corporate venture capital funds. A handful of corporations, such as Intel, created multiple funds.
Inflation-adjusted CVC investment levels during this time far exceeded previous waves. By 2000 established
corporations had become important players in the venture capital industry, participating in rounds well in excess of
$16 billion, approximately 15 percent of all venture capital investment. This marked a sharp incline from the meager
$0.5 billion invested by corporations in 1996 (Venture Economics). As with previous waves, the 2000 crisis in the
public markets resulted in a dramatic contraction in venture capital activity and has driven many corporations to
fold their venturing activities.
Current Wave of Corporate Venture Capital
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The twenty-first century is witnessing the most recent wave of corporate venture capital. Dozens of firms have
joined the Corporate Venture Group within the National Venture Capital Association (NVCA) since late 2003. And a
number of leading corporations remained committed to CVC investment even during the sharp declines and
significant financial losses. Although the absolute dollar amount of CVC is far from its peak, corporate investors
have accounted for approximately 15 percent of venture capital activity each year since the mid-1990s.
In many respects the recent wave has much in common with the previous CVC wave. Corporate investments
continue to parallel the broader interests of their independent counterparts: Internet-based ventures (Web 2.0)
remain a major investment target, as do other traditional VC target industries, such as semiconductors, telecom
equipment, and biotechnology. The rapid growth of clean energy space has attracted independent and corporate
venture capitalists alike. These patterns repeat in terms of the geographical diversity of CVC investment. For
instance, a growing fraction of CVCs' portfolios includes ventures based outside the United States, including many
ventures in developing countries.
Upon closer investigation we observe that the fourth wave features a critical structural change. It is now the case
that an increasing number of corporations view corporate venture capital as a key component of their innovation
strategy. Evidence on CVC longevity seems to support that observation. In the past the (p. 164) average life span
of a CVC program was less than three years (Gompers and Lerner, 1998). It was often suggested that a CEO
launches a CVC program only to be terminated by his or her successor. Nowadays most CVC programs have been
in operation for four years or longer (see next section for details). The sustained commitment to CVC investment
alludes to the key role it plays in a firm's innovation strategy.
This change did not happen overnight. Rather it reflects a broader transition in corporate R&D strategies: shifting
away from an exclusive focus on internal R&D (which, at the extreme, can lead to introverted behavior such as the
Not Invented Here syndrome; Katz and Allen, 1982) and toward embracing external sources of ideas and
innovations (also known as the trend toward open innovation; Chesbrough, 2003; also see Laursen and Salter,
2006; Birkinshaw et al., 2007). In that context, corporate venture capital can be viewed as a vehicle for engaging
and learning from one particularly innovative pool: that of entrepreneurial ventures. As such, CVC investment is an
integral part of a firm's innovation toolkit.
Whereas the roots of the change have to do with a broader shift in corporate R&D strategies, the implications for
corporate venture capital activity remain unclear. Many scholars and practitioners viewed the limited life span
characteristic of past CVC waves as a major hurdle. It creates internal challenges in terms of attracting talent and
staffing the CVC program. It also leads to external difficulties and stifles deal flow: independent venture capitalists
may hesitate to co-invest in an entity that could be dissolved by the time a follow-on funding round is needed. The
greater stability of current CVC programs has a potential to mitigate both internal and external challenges. The net
impact on CVC activity, however, is yet to play out in the data.
To conclude, the history of corporate venture capital offers several insights. At the macro level, the emergence of
novel technologies is an important driver of CVC investment as established firms seek to harness innovative
entrepreneurial ventures. The financial markets played a key role as well. Not only did they serve as catalysts for
entrepreneurial activity to begin with, but also they facilitated the transformation of new technology into high
financial returns. Interestingly, as CVC becomes an integral part of a firm's innovation strategy it may be sensitive
to the former factor (i.e., technological ferment) at the expense of the latter factor (i.e., financial markets). More
recent changes in the macro environment, including the growing globalization of venture capital activity and the
taxation of independent VC funds, will likely shape the future face of corporate venture capital investment.
At the firm level we continue to observe CVC investment as a predominantly large firm phenomenon. Incumbents in
turbulent industries mainly undertake it as a response to Schumpeterian competition. This observation, as well as
programs' greater longevity, suggests that CVC activity is part of a firm's external venturing strategies, also known
as open innovation.
(p. 165) Investment Patterns

This section presents key investment patterns for the fourth corporate venture capital wave. It further compares
and contrasts the data with patterns from the CVC wave of the 1990s. For historical data on CVC activity through
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2000, see Dushnitsky (2006).
Figure 5.2 (Panel A) presents a summary of total annual investment in new ventures by corporations and
independent venture capital funds during the period 19692003.6 The amounts represent dollar volume of rounds
and are adjusted to 2003 dollars.7 CVC activity has gone through four waves in the past thirty years. The first wave
peaked in the early 1970s. Activity declined until approximately 1978, when changes in legislation led to an
increase in venturing investments by independent venture capitalists as well as established firms. This second
wave peaked around 1986, with total annual investment at approximately $750 million. Investment levels declined
sharply after the stock crash of 1987, to a level of $130 million in 1993. The third wave began with the rise of the
Internet in the mid-1990s. At its peak in the year 2000 the dollar volume of rounds in which corporate investors
participated exceeded $18 billion. We are currently experiencing the fourth wave of CVC investment, which started
gaining momentum in the mid-2000s.
Figure 5.2 (Panel B) focuses on annual investments during the most recent two CVC waves, namely 1995 through
2009. The amounts represent nominal dollar volume of rounds. The figure further delineates the percentage of
venture capital deals in which a corporate investor was involved. It illustrates that during the second half of the
1990s, corporate venture capital activity expanded at a faster rate than that of independent VC funds. It peaked in
2000, when CVC investors participated in 25 percent of the number of deals that year. During the 2000s corporate
investors maintained active participation in the venture capital market, accounting for 15 to 20 percent of the
number of deals.

Figure 5.2 Annual Independent VC and CVC investments 19692003, CPI-adjusted (Panel A). Annual
Independent VC and CVC investments 19952009 (Panel B).
The patterns hide a critical structural change in corporate venture capital activity. A greater commitment on the
part of corporations to their CVC investment activity has characterized the recent wave in comparison to the
previous three waves. It manifests itself in an increase in the duration of CVC programs. For example, Gompers and
Lerner (1998) analyze the venture capital market between 1988 and 1996. They observe that the average time
span between the first and last corporate investment was about 2.5 years, or a third of the average time span for
independent VC funds (7.1 years). In contrast, a survey of thirty-seven global corporate investors in 2008 reveals
that over 80 percent of the CVC programs have been in operation for five years or longer (Ernst & Young, 2009). In
other words, the fourth CVC wave sees the duration of the programs more than double over that in the previous
three waves. (p. 166)
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Figure 5.3 CVC program investment duration.
A comprehensive investigation of corporate venture capital over the past two decades paints a similar picture.
Figure 5.3 presents a histogram of program duration using data on all CVC investments. The average duration
jumped from 2.2 years in the 1990s to 3.8 years during the 2000s.8 As the figure illustrates, the change is driven
by significant persistence in venturing activity: the fraction of corporations that engage in equity investment as a
one-off activity (i.e., invest for only a single year) is cut in half, while the fraction of those that invest for four years
or longer has doubled. As noted earlier, this observation likely reflects a broader (p. 167) pattern of transition
toward embracing external sources of innovations, of which corporate venture capital is one particular vehicle.
Figure 5.4 presents a breakdown of total corporate venture capital by ventures' sector. That is, the figure illustrates
the sectors that received CVC investment, by nominal investment amounts. Panels A and B report the sector
breakdown for the third and fourth CVC waves, respectively. We can observe a marked realignment in investment
activity. The software and telecommunication sectors, which dominated CVC portfolios in the 1990s, continue to
attract significant corporate investment, yet at a much smaller fraction. Biotechnology ventures account for almost
20 percent of aggregate CVC investment, up from about 5 percent in the previous decade. The semiconductor
sector exhibits a similar pattern.
The realignment in the aggregate CVC portfolio is driven by several factors. First, it reflects, in part, the return to
moderate valuations of Internet-related ventures. Second, it also captures a shift in the interests of CVC investors.
A case in point is the industry and energy sector. This sector attracts significant attention from independent VC
funds and has seen a surge in venture formation, which in turn stimulates CVC investment. Along these lines it is
important to note that some corporations invest in ventures that operate in their own sector, while others invest in
neighboring sectors. For example, nearly 50 percent of all CVC investment by chemical and pharmaceutical
companies went into ventures within those sectors, while only 18 percent of all CVC investment by semiconductor
firms went into semiconductor ventures (Dushnitsky and Lenox, 2005b). Third, the maturity of certain sectors as
well as currency fluctuations may also impact the relative breakdown of CVC portfolios.
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Figure 5.4 Total CVC activity by ventures' sector, 19912001 (Panel A). Total CVC activity by ventures'
sector, 20012009 (Panel B).
Shifting attention from ventures' sector affiliation to their country of origin, Figure 5.5 presents a geographical
breakdown of corporate venture capital. Panels A and B report ventures' country of origin for the third and fourth
CVC waves, respectively. The fraction of CVC investments in U.S.-based ventures declined from 88 percent in
19912000 to 75 percent in 20012009 (in nominal amounts). U.K.-based ventures continue to account for 2
percent of total CVC investment. (p. 168)
The relative fraction of developing countries is on the rise. China-based ventures account for 4 percent of total
investment amount during the fourth wave, up from 1 percent during the previous wave. And India entered the top
five recipients of corporate venture capital, accounting for 1 percent of global CVC investments.
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Figure 5.5 Total CVC activity by ventures' nation, 19912001 (Panel A). Total CVC activity by ventures'
nation, 20012009 (Panel B).
The geographical location of corporate venture capital programs remains largely unchanged. As such, I report key
data below yet opt not to present geographical breakdown. VentureXpert records a slight decrease in the fraction
of investment disbursed by U.S.-based corporate investors: down from 83 percent (19912000) to 78 percent
(20012009). During the earlier period top CVC originating countries included Japan (5 percent), Canada (3
percent), Singapore, Hong (p. 169) Kong, Germany, United Kingdom, South Korea, and Sweden (1 percent each).
During the later period top CVC investors were based in Canada (6 percent), South Korea, United Kingdom, Japan,
Germany (2 percent each), Singapore, China, Hong Kong, Switzerland, Israel, France, and the Netherlands (1
percent each). These numbers may downplay the role of non-U.S. CVC investors, as many of them are coded as
U.S.-based though the parent corporation is not headquartered in the United States (e.g., Panasonic Ventures and
Mitsui & Co. Venture Partners). Finally, the fact that corporate venture capital, in aggregate, tends to originate in
and reach the same countries does not necessarily mean that funds are invested domestically. As I discuss below,
CVC is used at times to learn about geographically distant markets or to access distant technologies.
(p. 170) The Corporate Venture Capital Literature

The academic corporate venture capital literature experienced growth that mimics the overall patterns of CVC
investment over the years (Figure 5.6). The recent surge in academic work is likely fueled by the increasingly
central role corporate venturing plays in firms' innovation strategy as well as the availability of systematic data on
venture capital activity. As a result a decade into the fourth wave of corporate venture capital the time is ripe to
take stock of structural changes in the CVC phenomenon and related scholarly work.
Figure 5.6 juxtaposes corporate venture capital studies published in leading academic journals (count of articles
published) and annual CVC investments (in nominal billions of dollars).9 The figure illustrates that a moderate
volume of CVC research during the second half of the 1980s followed the expansion of corporate venture capital
during the first half of that decade. The pattern repeats itself, with greater intensity, in subsequent years. Overall
Figure 5.6 underscores that the growth in academic work parallels corporate investments patterns.
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Figure 5.6 Corporate venture capital investment ($B) and publications (number per year).
The figure conceals an important development in the CVC literature: the introduction of venture capital databases
such as VentureXpert and Venture One. Gompers and Lerner (1998) first utilized commercially available data, the
Venture One database, to study corporate participation in the venture capital markets. Many other scholars employ
the VentureXpert database (which was originally managed in collaboration with the U.S.-based National Venture
Capital Association and is currently offered by Thomson). Since the first time it was employed by Dushnitsky and
Lenox (2005) and Wadhwa and Kotha (2006) it has been utilized in dozens of CVC studies.
