Corporate Venture Capital: The Big Idea
Take almost any phenomenally successful company that came to prominence in the last couple of decades, and there is probably a venture capitalist behind its success. Facebook, Google, WhatsApp, Uber, GoPro, and many others – all of them were backed up and mentored by venture capitalists early in their life, when the future was highly uncertain. Venture capitalists, in turn, recouped their investments manifold. Consider Peter Thiel, for example, who invested $500,000 in 2004 to acquire a 10.4% stake in Facebook, the majority of which he sold in 2012 for over $1 billion. Financial results like this have attracted a different kind of players to the venture capital market – the so-called corporate venture capital programs or venture capital arms of established corporations that seek high-potential startups to support.
But, according to Professor Anokhin, unlike traditional venture capitalists, corporate investors are not driven by financial considerations alone. Many of them pursue strategic goals when investing in promising startups. Most are driven by the innovation agenda, and seek to support ventures that may have interesting technological ideas to learn from. This is how corporations like Cisco approach corporate venture capital. Others seek to grow the market for their own products through CVC investments. Intel, for instance, provides support to companies like computer game developers that may drive up demand for its processors. Yet others, like Microsoft, the dreaded “Ogre to the North,” may seek technologies that undermine its dominance, and invest to gain control and dismantle the dangerous upstarts. In any case, the big question for corporations with venture capital programs is what kind of ventures to support given the strategic objectives they pursue.
Different Ventures, Different Benefits
According to Entrepreneurship Professor Sergey Anokhin from Kent State University, it has long been suspected that corporate venture capital investments are not created equal. Henry Chesbrough, who popularized the concept of open innovation, suggests that CVC investments fall into four groups: driving, emerging, enabling, and random. Dr. Anokhin and his team of researchers have analyzed investment decisions and their outcomes for over 150 corporations active on the CVC market. What emerged came as a surprise to the proponents of strategic prowess of corporations investing in startups. Well over 50% of new ventures supported by corporate VC funds fall into the ‘random’ category that implies no strategic fit with the corporate parent’s business, and thus cannot help with its innovativeness or sales effectiveness. At best, the effects are limited to financial returns. 20% of CVC deals are ‘emerging’ – they offer technological insights but no hopes of growing the market for the corporate parent. Over 16% of investments can be identified as ‘driving.’ They have the potential for both technological development and market expansion. Finally, about 5% of deals promise sales growth but no innovative benefits to the corporate parent. They are referred to as ‘enabling.’
So, less than half of all CVC investments can possibly provide strategic benefits to corporate investors. Yet, even these meager promises do not materialize. Only driving investments are beneficial for corporate innovativeness. Only driving and enabling investments can improve sales efficiency. Taken together, the research results imply that only one out of five ventures supported by corporations through their CVC programs will deliver strategic benefits that corporate parents pursue. What’s more, emerging investments are actually detrimental for corporate innovation and for sales efficiency. Interestingly, many of Microsoft’s investments fall into this category, which lends credibility to the claim that it uses CVC investments to stifle others’ innovation, not to advance its own. Still, it is stunning to see that on average corporations allocate about 20% of their efforts to such deals. It is thus hardly surprising, comments Professor Anokhin, that most CVC programs are short-lived, and rarely survive the expected ten-year term.
What it all means
The first implication of this study, says Dr. Anokhin, is that the strategic benefit narrative so favored by corporations in the first decade of the twenty-first century has given way to a much more balanced view of CVC. Full 80% of corporate investors focused on financial returns at least as much as on strategic benefits in the end of the decade compared to about 11% in the beginning.
Second, corporations are very poor at selecting the investment targets that are likely to bring about strategic benefits they seek. Not only are most deals ‘random’ and thus offer no strategic benefits, but one-fifth of corporate investments are explicitly detrimental to both corporate innovativeness and sales performance. Managing a CVC investment portfolio is a challenging proposition, and unless corporations approach it as such, it may become little more than a money drain. If so, a smarter strategy may be to invest corporate resources into internal core capabilities of the corporation and not waste money on external new ventures to support.
Sergey Anokhin – Professor at Department of marketing and entrepreneurship from Kent State University
Professor Anokhin’s research interests include entrepreneurship and innovation management in a variety of contexts. His work has been published in Journal of International Business Studies, Journal of Business Venturing, Journal of Management Studies, Organizational Research Methods, Small Business Economics, British Journal of Management, Journal of Small Business Management, Regional Studies, Entrepreneurship & Regional Development and other journals and edited volumes. His teaching portfolio includes doctoral, MBA and undergraduate courses in strategy, global management, and entrepreneurship delivered in traditional, online, and blended formats.