Daily BulletinHoliday Centre

The Conversation

  • Written by S. Ramakrishna Velamuri, Professor of Entrepreneurship, China Europe International Business School
image

Large established firms increasingly rely on external sources for innovation. One way these firms are seeking to foster innovative activity is via corporate venture capital programs.

According to the National Venture Capital Association (NVCA), established firms invested more than US$4 billion in venture businesses in 2014, representing more than 10% of all venture capital investments in the US during the year.

There’s a variety of different corporate venture capital structures and practices, reflecting in part the diverse objectives of corporate investors, which often go beyond financial returns. For instance, companies like IBM and Cisco have used their venture capital programs to scout for possible M&A opportunities.

Established firms also use them to supplement internal R&D departments, exposing them to new technologies and ideas that complement future product development efforts. For others, venture capital programs can be a way to engage with and monitor new, disruptive products or technologies that could potentially pose a threat to their existing businesses.

The dual objectives of corporate venture capital programs – strategic and financial – offer more structuring options than are needed for independent venture firms. If you are thinking about starting a venture capital program at your company, it’s important to choose a structure that will align with your firm’s priorities.

We recently completed a research study exploring the trade-offs between setting up a corporate venture capital program internally vs. externally, as an independent unit outside the firm. We also looked at how different organisational and legal structures impact personnel policies and investment practices, which can ultimately facilitate corporate objectives.

Based on what we learned from our in-depth interviews with investors and investees in the US, Europe and Asia, here are some of the key things firms should think about when establishing a venture capital program.

Internal vs. external

In general, internal units, where the corporations invest off their own balance sheets, are more conducive to strategic investments that support the existing core business of the corporate sponsor. However they are often slower in decision making and subject to greater fluctuation in strategic direction and resource endowments, depending on the corporate sponsor’s financial health.

External units can be more agile in decision making and are more nimble and autonomous for exploring investments into new business areas or innovations that are potentially disruptive to the core business. One implication of this difference is that external units may be better suited for early stage investments where relevance to the core is sometimes unclear and there is uncertainty about the strategy and direction of the startup. They also tend to attract experienced investment managers and deliver both strong financial returns and strategic benefits to the corporate sponsor.

Consider strategic goals

Internal units are better when near term strategic goals are clear and require strategic investments to further these interests or where the external environment is unfavourable and the need for tight control of investment activity is paramount. In such cases, strategic considerations might override financial ones.

On the other hand, when there is less current strategic overlap between the investor and investee, measuring the outcome of the corporate venture capital program using financial gains might be more appropriate. This is more easily done through an external unit.

Leveraging synergies

Focusing solely on financial objectives makes it very difficult for corporate venture capital units to compete against the more experienced internal VC firms that offer their managers greater incentives. The most successful corporate venture capital programs are those that can take advantage of the existing resources of their corporate sponsor as a key differentiator. Looking closely at opportunities for technology transfer between corporate sponsors and investees could possibly create value for both parties.

Developing an ecosystem

When used together with other tools (such as in-house R&D,M&As, strategic alliances), corporate venture capital programs can be excellent for developing an ecosystem. This enables the creation of proprietary partner networks or value chains, without the burden of integrating partners into the existing operations of the corporate sponsor. The sponsor can then retain influence through minority equity ownership. For example, Google, Motorola and Apple have used venture capital programs to help establish an ecosystem around their wireless and web activities.

The corporate venture capital model is still developing and less mature than the internal venture capital model. It took internal VC firms decades to establish their reputation and know-how in nurturing startups.

At the same time, an increasing number of corporate venture capital programs have moved from internal to external units in recent years, making it premature to draw definite conclusions on whether external units outperform internal ones. As new entrants typically adopt established industry norms, it will likely take many years for newly established corporate venture capital programs to determine the best organisational structure.

This article was co-authored by Paul Asel, Managing Director of Nokia Growth Partners.

Authors: S. Ramakrishna Velamuri, Professor of Entrepreneurship, China Europe International Business School

Read more http://theconversation.com/corporate-venture-capital-can-pay-but-only-if-you-get-the-structure-right-58215

INTERWEBS DIGITAL AGENCY

The Conversation

Politics

Closing the Gap Statement to Parliament

Mr Speaker, when we meet in this place, we are on Ngunnawal country. I give my thanks and pay my respects to our Ngunnawal elders, past, present and importantly emerging for our future. I honour...

Scott Morrison - avatar Scott Morrison

Prime Minister Interview with Alan Jones

ALAN JONES: Prime Minister, good morning.    PRIME MINISTER: Good morning, Alan.    JONES: I was just thinking last night when we're going to talk to you today, you must feel as though you've ...

News Company - avatar News Company

Prime Minister Bridget McKenzie press conference

PRIME MINISTER: Good afternoon everybody. The good news is that the Qantas flight is on its way to Wuhan and I want to thank everybody for their cooperation, particularly the Chinese Government as...

Scott Morrison - avatar Scott Morrison

Business News

Choosing the Right Coworking Space For Your Business

As the capital of Victoria in Australia, Melbourne is inhabited by millions of people and is known as one of the most liveable cities in the world. The latter is due to the city’s diverse community...

Sarah Williams - avatar Sarah Williams

What Should You Expect from A Carpentry Apprenticeship?

Those wanting to pursue a career in woodwork, whether it be to make furniture, construct buildings or repair existing wooden structures, will have to first commence a carpentry apprenticeship. This ...

News Company - avatar News Company

4 Tips To Choosing A Reliable SEO Company For Your Digital Marketing Agency

Working with a digital marketing agency Perth is the best bet in ensuring that your business is promoted well in the online space. If you are an app developer Perth, you may have to work closely wit...

News Company - avatar News Company

Travel

Travelling With Pets? Here Is What You Should Know

Only a pet parent can understand the dilemma one experiences while planning a vacation. Do you leave your pets at home?  Will you get a pet sitter or someone to take care of them while you are away?...

News Company - avatar News Company

How to Be a Smart Frugal Traveller

You are looking through Instagram, watching story after story of your followers overseas at a beach in Santorini, walking through the piazza in Italy, and eating a baguette in front of the Eiffel ...

News Company - avatar News Company

HOW TO PREPARE FOR YOUR GRADUATION TRIP

Graduation is the stage of life when a student receives the rewards of hard work of years. It must have taken sleepless nights and tiring days to achieve the task. Now, as you have received your cov...

News Company - avatar News Company

ShowPo