(p. 171) The availability of databases on venture capitalists and their corporate counterparts has affected the
literature in several ways. On the methodological front, the fraction of large-sample econometric analyses is on the
rise, while the relative share of case studies and surveys has decreased. During past CVC waves, data were
difficult to come by. At that time one of the main contributions of scholarly work included recording and describing
corporate venture capital practices. The generalizability of any one study, however, was limited due to the small
number of companies being covered and the cross-sectional nature of the sample. The introduction of commercial
databases made available large data panels and thus alleviated many obstacles. Scholars can account for a wide
set of causal factors, such as firm size and industry choice, and pursue econometric techniques that tackle
unobserved heterogeneity and temporal precedence.
The benefits go beyond methodological rigor. Robust analyses afford significant theoretical development. First,
scholars can uncover theoretical mechanisms and explore boundary conditions by comparing and contrasting
corporate venture capital practices across different industries or technological domains. Second, the theoretical
scope can be expanded to incorporate interaction with other corporate activities. To see this consider a case
study that documents a close relationship between a firm's investment and alliance activities. Although evidence of
CVC-alliance interaction is instructive, it could be an idiosyncratic case and might not extend to other corporations.
Given systematic data on investment practices across multiple corporations, one can credibly develop theory on
various forms of open innovation strategies (e.g., CVC, alliances, M&A). Third, the availability of standardized data
facilitates good research practices, such as replication, comparison, and sequential development. It follows that
the CVC literature has benefited theoretically and methodologically from the introduction of commercial databases.
In what follows, in line with Dushnitsky (2006), I open with evidence on the key characteristics of CVC programs,
their parent corporations, their portfolio companies, and the relationships between them. The discussion deals with
the issues that fall within the CVC Activity box (Figure 5.1, Panel B). Next I cover topics that have only recently
been addressed in the CVC literature: interaction between CVC and other firm activities (e.g., alliances, M&A), and
interaction with other entities (e.g., independent VC funds). These issues fall outside the CVC Activity box (Figure
5.1, Panel B). The section closes with a review of performance implications. For a summary of the topics and
corresponding studies, see Table 5.2.
Investors' Objectives
Why do established corporations choose to invest in entrepreneurial ventures? The objective of corporate venture
capital investors has been an important area of research. We know that financial objectives drive independent
venture capital funds. They invest in early- and late-stage business endeavors with the sole (p. 172) (p. 173)
purpose of capital appreciation through lucrative exits via an IPO or a trade-sale. The literature suggests that some
firms pursue CVC to secure financial gains, while others seek strategic benefits. Recent evidence suggests that
most corporate investors attempt to pursueor balanceboth objectives (Block and MacMillan, 1993; Chesbrough,
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2002; Ernst & Young, 2009).
Table 5.2 Empirical CVC Studies: Major Publications by Topic
Topics
Studies
Investor
Objectives
Siegel et al. (1988); Winters and Murfin (1988); Sykes (1990); McNally (1997); Kann
(2000); Ernst & Young (2002, 2009); Dushnitsky and Lenox (2003); Chesbrough and
Tucci (2004); Dushnitsky and Lenox (2005a); Gaba and Meyer (2008); Basu et al.
(2010); Sahaym et al. (2010)
Program
Governance
Rind (1981); Block and Ornati (1987); Siegel et al. (1988); Winters and Murfin (1988);
Sykes (1990, 1992); McNally (1997); Kann (2000); Birkinshaw et al. (2002); Keil (2002);
Keil et al. (2008); Ernst & Young (2009); Dushnitsky and Shapira (2010)
Investment
Relationships:
Pre-investment
Siegel et al. (1988); Sykes (1990); McNally (1997); Birkinshaw et al. (2002); Ernst &
Young (2002); Dushnitsky (2004); Keil et al. (2004); Katila et al. (2008); Dushnitsky and
Shaver (2009)
Post-investment
Siegel et al. (1988); Sykes (1990); McNally (1997); Maula (2001); Birkinshaw et al.
(2002); Bottazzi et al. (2004, 2008); Cumming (2006); Cumming and Johan (2008); Hill
and Birkinshaw (2008); Keil et al. (2008); Maula et al. (2009); Yang et al. (2009);
Bengtsson and Wang (2010); Dushnitsky and Shapira (2010); Masulis and Nahata
(2010)
Interdependencies
with Other Firm
Activities
Siegel et al. (1988); Winters and Murfin (1988); Sykes (1990); McNally (1997); Colombo
et al. (2006); Dushnitsky and Lenox (2005a); Keil et al. (2008); Benson and Ziedonis
(2009); Ernst & Young (2009); Phelps and Wadhwa (2009); Van de Vrande et al. (2009);
Benson and Ziedonis (2010); Dushnitsky and Lavie (2010); Tong and Li (2010)
Interdependencies
with Other Entities
Winters and Murfin (1988); Sykes (1990); Hochberg et al. (2007); Dushnitsky and
Shaver (2009); Ernst & Young (2009); Hill et al. (2009); Keil et al. (2010)
Performance
Implications:
Ventures
Block and MacMillan (1993); McNally (1997); Gompers and Lerner (1998); Maula and
Murray (2001); Hochberg et al. (2007); Maula et al. (2009); Ivanov and Xie (2010)
CVC programs
Siegel et al. (1988); Sykes (1990); McNally (1997); Gompers and Lerner (1998); Hill and
Birkinshaw (2008); Hill et al. (2009); Dushnitsky and Shapira (2010)
Parent
corporations
Chesbrough and Tucci (2004); Dushnitsky and Lenox (2005b); Schildt et al. (2005);
Dushnitsky and Lenox (2006); Wadhwa and Kotha (2006); Allen and Hevert (2007)
Note: See Figure 5.1 (Panels A and B) for main CVC topics.
As early as the second CVC wave, there is evidence of a diverse set of CVC objectives. Siegel et al. (1988) present
one of the first comprehensive surveys of corporate venture capital practices. The authors report that CVC
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programs rank return on investment as the most important objective. They qualify their finding given that almost
42 percent of the respondents rank financial returns as less than essential, while emphasizing various strategic
objectives. Combined with the fact that many programs seek financial returns along with strategic objectives, this
implies that corporate venture capital is not solely a financial exercise. Among the strategic benefits, exposure to
new technologies and markets ranks significantly higher than any other strategic objective. Other objectives, by
order of importance, are potential to manufacture or market new products, potential to acquire companies, and
potential to improve manufacturing processes.
Winters and Murfin (1988) identify two additional strategic objectives. First, corporate venture capital equips
multinational firms with international business opportunities, specifically the opportunity to license entrepreneurial
ventures' technologies or products and market them overseas. Second, CVC activity expands a firm's contacts
beyond its common network, thus opening it to many new business opportunities. Third, the authors are critical of
the view that CVC facilitates acquisitions given the inherent tension associated with acting as a potential acquirer
while simultaneously serving as an existing investor.
Sykes (1990) conducts a survey of strategically driven corporate venture capitalists. He reports that identify new
opportunities and develop business relationships top the list of strategic objectives. Other objectives, by order
of importance, are find potential acquisitions, learn how to do venture capital, and change corporate culture.
The lowest ranking objective, as reported by the thirty-one responding firms, is assist spin-outs from the
corporation.
The third CVC wave affords a unique opportunity to gain further insight into corporate objectives. In addition to
case studies and surveys, the availability of commercial venture capital databases stimulated a number of scholars
to derive CVC goals from observed investment patterns. The former approach affords rich insights about stated
objectives, while the latter group underscores CVC goals as enacted through their investment behavior.
Importantly, large-sample analyses facilitate systematic comparison between CVC investing firms and their
noninvesting industry peers. Such analysis can shed more light on a firm's decision to pursue corporate venture
capital.
A survey of forty global corporations that engage in venture capital investments indicates that 56 percent of the
respondents state strategic objectives, 33 percent declare financially driven investment, and 11 percent claim to
pursue (p. 174) both (Ernst & Young, 2002). Again window on technology developments is ranked as the
leading strategic objective. Other goals, by ranking, include importing/enhancing innovation with existing business
units, leveraging internal technological developments, tapping into foreign market, and corporate
diversification.
Studying over one hundred strategically driven corporate investors, Kann (2000) reports that external R&D is the
most common objective (45 percent), whereby corporations seek to increase internal R&D capabilities through
entrepreneurial technologies.10 Oftentimes the ultimate goal is to fill gaps in the corporate technology portfolio or
enhance awareness to strategic blind spots. The second and third objectives are accelerated market entry (30
percent) and demand enhancement (24 percent), respectively. Firms threatened by rapid changes to their core
businesses often pursue accelerated market entry in an attempt to leverage entrepreneurial technologies and
reinvent themselves. Kann observes that demand enhancement entails investment in ventures with
complementary technologies, products, or services. She notes that this goal is common in industries that are at the
early stage of their life cycle, experience emergence of standards, or face saturated demand.
McNally (1997) studies U.K.-based corporate venture capitalists. In response to his survey, only 36 percent of the
firms cite financial returns as the primary reason for their investment activity. Nonetheless financial return on
investment remains a prominent goal when considering either primary or secondary CVC objectives. As with U.S.based programs, identification of new markets is the top strategic objective (68 percent), with other objectives
being exposure to new technologies (43 percent), develop business relationships (38 percent), and
identification of new products (38 percent).11 Similar to other studies, the lowest ranked objective is assess
potential acquisition candidates (21 percent).
McNally's (1997) study offers a unique viewpoint on the decisions of firms that considered but did not pursue
corporate venture capital. The survey covers seventy-three firms, of which forty-five did not invest in new
ventures but partially considered doing so.12 Among the noninvestors, the most common motivation for
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contemplating such activity is to gain a window on technology. This finding holds irrespective of whether the firms
consider investing directly or through independent VC funds. The decision not to pursue CVC is motivated either by
the lack of corporate resources (i.e., capital and managerial time) or by the preference for more conventional
mechanisms for knowledge acquisition (i.e., internal R&D or acquisitions) that offer greater control.
Dushnitsky and Lenox (2005a) systematically compare corporate investors and noninvesting firms. Specifically
they construct a large panel of all public firms that were in industries where at least one firm invested corporate
venture capital during the 1990s.13 To the extent that CVC investment is part of a firm's open innovation strategy,
they conjecture, one should observe a profit-seeking firm investing corporate venture capital when CVC's marginal
innovative output is expected to be higher than that of internal R&D. The analysis highlights industry-level and (p.
175) firm-level factors that affect CVC's marginal contribution and thus stimulate CVC activity.
Dushnitsky and Lenox (2005a) report a positive relationship between a firm's annual equity investments and its
internal cash flow, in line with McNally's (1997) findings. They also find that CVC investment is affected by the
absorptive capacity of the parent corporation: a firm is more inclined to invest as technological proximity to
innovative ventures increases, yet at some point investment decreases in proximity. Equally important is the
evidence furnished by the authors' investigation of CVC sector breakdown. For example, they report that
corporations are more likely to fund ventures based in industries that experience greater technological ferment. In
these industries, the argument goes, entrepreneurs are more likely to identify valuable inventions; and as the pool
of highly innovative ventures grows, the strategic benefit of CVC investment rises relative to internal R&D.
Corporate venture capital is also directed toward ventures in industries with weak intellectual property protection
and, to some extent, in industries where complementary distribution capability is important. Taken together, the
observation that CVC patterns are sensitive to parent firm and venture industry characteristics implies that
corporate venture capital is a form of external R&D.
Chesbrough and Tucci (2004) investigate the research activities of 270 U.S. and foreign CVC investing firms during
the period 19802000. They explore variations in the level of corporate R&D expenses prior to and immediately
after the onset of the CVC program. A multivariate regression analysis indicates that the existence of a CVC
program is significantly associated with increases in corporate R&D, even after controlling for firm factors and
industry affiliation. Building on these findings, the authors state that corporate venture capital is of strategic value
to the parent corporation and may supplement other R&D efforts.
The characteristics of a parent firm's industry have been the subject of other studies (Basu et al., 2010; Dushnitsky
and Lenox, 2003; Gaba and Meyer, 2008; Sahaym et al., 2010). The drivers of industry-level corporate venture
capital patterns are addressed by Sahaym et al. Using data on all U.S. manufacturing industries between 1997 and
1999, the authors find that higher levels of industry R&D expenditures are associated with an increase in the
number of CVC deals in that industry. The positive R&D-CVC association is moderated by industry growth and
productivity. Specifically industries that exhibit higher levels of growth in sales between 1992 and 1996 exhibit a
stronger relationship between total industry R&D and aggregate CVC activity. A similar pattern is observed for
industries that experience high growth in total factor productivity between 1985 and 1994. The effect of the former
(latter) moderator is consistent with corporate venture capital as a vehicle geared toward demand enhancement
(window on technology).
