Corporate Venture and Corporate Venture Capital

K. McNally

Master in Engineering Policy and Management of Technology (2001)

Bernardo Rodrigues, Carlos Mora, Nuno Constantino

Agenda

• Definitions and Concepts

• Nature and Forms

• Venture Capital Industry

• Potential Benefits

• Case Studies

Definitions and Concepts

• Corporate Venture Capital or Corporate Venturing

A variety of techniques used by large companies seeking business growth and expansion

Nature and Forms (1)

• ICV - Internal Corporate Venturing– entrepeneurial activity within the company with

corporate sanction and resource commitment

• ECV - External Corporate Venturing– structured relationship between large firm with

small, unquoted usually innovative firm

• CVC - Corporate Venture Capital– equity stake is taken by large firm in small,

unquoted usually innovative firm

Nature and Forms (2)

• CVC - Corporate Venture Capital– Externally Managed (indirect)

• Pooled Funds (financial benefits)US increase between 1979 and 1986 up to 100 funds in 1987

US decrease from $484M (1989) to $84M (1992) because of recession

• Client Based/Dedicated Funds (financial+strategic benefits)US growth from 31 (1982) to 102 (1987) because of

strategic unsatisfaction

Advent Internation manages 14 funds (RJR Nabisco, Apple)

Nature and Forms (3)

• CVC - Corporate Venture Capital– Internally Managed (direct)

• In-House Corporate Managed Funds (strategic, structured, may involve direct support)

1990/2000 ABB, AT&T, Intel, SmithKline Beecham

• Ad-hoc/One-off Investments (strategic, unstructured/opportunistic, may involve direct support)

1980/1990 Exxon made, Apple received

1990s investments by 5 largets electronics and 10 largest pharmaceutical corporations in US

Venture Capital Industry (1)

• Venture Capital Funds– In USA focus on TBFs versus science based projects

– In UK tend to be reluctant in TBFs

– Barriers: the rigorous investee selection process

– Implications: move away from early stage deals

• Business Angels– invest small amounts, usually in startups

Venture Capital Industry (2)

• Public Markets– Disadvantages:

• High fixed costs in underwriting, accounting fees and printing costs

• criteria's for listing imply sufficient size and a trading record

Potential Benefits Large Firms

• Training – junior, middle and (“therapy” to) senior management

• New Market – new products, services and new technologies

• $$$$$$ – less costs, less costs R&D and capital gains

Fundamental reasons for CVC: Flexibility, adaptation and innovation.

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Potential Benefits Small Firms

• Financial benefits– Initial funding to investigate– Profits insufficient to meet capital

requirements– Survival

Barriers to

growth

Potential Benefits Small Firms

• Strategic benefits– Management assist (Short term problems,

recruiting, corporate assist)– Mentor or confidant - social or supportive role– Strategic network (tax lawyers, patent

agents…)

CVC gives small firms the necessary structure to compete in the aggressive market

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400 347 479

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1000

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1989 1991 1992 1993 1994

UK V.C. fundsM£

Recession

(…) Venture capital depends on the alignment of incentives to VC Investors, V capitalists and Entrepreneurs

Potential Benefits Independent Venture Capitalists

Levels of CVC activity - USA

• Well-established and widely accepted

• Less concern with acquisition and more focus on strategic collaboration

• Trend to start in externally funds and move to direct investments

• Indirect CVC:• 100 US firms with $413 million

Levels of CVC activity - USA

• Dedicated funds are increasing• 31 firms (1982) to 102 in 1987• ex: Monsanto with $50 million

• Internal management programmes are common

• 72 US firms + 27 foreign investing $500 million

• Several hundred of adhoc invest. each year• Digital Equipment, Compact

• Spin-outs are flourishing

Levels of CVC activity - UK

• Extremely low level of investment of major corporations in CVC

• Indirect CVC are increasing at low rate• Foreign firms like Elf Aquitaine and Molson

Companies (in Alta-Berkeley Lmtd)

• Internal managed funds represent a low amount

• Pilkingston’s Rainford VCF with £2,5 million

Reasons for underdeveloped nature of UK CVC

• Lack of motivation of large companies• predilection for alternative strategies• concentration on core business• organisation, structure and culture

• Lack of motivation of small companies• Entrepreneurs are not aware of CVC• Loss of identity and ownership

• Lack of investment opportunities• Reluctance of sacrifying secure jobs

• Information gap

Corporate Venture and Corporate Venture Capital