Dushnitsky and Lenox (2003) replicate Dushnitsky and Lenox (2005a) while focusing on the industry
characteristics of the parent corporation rather than the funded ventures. Analysis of about 1,200 U.S. public firms
finds that CVC activity is more likely to be undertaken by those operating in industries that experience
technological turbulence and feature a strong patent regime and where complementary (p. 176) assets are
important. These conditions likely motivate established firms to seek a window on technology.
Basu et al. (2010) study Fortune 500 corporations during the 1990s and explore their propensity to invest
corporate venture capital. The characteristics of a corporation's industry of operation are investigated first. The
results corroborate Dushnitsky and Lenox (2005a): technological turbulence and a strong patent regime are
associated with greater inclination to fund innovative ventures. The authors further report that CVC investment is
more likely when a corporation experiences intense competitive pressures. They conclude that those who are
based in dynamic environments often undertake CVC. The analysis also validates the effect of firm-level factors
reported in Dushnitsky and Lenox. The interaction between firm and industry factors yields a surprising result: the
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magnitude of CVC investment remains unchanged, and may actually decrease, when resource-rich firms face
dynamic environments. The results point to the existence of substantial intra-industry (i.e., within industry, across
firms) variance in CVC activity. In other words, within a homogeneous industry setting, firms may exhibit
heterogeneous investment behaviors.
Gaba and Meyer (2008) study a similar sample while applying a different perspective. Specifically the authors
analyze CVC adoption patterns. They too investigate a sample of Fortune 500 firms that were active in the
information and telecommunication sector between 1992 and 2001. They find evidence of contagion processes not
only among the IT firms, but also between IT firms and independent VC funds. Within the IT sector, the proximity
and prominence of CVC-investing firms, as well as evidence that the programs stimulate other activities (e.g.,
acquisition) are associated with further adoption of CVC by other IT firms. Interestingly factors associated with the
venture capital market exhibit the strongest effect on firms' adoption patterns. A firm is more likely to launch a CVC
program if it is geographically proximate to a VC cluster (e.g., Silicon Valley) and when venture capitalists' success
(i.e., number of IPOs) is salient. Finally, the authors report that the more distant a firm is from a VC cluster, the more
closely its adoption patterns mimic that of its IT industry peers.
As for the fourth CVC wave, we mainly have anecdotal evidence regarding the objectives of CVC investors. On the
one hand, the availability of commercial databases implies that it is less attractive to initiate extensive surveys. On
the other hand, sufficient data have not accumulated to make possible large-sample analyses of the latest CVC
wave.
A recent survey of thirty-seven corporate investors offers some insights into contemporary CVC objectives (Ernst
& Young, 2009). It echoes the sentiment that corporate venture capital plays a significant role in a firm's innovation
strategy: 97 percent of the respondents pursue strategic investment, up from 67 percent in the former Ernst &
Young (2002) survey. Many of these investors balance their strategic goals with financial aspirations. Yet only 3
percent are solely financially driven, less than a tenth of the fraction previously reported (33 percent). The top two
strategic objectives are map emerging innovations and technical developments (p. 177) and window on new
market opportunities. The lowest ranking objectives include leverage internal technological developments and
identify acquisition candidates.
To conclude, established firms pursue investment in new ventures for various reasons. A few clear trends emerge.
Although corporations continue to grapple with the best approach to balancing strategic objectives and financial
returns, the fraction of CVC programs driven solely by financial objectives has declined.14 Among the stated
strategic objectives, the most common objective is window on technology (also external R&D or even
potential to improve manufacturing processes). That is, firms invest CVC in the pursuit of novel technologies that
are relevant to corporate businesses. Analysis of CVC investment patterns substantiates this observation: investing
firms experience greater technological and competitive pressures to innovate, target ventures that are likely to
possess cutting-edge technologies, and have capabilities to absorb these technologies (Basu et al., 2010;
Dushnitsky and Lenox, 2003, 2005a; Sahaym et al., 2010).
Another stated objective is demand enhancement; corporations back those ventures that may increase demand
for the corporation's own product or services. The pattern of CVC investments is partially consistent with this
objective. There is some evidence that investing firms not only experience greater innovation pressures and target
inventive ventures, but also that the corporations allocate investments outside their own industry and toward those
industries that offer complementary products or services (Chesbrough, 2002; Dushnitsky and Lenox, 2005a;
Dushnitsky and Shaver, 2009). A telecommunication corporation, for instance, may opt to fund digital media
ventures. Along these lines corporate venture capital may afford an opportunity to enter complementary foreign
markets (e.g., international business opportunities or tapping into foreign markets). Interestingly there are
parallel objectives in the related context of bank venture capital (i.e., banks making investments in entrepreneurial
ventures). Hellmann et al. (2008) report that banks build demand for their lending business through venture capital
investments; a prior investment relationship with a venture increases a bank's chance of subsequently making a
loan to that venture.
It is also important to note that a number of objectives that have been traditionally ascribed to CVC programs have
been ranked consistently low by corporate venture capitalists. For example, exposure to entrepreneurial spirit
and change corporate culture appear, at best, as secondary objectives. Similarly programs are no longer tasked
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with spotting potential acquisition candidates, as more corporations become aware of the inherent tension
associated with acting as a potential acquirer while serving as an existing investor. That said, a common CVC
objective is the development of strategic relationships, most often with companies and individuals that the
corporations would not have interactions with otherwise (e.g., engagement with small entrepreneurial ventures, or
develop relationships with independent VCs). Finally, only a small number of corporations mandate their
programs to assist spin-outs from the corporation in order to leverage internal technological developments.
(p. 178) A productive approach toward thinking about CVC objectives could be based on the intended effect of a
venture's success on existing corporate businesses. Strategic objectives can be positioned along a continuum
ranging from seeking substitutes to sponsoring complements. On the one hand, investment activity may be used to
identify novel products, services, or technologies to replace existing corporate products, services, or
technologies, that is, targeting potential substitutes. For example, CVC may serve as an early alert system allowing
the firm to identify potentially competing entrepreneurial technologies. Some of the objectives that fit here include
exposure to new technologies (McNally, 1997), external R&D, and accelerated market access (Kann, 2000).
On the other hand, CVC activities may seek to complement corporate businesses by funding ventures that
increase the value of existing lines of businesses (Brandenburger and Nalebuff, 1996). The two may complement
each other along different dimensions: technologically (e.g., develop business relationships; Birkinshaw et al.,
2002), in the product market (e.g., demand enhancement; Kann, 2000), as well as geographically (e.g., tapping
into foreign market; Ernst & Young, 2002).
Program Governance
The governance of CVC activities is a multifaceted subject. It has to do with the structure of a CVC program, the
degree of autonomy it experiences, and the compensation of the personnel tasked with making investment
decisions. Because commercial databases do not cover these topics, we have seen limited progress in this
domain. Moreover the observed patterns may be particularly sensitive to sampling bias.15 That is not to say that
the issue is unimportant. On the contrary, several studies find that governance consideration explains much of
CVC ability to meet its objectives (e.g., Keil et al., 2008; Dushnitsky and Shapira, 2010).

Figure 5.7 Corporate venture capital major structures.
To facilitate systematic discussion and comparison across studies, Figure 5.7 labels the four prevalent CVC
structures. Some firms choose to invest in entrepreneurial ventures indirectly by joining existing VC funds as limited
partners; I label this practice CVC as LP. Other firms choose to establish CVC programs. In contrast to the
independent venture capital funds, which are structured almost exclusively as a limited partnership, we observe
heterogeneity in program structures. These range from tight structures to loose ones. Programs where current
operating business units are responsible for CVC activities are denoted as having a tight structure. This is a direct
investment structure (e.g., TI Venture Capital Program). Other programs are organized as wholly owned
subsidiaries, which are separate organizational structures set up for the sole purpose of pursuing corporate
venture capital (e.g., Novartis Venture Funds). Dedicated funds constitute the last, and least common, structure
where a firm and an independent VC fund comanage the investment activity. Past and present examples include
Sequoia Seed Capital, a joint venture between Sequoia Capital and Cisco Systems, and Tate & Lyle Ventures, a (p.
179) 25 million fund managed by Circadia Ventures in which the key limited partner is Tate & Lyle (a global
leader in industrial ingredients that owns such brands as Splenda). Finally, it is possible that a corporation will have
multiple CVC funds active at the same time, for example, Nokia (Nokia Growth Partners, Blue Run Ventures), and
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Deutsche Telekom (e.g., T-Mobile Venture Fund, T-Home Venture Fund, and T-Corporate Venture Fund).
Siegel et al. (1988) provide detailed survey-based evidence regarding program structure. Most programs
experience moderate to low levels of autonomy: 66 percent undergo a thorough review by corporate headquarters
prior to each investment, 21 percent are subject to formal approval process, and 11 percent are free to invest
without prior approval. Interestingly about half of the CVC programs (48 percent) report that a dedicated pool of
funds is made available to them on a one-time basis, while other programs are allocated smaller funds periodically
(27 percent) or on an ad-hoc basis (19 percent).16 Using cluster analysis, the authors identify two CVC types:
programs characterized by a high degree of autonomy and permanent financial commitment (denoted pilots) and
programs that are highly dependent of corporate approval and capital commitment (denoted copilots). As for the
compensation of CVC personnel, some programs offer only base salary (31 percent), others award bonuses based
on the venture's performance (over the short term, 29 percent; over the long term, 14 percent), and yet others
allow for direct participation in the venture fund (10 percent).
Winters and Murfin (1988) observe several different CVC structures. The types map onto the CVC as LP, direct
investment, and wholly owned subsidiary labels. The last structure, the authors note, is more likely to have funds
dedicated for investment activity. Furthermore a subsidiary structure is advantageous because it attracts VCs'
cooperation by signaling corporate commitment to venture investing. It also mitigates entrepreneurs' concerns of
malfeasant corporate behavior and offers flexibility in locating the programs in a state with low capital gains taxes.
(p. 180) Sykes (1990) underscores an evolution in governance practices. Specifically he points to the
emergence of dedicated VC funds that serve the interests of a sole corporate investor. Among the strategically
driven CVC programs he studies, 84 percent invest as limited partners, 81 percent act as direct investors, and 64
percent pursue both. He further observes that the differences in structure do not reflect dissimilarity in
objectives.17
McNally (1997) reports that 82 percent of the respondents provide funds to entrepreneurial ventures, 43 percent
invest through independent VC funds, and 25 percent do both. Moreover the evidence suggests that wholly owned
CVC subsidiaries invest in ventures directly as well as through independent VCs. As for autonomy, most CVC
programs experience a moderate level of flexibility. This is especially true of investment in independent VCs, where
a third of the programs were not subject to headquarters' approval. In contrast, only 9 percent of the programs
investing directly in new ventures did not require any headquarters' approval. As for the interaction between the
CVC structure and its objectives, there is little evidence to indicate the two are correlated. Both the programs that
invest through VC funds and those that fund ventures directly rank the search for new technologies, establishment
of business relationships, and high financial gains as their top objectives.18 In line with Sykes (1990), McNally
points to a growing salience of dedicated funds: 46 percent of the independent VC funds with nonfinancial firms as
limited partners had a sole limited partner (the majority of these funds are managed by Advent International).
Kann (2000) distinguishes between three structures: CVC as LP (11 percent of the programs in her sample),
dedicated fund (also 11 percent), and a third category of corporate-managed-programs that aggregates direct
investment and wholly owned subsidiary (78 percent). Interestingly she finds a significant correlation between CVC
structure and objectives: firms that sponsor complementary ventures are more likely to pursue CVC as LP, while
firms that aim to increase internal R&D capabilities are more likely to employ a corporate-managed program
structure.19 The 2002 Ernst & Young survey finds that 32 percent of the programs are structured as a CVC
subsidiary, and 59 percent pursue some variation of direct investment, either as an independent unit (5 percent) or
a fully integrated part of a corporate business unit (55 percent).
Keil et al. (2008) offer insight on the governance of CVC programs using longitudinal case studies of five
telecommunication corporations between 1998 and 2002. Their analysis highlights the trade-offs between direct
investment and wholly owned subsidiary. The former is associated with greater technical experience, a personal
network with the corporation, and understanding of corporate capabilities needs. The latter usually affords
experience with entrepreneurs, personal relationships with the external VC community, and a degree of buffer from
cognitive and structural corporate practices that enable the discovery and assimilation of cutting-edge
technologies. More broadly the governance of a CVC program has an impact on multiple dimensions: functional
expertise, contacts and ties with different communities, as well as structural and cognitive barriers. All governance
forms (p. 181) share some advantages and disadvantages along these dimensions.20 For instance, programs
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structured as wholly owned subsidiaries are buffered from short-term thinking prevalent in many business units. Yet
this advantage is balanced by the fact that these programs are isolated and thus less effective in communicating
new opportunities to the business units.
Keil (2002) presents complementary insights based on a detailed study of two telecommunication firms during a
similar time period. His findings allude to a temporal facet of CVC structure. Namely, a CVC as LP structure may be
adopted early on to facilitate familiarity with and learning from traditional venture capitalists. As a firm develops a
better understanding of venture capital practices, it may then pursue a different CVC structure. More broadly Keil
reports that learning processes (of which learning from traditional VC funds is one aspect) and knowledge
management (e.g., formal codification of investment practices and informal networking with constituencies inside
and outside the corporation) drive a firm's external venturing capability.
Birkinshaw et al. (2002) report that the parent corporation (either as direct investment or wholly owned subsidiary)
solely owns 90 percent of the programs in their sample. The programs are only moderately autonomousabout 35
percent do not have a dedicated pool of funds and seek approval for each investment. The authors find that CVC
governance and objectives are correlated. Programs that invest externally for strategic gains are more likely to
have their funds subject to corporate approval (35 percent of programs with such objective), in comparison to
financially driven programs (25 percent of programs with such objective). Interestingly, strategically driven
programs experience lesser (greater) autonomy with respect to the management of their portfolio companies
(making decisions regarding the CVC program).21 Finally, they find that standard corporate salary is the common
compensation scheme among CVC personnel, mainly due to concerns over pay inequality and attempts to align a
program's interests with that of the parent corporation. Bonuses based on either financial or strategic performance
are used occasionally and, to a lesser extent, carried interest in CVC portfolio companies.
A small body of work focuses on the compensation practices firms undertake when they establish new venture
divisions. In Block and Ornati's (1987) study of forty-two Fortune 500 companies, they find that many firms
recognize the importance of pay-for-performance, yet in practice corporate venture managers are paid no
differently than other corporate personnel.22 Career concerns may drive CVC personnel to shun potentially
profitable ventures that pay over the long haul (Rind, 1981). Specifically CVC managers are wary that they will not
be in a position to enjoy the fruits of such investments, but will be held accountable for the losses in the short run.
In a related study Sykes (1992) finds that the need for performance pay compensation for venture managers is
acknowledged but not always practiced.23 Among the main reasons for the lack of equity-based compensations
are (1) a need for pay equality vis-à-vis other corporate employees, (2) an effort to align the venture's (p.
182) goal with corporate interests, (3) an inability to determine venture performance or manage complex
compensation systems, and (4) an attempt to avoid problems when transferring employees to and from the
venture.
As with program governance, the incentives awarded to corporate venture capitalists play a critical role. Studying
investment practices of all corporate and independent investors during the 1990s, Dushnitsky and Shapira (2010)
find that, on average, CVCs shy away from risk. Corporations invest in more mature and potentially less risky
ventures than independent VCs do. In addition, deals involving a corporate VC unit are associated with a syndicate
size that is 49 percent larger than those with independent VC participation alone. These patterns persist even after
controlling for units' objectives (financial or strategic) and other corporate characteristics. Interestingly, in the
presence of performance pay, corporate VC personnel engage in practices that differ only slightly from that of their
independent VC counterparts. Put differently, CVC programs with performance-based pay partake in deals that look
a lot like the ones done by independent VCs; the corporate VCs invested in earlier stages and made their
investments through smaller syndicates.
The aforementioned compensation practices persist nowadays. A survey of thirty-seven veteran CVC programs
(Ernst & Young, 2009) finds that 75 percent offer flat salary with no pay-for-performance. The programs often
parallel independent VCs on other dimensions: 55 percent employ six professional or fewer, and only 20 percent
have ten or more employees.
To summarize, prior work notes that firms often adopt governance structures they believe can support benefits
capture (Keil, 2002; Keil et al., 2008), and that deviation from ideal structure types may result in inferior
performance (Hill and Birkinshaw, 2008). We can identify three major themes that shape a CVC program's ultimate
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governance structure. First, with respect to programs' structure, the main categories include direct investment (i.e.,
a corporate business unit manages CVC activity), wholly owned subsidiary (i.e., a subsidiary is set up to handle
investments), dedicated fund (i.e., a fund comanaged by the firm and a venture capitalist), and CVC as LP (i.e.,
capital allocated to a venture capital fund). There is a notable presence of dedicated funds supported by a growing
number of VC professionals who are experienced in working closely with large corporations and their unique CVC
needs.
Second, there is substantial variation in program autonomy in terms of capital allocation and decision autonomy.
Some programs are allocated a large amount of capital up front, while others receive the necessary funds on an
ad-hoc basis. The discretion to make investments (i.e., fund a particular venture) and exit (i.e., sell a venture or
take it public) is fully delegated to the CVC program in some corporations yet remains subject to scrutiny and
corporate approval in others. Third, a lively debate continues regarding CVC compensation schemes. A flat-rate
corporate salary was the prevailing compensation scheme among CVC personnel in the past and remains a
common practice in a large minority of programs nowadays.
(p. 183) The interdependencies between the three governance facets have received little attention in the
literature. Yet there is some evidence to suggest that these facets are partially correlated. Tightly structured
programs (e.g., direct investments) are more likely to be subjected to rigorous corporate scrutiny. Also they are
more likely to employ corporate-wide compensation to avoid inequality concerns and ensure alignment with the
interests of the parent corporation. In contrast, loosely structured programs (e.g., wholly owned subsidiaries and
dedicated funds) are likely to have a dedicated pool of funds and enjoy decision-making autonomy. These
programs often employ compensation schemes that have a substantial performance pay component.
Investment Relationships
Investment relationships between CVC programs and entrepreneurial ventures are complex and involve the
bidirectional flow of information, capital, and commercial assets. From entrepreneurs' perspective, the relationship
is an opportunity for monetary and nonpecuniary support. Given the asymmetry in size, it also requires careful
management in the time leading to the investment as well as once funding is received. From the CVC's perspective,
first and foremost it seeks to identify, select, and attract prospective portfolio companies. After the investment CVC
programs employ various mechanisms to manage portfolio companies. Taken together, selection and monitoring
are the fundamental building blocks of a successful investment relationship. They also allow the firm to leverage or
learn about entrepreneurial inventions.
The topic of investment relationships has received much attention in the literature. In a way that echoes the
complexity of these relationships, the work spans various methodologies, including large-sample analysis, surveys,
and anecdotal evidence. I begin by discussing evidence regarding CVC-entrepreneur relationships leading up to
the funding round, and then proceed to review work on the postinvestment period.
Pre-Investment Relationship Dynamics

In his study of thirty-one strategically driven programs, Sykes (1990) finds that ties to the venture capital
community, and to a lesser extent referral from corporate personnel, are important deal-flow sources. Siegel et al.
(1988) report that the source of deal flow varies across programs. The more autonomous programs (i.e., pilots)
view ties to independent VCs as the main source of deal flow. In contrast, referral from a firm's own departments is
more important for programs that are dependent on corporate approval and capital (i.e., copilots). The authors
also find that CVC programs and independent VC funds employ similar investment criteria. Interestingly they report
that in those cases where ventures operate in an industry that is attractive to the parent firm, a CVC program is
more likely to face difficulties attracting adequate deal flow.
(p. 184) In the United Kingdom McNally (1997) observes that deal flow is contingent on whether a firm
approaches potential portfolio companies directly or through intermediaries such as venture capitalists. Oftentimes
a business relationship (i.e., customer-supplier linkages or contractual alliances) predates the investment
relationship. As for the investment criteria, contrary to Siegel et al. (1988), McNally finds that CVCs assess
ventures' products and market first, and only then evaluate entrepreneurs' experiences. The selection process is
strict, and CVC investors fund less than 10 percent of the potential targets.24
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Birkinshaw et al. (2002) find substantial variation in selection and monitoring practices across programs' objectives.
Venture capitalists are the main source of deal flow for externally focused programs investing either for financial or
strategic reasons. Other external sources include direct contact by entrepreneurs (ranked second) and referral by
corporate employees (ranked third). The reverse rank-order holds for internally focused programs. As for the
acceptance rates, most internally focused programs and all externally focused ones screen out about 85 to 90
percent of all the incoming ideas and fund only 2 to 3 percent of the initial proposal pool.25 Similarly an Ernst &
Young (2002) survey points to VC and direct entrepreneur referrals as the main sources of new investments, each
accounting for about 30 percent of CVC deal flow. Other sources include, in order of importance, internal
employees and professional service firms.
Based on large-sample empirical analysis, a group of studies further advances our understanding of the process
by which corporate venture capitalists and entrepreneurs consummate an investment relationship (Dushnitsky,
2004; Katila et al., 2008; Dushnitsky and Shaver, 2009). Katila et al. study a random sample of 701 ventures
funded between 1979 and 1995 (11 percent of the U.S. technology ventures funded during that period). They find
that the resource and safeguard profile of a venture's industry explains the likelihood it receives CVC funding. On
the resource front, an entrepreneurial venture with greater resource needs (as measured by the intensity of capital
and marketing expenditures in venture's industry, as well as round amount) is more likely to opt for CVC funding. As
for safeguards, an entrepreneur operating in an industry characterized by stronger safeguards (e.g., patents or
lead time) is more likely to seek CVC backing. The authors also report evidence of a pecking order in ventures'
resource dependency: CVC investment is most likely in the presence of manufacturing resource needs, then
marketing needs, and finally financial needs. They further find a hierarchy in safeguard mechanisms (lead time,
followed by trade secrets, and patents).
Dushnitsky (2004) and Dushnitsky and Shaver (2009) take a different approach. Rather than studying the needs of
a venture and the resource profile of its industry, they advance an approach that considers corporate and
entrepreneur perspectives in tandem. Dushnitsky (2004) argues that many investment relationships do not
materialize because the corporation will not invest unless the entrepreneur discloses her invention, and the
entrepreneur is wary of doing so, fearing imitation. As a result Dushnitsky predicts that a firm is more likely to
exploit entrepreneurial disclosure, and thus relationships are less likely to be formed when entrepreneurs' (p. 185)
concerns of CVC actions are at their highest level: when (1) the invention is a potential substitute of corporate
products, and (2) a business unit manages investments that potentially substitute its own products. In contrast, an
investment is more likely to form when the products are complements.
Given that disclosure requirements (and therefore imitation concerns) are most severe for nascent ventures,
Dushnitsky (2004) amasses data on the population of 1,646 start-up-stage ventures financed during the 1990s. To
account for the aforementioned dynamics, the focus is on the relative position of the venture rather than the
CVC.26 The results are consistent with the hypotheses and offer large-sample support to Siegel et al.'s (1988)
observation that quality deal flow is particularly thin in areas closely related to parent firm products and services.27
Dushnitsky and Shaver (2009) shift attention from the moderating effect of CVC organization toward the role of the
Intellectual Property Rights (IPR) regime. Drawing on similar logic, they hypothesize that a corporate investor is
more likely to exploit entrepreneurial disclosure, and thus a relationship is less likely to form when (1) the
entrepreneurial invention is a potential substitute of corporate products and (2) the industry is characterized by a
weak IPR regime. The authors expand the analysis to include the various IPR regimes, such as the pharmaceutical
and health care sectors. The results are instructive: an investment relationship between potential substitutes
decreases under a weak IPR (strong IPR) regime where imitation concerns are intense (alleviated). If the products
of a CVC-entrepreneur pair are not substitutes (i.e., there is no reason to fear imitation in the first place), the
likelihood of an investment relationship is high and insensitive to the IP regime.
It follows that the efficacy of a CVC program is shaped by its governance structure (e.g., Keil et al., 2008; Hill and
Birkinshaw, 2008) and its relationship with each venture (e.g., Dushnitsky and Shaver, 2009; Katila et al., 2008).
Keil et al. (2004) identify an additional factor: the relationship among the ventures in a CVC's portfolio. The authors
conjecture that, irrespective of their relationship to corporate core businesses, the more related portfolio ventures
are, the greater a firm's ability to leverage insights from CVC investments to exploit its own knowledge base. In
contrast, the greater the number of ventures in a CVC portfolio the lower its ability to leverage insights to exploit its
own knowledge base.
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Post-Investment Relationship Dynamics
Once an investment is consummated, the corporation proceeds to monitor its portfolio companies (e.g., Bottazzi et
al., 2004, 2008; Cumming, 2006; Masulis and Nahata, 2010; Sykes, 1990). One also observes bidirectional flow of
information and assets between the corporation and the ventures (e.g., Bengtsson and Wang, 2010; Birkinshaw et
al., 2002; Maula et al., 2009; McNally, 1997; Siegel et al., 1988; Yang et al., 2009).
Sykes (1990) offers evidence of monitoring mechanisms, documenting CVC participation in board meetings and a
review of periodic reports. McNally (1997) (p. 186) reports that U.K. corporations closely monitor their portfolio
companies: 96 percent take a seat on the board and communicate with their portfolio companies on a monthly or
weekly basis. Recent surveys further uncover the extent to which CVCs on both sides of the Atlantic seek board
participation. Maula (2001) studies U.S.-based portfolio companies in the computer and communication industries,
reporting that their CVC investors hold either a board seat (31 percent) or passive observer rights (40 percent). A
contemporaneous survey of European venture capital investors (Bottazzi et al., 2004) finds that CVC investors
serve on portfolio companies' boards (68 percent) and conduct close monitoring and monthly site visits (70
percent) at a level that is slightly lower than those for independent VCs (78 and 76 percent respectively). Based on
a survey of CVCs across the globe, Birkinshaw et al. (2002) reports that the majority takes a board seat (50
percent) or an observer seat (39 percent).28
In a comprehensive study of the subject, Masulis and Nahata (2010) derive detailed board information from IPO
prospectuses. Specifically they investigate 177 CVC-backed U.S.-based ventures that went public in the 1996
2001 period.29 The analysis reveals that board representation is sensitive to the relative position of the venture
versus the CVC: strongly complementary CVC investors receive the most board seats, followed by weakly
complementary CVCs, with the potential substitutes having the fewest seats. The pattern holds not only for the
absolute number of CVC seats but also with respect to percentage share of CVC seats. The authors find that CVCs
are less likely to be lead investors, and in those few cases where they do, the lead CVC holds lower board
representation than do the lead traditional VCs.
Board representation is not the sole dimension on which corporate and independent venture capitalists differ. The
differences extend to other contractual features, such as veto rights. Cumming and Johan (2008) analyze 223 term
sheets for European ventures and find that captive investors (which include many CVCs) are approximately 20
percent more likely to take a greater number of veto rights.
Cumming (2006) observes differences in the type of securities investors seek in return to their investments. He
reports that independent VCs are more likely than CVCs to use common equity and convertible securities. These
securities are designed to give an investor substantial financial participation in ventures' success. Corporate
investors, in contrast, are more likely to use nonconvertible debt, which is predominantly designed to protect an
investor in case of ventures' failure. Cumming therefore concludes that compared to independent VCs,
corporations are focused more on downside protection than upside potential. These patterns persist for Canadian
and U.S. investors in Canadian ventures, as well as for European corporate investors.
Given the strategic nature of the relationships, several studies investigate the complex flow of information and
assets between a corporate investor and its portfolio companies. These studies consider not only the impact of an
investor on the venture, but also the reverse. McNally (1997) finds that many ventures view CVC board presence
positively and particularly commend corporate assistance in solving (p. 187) short-term problems and a
corporate role as a sounding board to management team. Sykes (1990) observes that corporate investors provide
value-added services to the venture (e.g., awarding expert advice) and at the same time leverage portfolio
companies to the benefit of the parent firm (e.g., seeking advice from the venture, identifying other investment
opportunities, forming business relationships).
The relationships are not without challenges. Cultural asymmetry, for example, plays a critical role; Siegel et al.
(1988) note that incompatibility between corporate and entrepreneurial cultures is a leading obstacle to an
effective relationship. Relatedly, while CVC personnel interact with the venture on a weekly or monthly basis, other
corporate personnel seldom do so (Birkinshaw et al., 2002). Indeed rich data for over 1,600 VC-backed European
ventures reveal that corporate investors are not as engaged in their portfolio companies compared to independent
VCs: the CVCs are less involved in recruiting senior management as well as hiring outside directors (Bottazzi et al.,
2008). As noted in the previous discussion of CVC governance, many corporations adopt structures that seek to
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promote fruitful relationships, although with mostly modest success (e.g., Hill and Birkinshaw, 2008; Keil et al.,
2008). The findings reported in Bengtsson and Wang (2010) illustrate this point. Studying a large repository of
entrepreneurial testimonies, they find that corporate investors score poorly on the broad track record
rankings.30 Moreover corporations' ranking is significantly lower than that of independent VCs on specific
dimensions, including operating competence.
It is important to note that not all corporate investors exhibit similar behavior. Rather their relationship with any
given venture is multifaceted and highly sensitive to the level of complementarities between the two. As with board
representation (Masulis and Nahata, 2010), Maula et al. (2009) find that the CVC-entrepreneur relationship is
sensitive to the level of complementarities. In a survey of the CEOs of ninety-one CVC-backed ventures, they
reveal that the greater the level of complementarities (i.e., capabilities or products that are construed to be
complementary), the greater is the social interaction between the two. Similarly, as complementarity levels
decrease, a portfolio company is more likely to employ safeguards (e.g., surrender lower equity share, bar a board
seat from its CVC investors, or wait before raising CVC). More important, an increase in the use of safeguards
protects the venture from erosion in autonomy as well as involuntary transfer of its invention to the parent
corporation. It also leads to lower levels of social interaction. The latter may prove detrimental since social
interactions between the corporate investor and the venture are associated with learning benefits to the venture.
To conclude, a new body of work has catapulted our understanding of investment relationships. On the topic of
CVC-entrepreneur relationships leading up to the funding round, I have substantiated previous observations and
gained novel insights. For instance, corporate investors rely on referrals from other venture capital investors for
the majority of their deal flow, with employees and business partners being an additional source of prospective
targets. We also gain insights into the issue of investment formation. Large-sample empirical work demonstrates
that corporations are most likely to fund ventures with significant resource needs or (p. 188) those with a high
level of complementarities. The research uncovers subtle dynamics between CVCs and entrepreneurs: investment
between those with potentially substituting products is sensitive to IP regime and CVC organizational structure.
We also have much evidence on CVC-entrepreneur relationships post-investment. Corporate venture capitalists
communicate with their portfolio companies more than twice a month. More than two-thirds of the programs have a
board seat, or at least hold observer rights. The relationships, however, are not limited to monitoring activities. The
entrepreneurs benefit from corporate advice, and at times the ventures educate the parent corporation about new
technologies or business opportunities. Interestingly there is evidence that the level of complementarities of a CVCentrepreneur pair shapes the intensity of monitoring and other interactions between the two.
Interactions with Other Firm Activities

Corporate venture capital allows established firms to harness the innovative spirit of external ventures. A firm may
decide to pursue alternative modes of interaction with those entrepreneurial ventures. For example, it may opt to
acquire a venture, form a strategic alliance, license the technology, or recruit key personnel away from the
venture. Arora and Gambardella (1990) were among the first to document interdependencies between these
different activities. Subsequent work suggests that a firm chooses which activity to undertake (e.g., Folta and
Leiblein, 1994; Garette and Dussauge, 2000; Hagedoorn and Duysters, 2002; Reuer and Ragozzino, 2008), and
that a firm's participation in one activity affects its inclination or ability to initiate other activities (e.g., Beckman et
al., 2004; Gulati and Westphal, 1999; Nicholls-Nixon and Woo, 2003; Rosenkopf and Almeida, 2003). These
studies, however, did not cover CVC investment.
Recent work has begun to investigate the interdependence between CVC and other firm activities. This stream of
research is motivated, on the theoretical front, by the aforementioned work and, on the empirical front, by the
availability of systematic venture capital data. To date, research indicates that CVC is indeed a part of a
comprehensive firm strategy. Specifically there are notable interdependencies between corporate venture capital
and other firm activities (Van de Vrande et al., 2009; Keil et al., 2008). In parallel, recent studies focus on the
specific interdependencies between corporate venture capital and internal R&D (Chesbrough and Tucci, 2004;
Dushnitsky and Lenox, 2005a), strategic alliances (e.g., Dushnitsky and Lavie, 2010; Wadhwa and Phelps, 2009),
or M&A activity (Benson and Ziedonis, 2009, 2010; Tong and Li, 2010). I review these studies below.
There is evidence that internal R&D, a traditional form of innovation effort, does interact with corporate venture
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capital. For example, Chesbrough and Tucci (2004) report that internal R&D expenditures increase once a firm
launches a CVC program. Dushnitsky and Lenox (2005a) find evidence that firms pursue CVC activity when its
marginal innovative output is higher than that of internal R&D.31
(p. 189) Van de Vrande et al. (2009) study a comprehensive set of external R&D activities undertaken by 153
pharmaceutical firms during the 1990s, including CVC investments as well as M&A, technology alliances, and joint
ventures. Their analysis suggests that uncertainty regarding external factors (i.e., environmental turbulence,
technological newness) and dyadic consideration (i.e., prior cooperation, technological distance) drive a firm's
activity choice. Keil et al. (2008) study a similar set of activities by 110 firms in the information and
telecommunication sector during the period 19932000. Their findings also call for a broader consideration of
different firm activities; for instance, they find that CVC investment (M&A) contributes most (least) to parent firm
innovativeness when the ventures' products are related to the parent.
As the two salient forms of interfirm relationships, there is reason to believe that corporate venture capital and
strategic alliances are interdependent. Before such investigation can be undertaken, however, one has to establish
that CVC and alliances represent fundamentally distinct firm activities. Table 5.1, and the discussion leading to it,
makes that point.
Is a firm more likely to ally with ventures it previously funded? The answer, according to McNally (1997), is yes. He
investigated twenty-three corporate-backed ventures located in the United Kingdom. In almost two-thirds of the
cases, the firm and the venture entered a business relationship at a later date (e.g., buyer-supplier relationships,
licensing agreements, or research contracts). Colombo et al. (2006) report similar findings based on a proprietary
sample of Italian ventures for the period 19942003. The authors observe that an alliance is more likely to form
between a pair of firms with a previous CVC relationship. Moreover a CVC-backed venture is more likely to enter a
technology development than a commercialization alliance.
Wadhwa and Phelps (2009) advance a dyad-level analysis that further explores the impact of CVC investment on
alliance activity. They study whether 256 CVC investments by twenty-eight telecom equipment manufacturers lead
to a strategic alliance between the investing corporation and its portfolio companies. The results suggest that an
alliance is more likely to ensue as the venture matures, is awarded more patents, and has other CVC investors. The
factors are particularly pronounced when a CVC-investing firm has limited technological resources. For instance,
more technologically capable investors can evaluate a venture's virtues and need not delay alliance formation
until it matures.
Dushnitsky and Lavie (2010) advance a firm-level investigation of CVC-alliance association. Specifically they study
whether alliance formation facilitates CVC investment not only among a firm's existing alliance partners but also in
other, previously unrelated ventures. Analyzing the alliances and CVC investments of 372 software firms during the
1990s, they find an inverted U-shaped association between CVC investment and alliance formation. The authors
conjecture that the pattern reflects two opposing effects: on the one hand, resource complementarity and network
resource visibility prompt a reinforcing association between CVC and alliance activities, while on the other hand,
external resource redundancy and (p. 190) internal resource allocation constraints lead to an attenuating effect
between the two. They also report that the positive CVC-alliance association diminishes as a firm possesses
greater internal resource stocks, matures, and accumulates experience with prior CVC investments.
Corporate venture capital can also impact a firm's M&A strategy. A few surveys indicate that CVC is deployed as a
precursor to acquisitions (e.g., Sykes, 1990); other surveys suggest that M&A facilitation is not a CVC objective
(e.g., Winters & Murfin, 1988; Ernst & Young, 2009); and yet others find that the CVC-M&A relationship varies
across program types (e.g., Siegel et al., 1988).
Tong and Li (2010) explore a firm's decision to engage a target company through CVC or M&A. To that end they
construct a large sample of almost 2,800 deals between 2003 and 2005, of which 546 are CVC investments and the
remaining observations are M&A deals. Interestingly the authors find no overlap between the two: not a single CVC
investment evolved into an acquisition. In line with real option theory, the results indicate that a firm is more likely to
pursue CVC investment the greater the level of uncertainty in its industry. Moreover investment irreversibility
further increases firms' propensity toward CVC, while growth opportunities facing the target company weaken the
positive uncertainty-CVC association.
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Benson and Ziedonis (2010) investigate the impact of CVC investment on subsequent M&A activity. They examine
530 entrepreneurial ventures acquired by sixty-one CVC investors during 19872003 and report that the acquiring
corporation (i.e., CVC-backed ventures) backed only 89 (17 percent) of them. More important, the authors find that
CVC has an adverse effect on M&A performance (i.e., acquirer's average cumulative abnormal return). An
acquisition of a nonportfolio company is associated with a positive average return of 0.67 percent to the acquiring
corporation, whereas acquiring a portfolio company decreases corporate value by an average of 0.97 percent.
Although no definite factor seems to explain this surprising result, there is some evidence that CVC programs with
an autonomous governance structure experience a lower adverse effect.32
In a companion study Benson and Ziedonis (2009) examine the aggregate effect of corporate venture capital.
Using the aforementioned data, the authors study the performance of each and every acquisition as a function of
aggregate CVC intensity (i.e., the ratio of a firm's total CVC disbursement to its R&D plus CVC expenditures). They
find that aggregate CVC experience is associated with positive acquisition performance, yet the effect diminishes
as CVC intensity increases. Interestingly the contribution of aggregate CVC to a firm's acquisition performance is
most pronounced for those corporations whose CVC programs exhibit greater longevity.
To conclude, a recent stream of research documents substantial interaction between corporate venture capital
and other firm activities. The nature of the interaction may seem counterintuitive at first. For example, firms
experience decreased value when acquiring a previously funded venture. Upon closer investigation, the largescale evidence is consistent with (previous intriguing) (p. 191) observations; namely, M&A activity ranks
relatively low as a CVC objective. In other cases, the interdependencies appear to resonate with our priors. For
instance, there is evidence of an association between CVC investment and alliance formation. Again a closer
investigation is warranted. While a CVC investment between a corporation-venture pair may transition into a
strategic alliance between the two, there is also evidence that at the aggregate firm level, alliance activity is driving
corporate venture capital.
The findings underscore the need to further our understanding of the interactions between CVC and other firm
activities. Such work could explore the way external constituents are recognized and interacted with: Does CVC
investment expand or contract the set of partners a firm interacts with? It should also expose the internal
implications of engaging in multiple activities: Does CVC investment enhance or exhaust the resources necessary
to effectively sponsor alliance activity? The answers to each question will likely draw on different theories. Broadly
speaking, the discussion highlights the need for a comprehensive analysis of firm activities. Rather than studying
corporate venture capital in isolation, there is room to situate it within a broader set of activities a firm is engaged
in.
Interactions with Other Entities

Established firms view corporate venture capital as a vehicle to gain exposure to otherwise untapped partners.
Access to entrepreneurial ventures is clearly the main target of CVC investment. That said, the venture capital
market involves a broader set of entities that many corporations do not interact with during the usual course of
their operations. In addition to the venture capitalists, there are the scientists, investment bankers, deal brokers,
and others (e.g., Keil, 2002; Rider, 2009). Closer contact with these entities and individuals can expose a
corporation to many new business opportunities that would probably not have emerged in any other way. With the
exception of interaction with entrepreneurial ventures (which was covered earlier), there is scant evidence on the
role corporate venture capital plays in facilitating interactions with other entities. The little evidence we have
centers on the interaction with independent venture capital funds.
Winters and Murfin (1988) and Sykes (1990) state that acceptance by the venture capital community is key to CVC
success. It extends deal flow, introduces best practices from the veteran VCs, and assists in nurturing the
ventures. The authors note that governance structure (i.e., launching a separate CVC subsidiary) can win
acceptance. Not only does it imply a long-term commitment on the part of the corporation, but also the existence of
a dedicated subsidiary implies an ability to react to investment opportunities in a timely manner.
Recent surveys echo these observations. Hill et al. (2009) find that programs that syndicate with independent VCs
experience several benefits, including greater perceived strategic value, higher investment output per year, and
lower closure rate among portfolio companies. Ernst & Young (2009) report that the development (p. 192) of
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relationships with independent VCs ranks as an important strategic objective among leading corporate investors.
Large-sample analysis offers further insights on the subject. Keil et al. (2010) study venture capital syndicates
between 1996 and 2005. Consistent with extant work on VC networks (e.g., Stuart and Sorenson, 2001; Hochberg
et al., 2007), they observe that CVCs with prior central positions in syndication networks significantly explain future
network positions of CVCs. Interestingly they find that the resources of a CVC's parent corporation can substitute
for a CVC's lack of prior centrality. That is, a CVC investor that occupies a peripheral position within the VC network
can leverage the resources of its parent corporation to gain a central position.
There is also evidence that corporate and independent venture capitalists exert externalities on each other, even
absent direct interaction. Hochberg et al. (2007) study the performance of U.S. entrepreneurial ventures between
1980 and 2003. They find that a VC-backed venture is more likely to survive when its independent VC has coinvested in the past along with CVC investors. That is, an independent VC experiences positive externalities on its
portfolio survival due to its relationships with corporate investors. Dushnitsky and Shaver (2009), reviewed earlier,
illustrate that the presence of independent VCs may be associated with negative externalities on corporate
investors. They find that highly sought-after entrepreneurs may opt for independent VC backing rather than
corporate funding. The negative externalities are attributed to the differences in the propensity of investors to
expropriate entrepreneurial invention and its affect on entrepreneurs' investor choices.
To conclude, a handful of studies investigate the interaction between corporate venture capitalists and other
entities. The evidence indicates that CVCs pursue and benefit from such interactions. However, we know little
about the changing nature of the interactions during the fourth CVC wave, which is characterized by greater
program longevity and CVC professionalization. As corporate venture capitalists become a more permanent part of
the venture capital landscape, it is possible that past issues (e.g., how to enter into the VC network) make room for
new challenges (e.g., how to enact an efficient division of labor).
Implicit in the current conversation is the assumption that other entities are a means to an end. Put differently, we
evaluate interactions with other entities in terms of their contributions to consummating equity investment in
entrepreneurial ventures. Equally important, one could take a broader perspective and consider the impact on
other firm activities. Following Dushnitsky and Lavie (2010), it is possible that corporate venture capital increases a
firm's ability to form alliances with innovative partners, both among and outside its portfolio companies. Similarly
CVC investment may impact its parent firm's acquisition activity, irrespective of whether the target is a former
portfolio company (i.e., Benson and Ziedonis, 2009). It follows that through interactions with other entities, CVC
complements other firm activities.
(p. 193)
Performance Implications
The performance implications of corporate venture capital continue to be the subject of many academic studies. In
line with prior work, the findings are discussed for each of the three main groups: the CVC-backed entrepreneurial
ventures, the CVC programs, and the parent corporations. The distinction is necessary because at times an
entrepreneurial venture or a CVC program may benefit at the expense of the parent firm (or vice versa).
Performance of the Entrepreneurial Venture

Corporate-backed ventures are likely to experience several advantages. First, a corporate investor can extend
value-added services similar to those provided by quality VC funds (Block and MacMillan, 1993). Second, a
corporate investor can also offer unique services that leverage corporate resources; a venture may be allowed
access to corporate laboratories, to employ the corporation as a readily available beta site, or to harness a firm's
network of customers and suppliers as well as domestic and foreign distribution channels (Acs et al., 1997; Maula
and Murray, 2001; Pisano, 1991; Teece, 1986). A corporate investor can also offer unique insights into industry
trends.33 Third, the backing of a large corporation acts as an important endorsement effect toward third parties
and/or the capital markets (Stuart et al., 1999). For a detailed list of corporate contributions, see Table 6.3 in
Dushnitsky (2006).
Along these lines McNally (1997) finds that most ventures accrue substantial nonpecuniary benefits in the form of
help with short-term problems (83 percent) and access to corporate management (70 percent) and technical
expertise (49 percent). Other benefits include the ability to leverage corporate assets and access corporate
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marketing and distribution networks (39 percent). Consistent with the endorsement effect, 70 percent reported an
indirect advantage in the form of greater credibility. Among those ventures that received indirect CVC investment
(i.e., CVC as LP), almost half were not aware of the corporate investor. That said, many ventures experienced
greater likelihood of forming future business relationships with the corporation.
Gompers and Lerner (1998) study 30,000 investment rounds between 1983 and 1994. They find that corporatebacked ventures are at least as likely to succeed as VC-backed ventures, where success is defined as an IPO or
an acquisition at high valuation. A corporate-backed venture is most likely to succeed if there is a fit between it and
the sponsoring corporation. The authors also find that CVCs invest at a premium compared to similar investments
by independent VCs. The premium, however, is not sensitive to the degree of fit between the venture and the
corporation. Note that a CVC premium is advantageous from the venture's viewpoint (it is able to raise funds at a
lower cost), yet it might result in lower returns to the corporate investor.
Maula and Murray (2001) and Ivanov and Xie (2010) report complementary findings. Whereas Gompers and Lerner
(1998) study the probability of an IPO as a (p. 194) function of corporate backing, these studies investigate the
valuation conditioned on going through an IPO. Maula and Murray analyze 325 IT and communication ventures that
listed on NASDAQ between 1998 and 1999. Corporate-backed ventures receive higher valuations than comparable
ventures funded solely by independent VCs. Ventures that are cofinanced by multiple CVC investors earn the
highest valuations.
Ivanov and Xie (2010) study IPO prospectuses and performance of 1,510 venture-backed companies that went
public during the period 19812000. They focus on the impact of strategic fit between the venture and its
corporate inventor.34 About 15 percent of the sample are CVC-backed ventures, of which 123 (96) exhibit strategic
fit (no strategic fit). In line with Gompers and Lerner (1998), the authors find that CVC-backed ventures enjoy a
valuation premium at IPO only if they have a strategic fit with the parent corporation.
A survey of ninety-one CVC-backed ventures sheds further light on the impact of corporate investors (Maula et al.,
2009). On the one hand, a corporate investor can offer learning benefits in the form of deeper market knowledge,
technical know-how, and information on competition. On the other hand, bureaucratic corporate processes may
delay a venture's growth, and it may even find that autonomy and intellectual property are lost to the parent
corporation. The authors report that greater complementarities and social interaction between a venture-corporate
pair increase the chances of realizing learning benefits. Although the use of safeguards decreases the chance of
adverse corporate impact, it also limits a venture's learning benefits.
Hochberg et al. (2007) study the performance of venture-backed companies in the United States during the period
19802003. In line with Gompers and Lerner (1998), Maula and Murray (2001), and Ivanov and Xie (2010), they
find that CVC-backed ventures are at least as likely to survive as independent VC-backed ventures. Interestingly,
even in the absence of a direct investment a corporate investor has a positive effect: a venture's survival chances
increase the better networked its lead independent VC is with CVC investors. That is, ventures benefit from being
backed by independent VCs that frequently co-invest with corporations.35 Because the analysis focuses on
ventures with no direct CVC backing, the authors suggest that a well-networked independent VC enhances a
venture's chances of becoming a supplier or forming a strategic alliance with an established corporation.
In sum, CVC-backed ventures exhibit, on average, favorable performance both in absolute terms (McNally, 1997;
Maula et al., 2001) and in comparison to VC-backed ventures (Gompers and Lerner, 1998; Maula and Murray,
2001; Ivanov and Xie, 2010). However, we do not know whether the benefits to the venture come at the expense
of the corporation (e.g., inflated valuations). Further, it is unclear whether a venture's favorable performance
should be attributed to the CVCs' ability to pick winners or build superior ventures (Sorensen, 2007). Finally, we
need to map the mechanisms by which corporate backing enhances ventures' value. Future research should
explore the effect of technological overlap (e.g., cross-citation of patents), shared manufacturing operations (e.g.,
the venture or the firm is listed (p. 195) as a major supplier of the other), joint marketing efforts (e.g., use of
similar third-party marketing channels), or product complementarities (e.g., product offering in related Corp-Tech
categories) on ventures' performance.
Performance of the CVC Program

Evaluating the performance of the CVC program is a challenging task. There is no agreed upon list of strategic
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benefits on which programs are measured. This is further complicated by the fact that measuring programs solely
on their strategic contribution may not be indicative of financial performance. Broadly speaking, extant work can
be divided into two streams. Later studies are based on large-sample analyses yet tend to focus on a narrow set of
performance measures. Earlier, survey-based studies account for a broad set of strategic and financial returns.
Although surveys offer richer insights into different performance dimensions, they employ smaller samples and can
be more sensitive to single-respondent bias. Taken together, these studies advance our understanding of CVC
performance.
Siegel et al. (1988) find that corporate venture capitalists are highly satisfied with programs' performance, with
exposure to new technologies and markets receiving the highest rating. Moreover pilot programs (i.e., programs
with a high degree of autonomy and permanent financial commitment) reported higher satisfaction in achieving
both financial and strategic objectives, compared to copilot programs (i.e., those that are highly dependent on
corporate approval and capital commitment). Based on a survey of thirty-one strategically driven CVC programs,
Sykes (1990) reports that 40 percent (24 percent) experience very high (nil or negative) value creation. Programs
that rate higher on strategic value creation are also associated with higher financial returns.
McNally (1997) offers rich insights on the relationship between CVC programs' structure and performance. About 50
percent of the CVC as LP programs terminated their investment activity, compared to 39 percent of the direct
investment programs. The former structure is mainly associated with an opportunity to learn about venture capital,
gain financial returns, and enhance social responsibility. In contrast, programs that directly invest in
entrepreneurial ventures report high satisfaction with the development of business relationships and exposure to
new markets and technologies.36
Gompers and Lerner (1998) first advanced large-scale empirical evidence regarding program termination. To the
extent that program longevity is a proxy of its success, the authors find that CVC programs do not fair as well as
independent VC funds: a mean of 2.5 years (and 4.4 investments) for the former compared to 7.1 years (and 43.5
investments) by the latter. Interestingly the greater the strategic fit within a program's portfolio (i.e., the fraction of
ventures with products or services similar to that of the parent corporation), the lower the likelihood of early
termination.37
Hill et al. (2009) report that programs that aggressively pursue syndication with independent VCs experience
greater perceived strategic value, higher investment output per year, and lower closure rate among portfolio
companies. The (p. 196) positive effect of syndication on investment output per year is particularly strong for
programs seeking investment in external ventures. They find that the degree of CVC governance (i.e., having preallocated capital and minimal corporate review) does not affect perceived strategic value for externally focused
programs. However, it is significantly associated with a decrease in portfolio companies' closure rates. Greater
longevity of the CVC unit and its portfolio companies is also associated with the use of VC-like compensation (i.e.,
carried interest).
Dushnitsky and Shapira (2010) further studied the impact of CVC compensation schemes. The authors analyze
corporate and independent investors during the 1990s. As noted earlier, they find that CVC investment practices
are sensitive to the nature of their compensation packages. The authors further report that different investment
practices affect a program's performance (i.e., the fraction of favorable liquidity events among its portfolio). On
average, CVCs' portfolios perform at least as well as the portfolios of independent VCs. In the presence of
performance pay, CVCs' portfolios exhibit significantly greater liquidity events compared to that of their
independent VC counterparts.
To conclude, there is mixed evidence regarding the performance of corporate venture capital programs.
Nonetheless a few consistent observations emerge. Programs that perform well strategically also report favorable
financial returns. The degree to which firms experience favorable performance varies across governance
structures (i.e., program autonomy or compensation schemes). The measurement of CVC performance remains an
ongoing challenge. The financial performance of CVC portfolio offers only limited information about a program's
overall success. The main advantage is that financial information is easy to observe and compare across
corporations. Richer, survey-based information is often based on executives' accounts of their program
performance. The measures have many advantages, yet they are also subjective and liable to various singlesource biases. Future work should triangulate these informative yet individual assessments with quantitative
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measures as well as supplement it with information from other non-CVC personnel (e.g., CEO, CFO, COO, and head
of business units).
Performance of the Parent Corporation

Studying the effect of CVC investment on the parent corporation raises two challenges. First, it is not clear whether
the effect is positive or negative. The corporation does not necessarily experience favorable outcomes when its
portfolio companies or even the CVC program reports positive performance. The success of the entrepreneurial
venture, for example, may be at the expense of the corporate investor (e.g., inflated valuations). Second, there are
major measurement hurdles. A program aimed at enhancing demand may affect revenue and profits in the short
term, whereas the contribution of a window on technology strategy is expected to unfold over a longer period of
time. Nonetheless a handful of scholars have explored the performance implications for the investing corporations.
These studies usually employ pooled cross-sectional time-series samples, as opposed to survey responses.
(p. 197) Chesbrough and Tucci (2004) investigate the research activities of 270 U.S. and foreign CVC investing
firms during the period 19802000. They explore variations in the level of corporate R&D expenses prior to and
immediately after the onset of the CVC program. A multivariate regression analysis indicates that the existence of a
CVC program is significantly associated with increases in corporate R&D, even after controlling for firm factors and
industry affiliation. Building on these findings, the authors state that corporate venture capital is of strategic value
to the parent corporation and may supplement other R&D efforts.
Dushnitsky and Lenox (2005b) analyze a large unbalanced panel of U.S. public firms during the time period 1975
1995. Utilizing panel data analysis and controlling for unobserved, time-variant heterogeneity, they find that
increases in a firm's CVC investment are associated with subsequent increases in citation-weighted patenting rates
of its parent corporation. This finding is consistent with the view of corporate venture capital as a vehicle for
harnessing innovative entrepreneurial ventures. Further, the magnitude of the effect depends on the IPR regime in
the industry as well as the level of absorptive capacity of the investing firm. It is within weak IP regimes that CVC is
associated with the greatest contribution to firm's innovativeness. The finding is consistent with the view that in
those industries ventures are hesitant to discuss their inventions, and CVC provides an opportunity for the
corporation to pierce the veil of secrecy (e.g., conduct due diligence and participate in board meetings).
Focusing on the telecommunications equipment manufacturing industry, Wadhwa and Kotha (2006) advance
further evidence regarding the CVC-innovation relationship. Studying thirty-six corporate investors between 1989
and 1999, they find a nonmonotone association between the number of ventures a firm invested in and the number
of patents it applied for in the following year. Interestingly the nature of the association is sensitive to the level of
involvement in the ventures. The latter captures the number of board seats a corporation undertakes in its portfolio
companies as well as the number of strategic alliances formed between the two. When CVC involvement is low, the
CVC-innovation relationship takes an inverted U shape: a firm's innovation performance first increases and then
decreases in the number of ventures it funded. However, when investors' involvement level is high, the relationship
reverses, and firm innovation outputs feature a U-shaped relationship with CVC investment.
Schildt et al. (2005) also study information and telecommunication firms. Using a sample of 110 U.S. firms that
invested CVC during the period 19902000, they compare the inclination to perform explorative learning through
corporate venture capital, strategic alliances, joint ventures, and acquisitions. They define explorative innovation
activity as investing-firm patents citing only portfolio companies, and exploitive innovation as patents citing both a
firm's prior patents and portfolio companies. In comparison with acquisition, corporate venture capital is found to be
only weakly associated with exploratory behavior. The results suggest that exploitive activity is as important in
CVC investment as it is for other forms of interorganizational learning.38
(p. 198) Shifting the focus from innovation to financial performance, Allen and Hevert (2007) analyze the internal
rate of return (IRR) for ninety information technology companies that reported equity investments during 1990
2002. The authors glean detailed information from firms' 10-K reports, which covers CVC as well as other equity
investments.39 On average, corporate venture capital exhibits negative returns. That said, the performance is
bimodal where a notable minority (39 percent) experience very high IRRs and the remaining CVC programs exhibit
negligible or negative returns. Not surprisingly CVC programs that launched their activity during the height of the
dot-com bubble (19982001) exhibit the lowest returns. Interestingly the largest CVC programs featured the lowest
IRR performance, irrespective of the time period.
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Dushnitsky and Lenox (2006) explore investing firms' value creation using a panel of about 1,200 U.S. public firms
during the period 19901999. They compare investing firms' value creation (measured as Tobin's q) to that
experienced by noninvesting firms in the same industry during the same year. The main advantage of this
approach is the fact that it captures both the narrow financial returns to CVC investment and the long-term
strategic benefits.40 The analyses suggest that CVC is associated with the creation of firm value, but that this
relationship is conditional on both temporal and sectoral factors. The positive relationship between CVC and firm
value is greatest within the devices and information sectors. Moreover the marginal contribution of CVC rises when
firms explicitly pursue strategic objectives.
To conclude, a growing body of work investigates the contribution of CVC programs to their parent corporations.
The evidence suggests that corporate venture capital creates firm value especially when the program is
strategically driven. Moreover the magnitude of value creation is a function not only of the investment activity per
se, but also of the parent firm's absorptive capacity as well as industry-level factors. Future work may expand on
these studies in a number of ways. First, one should recognize the disconnect between venture and parent firm
success. As mentioned above, a venture may command inflated valuations, which could have an adverse effect
on parent firm performance. At the other extreme, an outright failure of the venture may be associated with
substantial strategic benefits. These benefits may accrue to the investing firm when technologies remain viable
after the originating venture has dissolved (Hoetker and Agarwal, 2007) and failure itself carries informational
weight (McGrath, 1999).
Directions for Future Research

The previous decade witnessed the coming of age of the corporate venture capital literature. During that time we
have seen more CVC studies published in top academic journals than in the previous four decades combined.
Moreover the (p. 199) topic draws interest from various disciplines, including economics, entrepreneurship,
finance, organizational theory, and strategy. The drivers of this literature are twofold.
First, the CVC phenomenon underwent major structural changes. For example, the average longevity of a CVC
program has almost doubled during the past decade. The observations imply that CVC activity is construed as an
integral part of a firm's innovation strategy. They echo a broader transition in corporate R&D strategies: shifting
away from an exclusive focus on internal R&D and toward embracing external sources of ideas and innovations.
As CVC activity takes a more central role in firms' strategy, we observe CVC research is increasing in salience.
Second, the introduction of venture capital databases enables rigorous statistical analysis of corporate venture
capital. Consequently we observe the literature shifting from case studies and survey-based research and toward
sophisticated econometric analysis of large panel data. The shift in methodologies enhances the generalizability of
CVC research, as studies address a wider set of causal factors and tackle unobserved heterogeneity. Equally
important, robust analyses have led to further theoretical development. Large-sample studies, for example,
uncover theoretical mechanisms by exploring boundary conditions (e.g., comparing and contrasting CVC practices
across different industries or technological domains).
Although we know much more about corporate venture capital, there are a number of issues that merit further
investigation. Many studies focused on the telecommunication sector and, to a smaller extent, the biotechnology
industry. The relative share of these sectors is on the decline, as Figure 5.4 illustrates. It is therefore important to
present evidence on the impact of corporate venture capital in other settings. Future work should investigate new
sectors, such as chemicals and medical devices as well as the rapidly growing sectors of food supplements and
clean energy. To the extent that different sectors are subjected to different boundary conditions, future work could
advance our understanding of corporate venture capital.
On the same note, there is room to systematically compare and contrast CVC patterns across sectors. Crossindustry comparisons are well positioned to highlight important boundary conditions. Extant work exploited
differences in the level of industry competition, technological ferment, and strength of IP regimes to uncover
boundary conditions affecting the inclination to engage in corporate venture capital (e.g., Dushnitsky and Lenox,
2005a, 2005b; Sahaym et al., 2010). Other dimensions should be considered as well. Do differences in capital
requirements (i.e., the average amount of money required to launch a new venture) explain CVC patterns across
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industries? New dimensions could also shed light on important organizational factors. For example, difference in the
temporal pace of technological development might explain a firm's ability to learn in a timely manner about external
innovation.
Other opportunities for future research arise due to the structural changes of the recent CVC wave. To a large
extent our knowledge of CVC practices and performance is based on analysis of data from the second and third
waves of corporate (p. 200) venture capital. Given the new structural attributes of many CVC programs, we
should reexamine whether past insights continue to hold true. Future work should rigorously compare and contrast
data from the fourth wave with prior studies. For example, do CVC-investing firms continue to enjoy financial
premiums during the 2000s of the scope they experienced during the 1990s?
At the macro level there are many opportunities to explore the relationship between CVC investment and nationallevel factors. Over the past decade the venture capital market expanded outside the United States (e.g., Jeng and
Wells, 2000; Mkel and Maula, 2005; Wright et al., 2005; Guler and Guilien, 2010). Corporate venture capital
investments parallel these broader trends; it is increasingly more likely that a corporate investor will back a
European- or Asian-based venture (Figure 5.5). Future work should investigate what factors stimulate CVC
investment across the globe. The analysis should go beyond the general categories; for example, within the broad
legal regime definition we may find that the effect of rule-of-law or anti-directors-rights differs from that of strong
intellectual property rights. Finally, scholars could also distinguish between those factors that are driving firms'
investment behavior (i.e., originating CVC) and those that attract corporate venture capital (i.e., receiving CVC).
Future work could go beyond comparing CVC performance across time or national borders. A new set of issues
arises as corporate venture capital becomes an integral part of a firm's innovation strategy. For instance, one of
the key questions in the past was whether or not to engage in CVC activity. In contrast, nowadays we observe
corporations with multiple CVC funds, and the question shifts toward how to best manage and coordinate among
the programs. Thus the focus shifts from initiation to management of CVC programs.
Finally, these new research questions underscore the need for broader methodological approaches to the study of
corporate venture capital. Case studies and survey-based work could once again play an important role in
advancing CVC research. The evidence reported in Siegel et al. (1988), McNally (1997), Chesbrough (2002),
Birkinshaw et al. (2002), Gawer and Henderson (2007), Keil et al. (2008), and others first stimulated the study of
corporate venture capital. The insights gleaned through these approaches offer rich and detailed information
regarding the new issues and challenges facing corporate investors in the twenty-first century.
Similarly, formal approaches could advance our understanding of corporate venture capital. They can draw on as
well as contribute to empirical work. The development of new models can draw on stylized facts from cases,
surveys, and large-sample work. More important, formal models can be instrumental in deciphering the evercomplex CVC phenomenon. A small body of formal work already tackles important issues, such as the role of CVC
in facing downstream rivalry (e.g., Fulghieri and Sevilir, 2009), seeding complementary markets (e.g., Riyanto and
Schwienbacher, 2006), attracting and retaining top talent (e.g., de Bettignies and Chemla, 2008), and innovation
efforts across the business cycle (e.g., Jovanovic and Rousseau, 2009). Formal work has been particularly
effective in explaining the contrasting forces a corporate-entrepreneur pair experience in the finance and (p.
201) product markets (e.g., Hellmann, 2002; Dushnitsky, 2004) as well as the subtle interactions that shape the
internal organization of innovation and CVC efforts (e.g., Aghion and Tirole, 1994; Anand and Galetovic, 2000;
Anton and Yao, 1995; Gans and Stern, 2000; Hellmann, 2007; Klepper and Sleeper, 2005; Mathews, 2006;
Robinson, 2008). As CVC activity becomes more embedded with other firm activities and a broader set of external
consistencies, there are subtle interactions that can be best explored using formal approaches.
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Notes:
(1.) Several corporate venture capital units have been assigned, at a later point in their life, responsibilities for
managing the internal corporate venturing program or supporting voluntary spin-offs.
(2.) Other forms of inter-organizational relationships are briefly discussed here. As for non-equity alliance, they
share the above mentioned factors and further differ from CVC due to the lack of an equity arrangement. Joint
ventures, in addition to the above factors, entail the formation of a third entity (the joint venture) whereas CVC
involves only two independent firms, the corporate investor and entrepreneurial venture.
(3.) This section draws and expands on the discussion in Dushnitsky (2006).
(4.) The first VC fund, American Research and Development, was formed in 1946. Digital Equipment, Memorex,
Raychem, and Scientific Data Systems are only some of the first success stories of the venture capital industry.
(5.) Gompers and Lerner (1998) summarize the causes for the venture capital revival in the 1980s. The prudent
man amendment to the Employee Retirement Income Security Act of 1979 led pension funds to funnel a fraction of
their portfolios to VC investments. A year earlier capital gains tax rates were lowered, effectively increasing the
returns on investments. Finally, the emergence of technological opportunities, for example biotechnology and
personal computers, stimulated further investment.
(6.) The data are derived from the VentureXpert database. The database was initially introduced by Venture
Economics, the official research partner of the U.S. National Venture Capital Association, and was later acquired by
Thomson Financial. Previous academic studies on the venture capital industry have used the Venture Economics
database (Bygrave 1989; Gompers and Lerner, 1998; Gompers 1995, 2002; Sorenson and Stuart, 2001;
Dushnitsky and Shaver, 2009). Because each investment generates a unique record in the database, the data
contain the full history of investors' investments in each venture. While the database is not without limitations, it is
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among the most comprehensiveand publically availablerecord of private equity activities.
(7.) A round may consist of several investments by different investors, some of which may be corporate investors,
while others may be independent VC funds. The amounts are adjusted to 2003 dollars using the annual U.S.
Consumer Price Index.
(8.) Between 2000 and 2009 there were upward of 350 corporate investors, and over 40 percent of them have
been in operation for four years or longer (Figure 5.3). This fraction is notably lower than the results in Ernst
&Young (2009), which reports that 80 percent of the programs (thirty out of thirty-seven) have been active for
more than five years. The discrepancy is attributed in all likelihood to the fact that the survey attracted responses
from a group of more committed corporate venture capitalists.
(9.) I derived CVC investment information from Thomson's VentureXpert database and gleaned data on academic
articles via the EBSCO database. The figure reports the number of articles published in leading peer-reviewed
journals in the fields of economics, entrepreneurship, finance, management, and strategy. To that end a
comprehensive search of the EBSCO database identifies almost one hundred peer-reviewed studies using the
terms corporate venture capital, corporate venturing, or corporate ventures. Next, for each academic
discipline I counted the number of studies that appear in that field's leading journals. The figure depicts the count of
articles published in leading peer-reviewed journals. To the extent that other studies investigate the CVC
phenomenon yet do not use any of the aforementioned terms, the figure underestimates the scope of academic
work on the topic.
(10.) Kann's (2000) results are based on interviews and secondary data for 152 CVC programs operated by 120
corporations. All CVC programs were listed in the Directory of Corporate Venturing (AssetsAlernatives) or
MoneyTree (PriceWaterhouseCoopers).
(11.) A firm may list a number of objectives in its response; thus primary objectives are not mutually exclusive.
(12.) The decision not to pursue CVC is not due to lack of opportunity on the firms' part: about 67 percent of the
forty-five companies were approached either by an entrepreneurial venture or an independent VC fund. Of the
firms that were approached only 44 percent (29 percent) entertained the idea of direct investment (investing
through a VC fund).
(13.) Dushnitsky and Lenox (2005a) employ a large unbalanced panel of 1,171 U.S. public firms during the period
19901999. The sample covers firms' venturing (VentureXpert), patenting (Hall et al., 2002), and financial
information as well as the appropriability regime in which they operate (Cohen et al., 2000).
(14.) The observation may have to do with the way corporations invest in independent VC funds.
(15.) Governance practices may be over- or underreported to the extent that different facets of CVC governance
are correlated. For example, a study focusing on CVC of a particular structure (e.g., wholly owned subsidiary) may
emphasize compensation practices that might not be common across all programs.
(16.) The majority of the respondents state that a large pool of funds was specifically earmarked for venture capital
investment on a one-time basis. This practice is common among independent VC funds. Each limited partner
commits to provide a certain amount of money and to transfer the funds based on VC's capital calls.
(17.) The two groups rank a list of strategic objectives similarly, with one exception: direct investors also seek to
change corporate culture, whereas limited partners see their investment as an opportunity to learn about venture
capital markets.
(18.) McNally (1997) notes that ad-hoc investments directed at entrepreneurial ventures (rather than through VCs)
are likely motivated by strategic, not financial, objectives.
(19.) Unfortunately the analysis does not allow us to determine whether CVC objectives differ between programs
structured as direct investment and those structured as wholly owned subsidiary.
(20.) There are a few dimensions on which one governance structure dominates the others, for instance, contacts
with different communities (where direct investments enjoy strong links internally, while dedicated funds have
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strong tie with external venture capitalists).
(21.) In comparison to financially oriented programs, strategically oriented programs report lower levels of decision
autonomy with respect to establishment of investment criteria and hiring, but higher levels of decision autonomy in
making $1 million to $5 million investments or pursuing an IPO.
(22.) They found that 69 percent are not compensated any differently than their corporate peers.
(23.) Sykes (1992) reports that only two corporate ventures received stock-like compensation, and two others
received standard corporate pay. The other four had a bonus based on long- or short-term performance.
(24.) The investment amount and the CVC's industry affiliation are reportedly the leading criteria driving
entrepreneurs' choice of an investor (McNally, 1997).
(25.) Programs that invest internally with the goal of spinning out ventures are the exception. These programs
consider about 30 percent of the incoming ideas and invest in approximately 15 percent of all proposals.
(26.) The study focuses on the relative position of the venture's industry versus that of the CVC parent firm.
Irrespective of its resource needs, an Internet software venture may view a software corporation (e.g., Microsoft)
as a potential substitute and thus as a greater threat than a corporation with unrelated (e.g., an oil company such
as Chevron) or complementary (e.g., a semiconductor firm such as Intel) products.
(27.) Siegel et al. (1988) note that CVCs experience inadequate deal flow in those cases where the ventures
operate in an industry that is similar to the parent firm's. Some of the earlier work on CVC provides anecdotal
evidence of entrepreneurs' disinclination to approach firms in a competing line of business (Rind, 1981; Hardymon
et al., 1983). Gompers (2002) makes similar observations.
(28.) The numbers may be understated, as internally focused programs can exert monitoring in other forms.
(29.) The authors note that the benefits associated with detailed IPO prospectus information are balanced by the
fact that a few CVC-backed venturesarguably the highest quality onesreach the IPO phase.
(30.) The authors use data from an online community of entrepreneurs called The Funded that comprise
multidimensional rankings and comments made by 1,472 unique entrepreneurs on 526 unique U.S. venture
capitalists.
(31.) See the previous section for detailed discussion of these studies.
(32.) In line with Keil et al. (2008) and Dushnitsky and Shapira (2010), the authors note that autonomous programs
tend to attract investment professionals with functional experience in finance, and award high-powered incentives,
both of which contribute to more effective M&A action.
(33.) Many ventures appreciate CVCs' expertise, as Rosenstein et al. (1993) find in a survey of 162 ventures. One
entrepreneur shared his opinion of corporate investors: [They] had a better understanding of operating business
hands-on versus venture capitalists whose experience is often obtained vicariously. A more recent testimony
was voiced by a founder of a software venture: Lane15 Software needs advanced warning of trends and
technologies in microprocessors and computer systems. Investments from Intel Capital and Dell Ventures ensure
[it] has an insider's knowledge (Entrepreneur magazine, July 2002).
(34.) Whereas Gompers and Lerner (1998) use industry overlap to define potential strategic fit, Ivanov and Xie
(2010) focus solely on existing relationships. That is, a venture-corporation pair is said to exhibit strategic fit if
there is mention of an alliance, a strategic relationship, or a business relationship (e.g., customer or supplier)
between the two. About 15 percent of the sample are CVC-backed venture, of which 123 (96) exhibit strategic fit
(no strategic fit).
(35.) The reverse does not hold true: being backed by an independent VC that is frequently invited into syndicates
led by CVC investors is not associated with better survival chances.
(36.) McNally (1997) reports that the ability to assist spinout from the corporation is associated with the highest
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Innovation Toolkit
satisfaction level. However, only two out of the twenty-three respondents pursued this strategy.
(37.) Hill and Birkinshaw (2008) offer further insights into program longevity. The authors survey a set of venturing
units with diverse objectives, including CVC programs (denoted external explorer or external exploiter) as well
as internally focused units (denoted internal explorer or internal exploiter units). They further observe that
units exhibit diverse organizational features in terms of their network of relationships, unit activities, and
management system. The authors find that the greater the level of congruency between a program's objectives
and organizational features, the longer its longevity.
(38.) The authors find only 7 out of 998 CVC investments result in investing-firm's patents citing portfolio
companies. The dependent variable may fail to reflect the learning benefits associated with CVC due to a citation
lag that averages three to four years (Hall et al., 2002) and the fact that a CVC has boomed in 1999 and 2000.
(39.) The definition is broader than that employed by NVCA census data, which is used by the other studies. It
covers direct CVC activity, indirect corporate investments in VC funds, and available-for-sale holdings in public
companies.
(40.) The authors define Tobin's q as the market valuation over the value of tangible assets.
Gary Dushnitsky
Gary Dushnitsky (PhD, 2004, NYU) is an associate professor of strategy and entrepreneurship at the London Business School, and
academic director of the Deloitte Institute of Innovation and Entrepreneurship. He is also a senior fellow at The Wharton School
(University of Pennsylvania), where he was previously a faculty member. Gary serves as a senior editor at Organization Science
and Strategic Entrepreneurship Journal and is or has been a member of several editorial review boards. Gary's research focuses
on the economics of entrepreneurship and innovation and he has been published in leading academic journals, including Strategic
Management Journal, Organization Science, and others. His work received several academic distinctions including the inaugural
Kauffmann Junior Faculty Fellowship (2009) and several best dissertation prizes.
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