The relative failure rates of different types of venture unit. Source: (Campbell & Birkinshaw, 2004)12 Figure 3: Corporate Venturing; Direct Investments. Adapted from (Rauser, 2002).16 Figure 4: Mapping the Corporate VC Investments, adapted from (Chesbrough, 2002)24 Figure 5 : New Ventures' organizational setup. Source: 3M New Ventures presentation43 List of Tables Table 1: Paths for corporate growth (Ansoff, 1965, p.99)2 Table 2: Existing definitions. Adapted from (Sharma & Chrisman, 1999)5 Table 3: Potentially Appropriate Forms of Corporate Venturing in Various Corporate
Moreover, companies create CVC's, in order to scout novel products, services or technologies, which might be substitutes for those they currently produce and thus maintain their competitive advantage (Dushnitsky, 2011). In fact, in the late nineties
billions of dollars have been invested by established companies in corporate ventures (Dushnitsky & Lenox, 2006). Nevertheless, not all CV's have been successful. The economic downturn of September 2000 led almost one-third of the investment companies to retreat from corporate funding in start-up companies (Campbell et al., Fall2003). The quarterly venture-capital investments, which were at $ 6,2 billion at the beginning of 2000 dropped dramatically to $ 848 million in the third quarter of 2001 (Dushnitsky & Lenox, 2006). This dramatic decrease in venture capital-investments is known in the literature as "bursting of the internet bubble." The numbers show that numerous corporate venture capitalists tried to release from corporate venture investments indicating how risky this type of investment-often referred to as Corporate Venture Capital
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. Adapted from (Sharma & Chrisman, 1999) Author /s & Year Definition suggested Zahra (1995, 1996) Corporate Entrepreneurship: "is
the sum of a company's innovation, renewal and venturing efforts. Innovation involves creating and introducing products, production processes, and organizational systems. Renewal means revitalizing the company's operations by changing the scope of its business, its competitive approaches or both. It also means building or acquiring new capabilities and then creatively leveraging them to add value for shareholders. Venturing means that the firm will enter new businesses by expanding operations in existing or new
markets." Block & MacMillan (1993) Corporate Venturing: "A
project is a Corporate Venture when (a) it involves an activity new to the organization, (b) is initiated or conducted internally, (c) involves significantly higher risk of failure or large losses than the organization's base business, (d) is characterized by greater uncertainty than the base business, (e) will be managed separately at some time during its life, (f) is undertaken for the purpose of increasing sales, profit, productivity or
quality." According to Sharma and Chrisman, corporate venturing might be external or internal. Internal corporate venturing refers to an organizational creation which is initiated by an existing organizational entity, is treated as a new business and resides within the existing organizational domain. The external corporate venturing has all the above characteristics except for the fact that the organization resides outside the existing organizational domain. This external organization, or else called "new venture" is described as the investee company, which might be run by a small team of venture managers or by an entire venturing company within the investing corporation (Block & MacMillan, 1993). At this point, it is essential to define what corporate venture capital (CVC) is. According to Chesbrough (2002), corporate venture capital is the investment of corporate funds directly in external start-up companies. The strategic use of corporate excessive resources (e.g. cash) and investments in start-up companies outside the organizational boundaries of the investing company are described as corporate venturing investment (CVIs) (Lin & Lee, 2011). The definition also includes investments in start-ups that a corporation has already spun-off as independent businesses (Rauser, 2002). What Leads Enterprises to Corporate Venturing Corporate Venturing is the instrument for fulfilling one of two or two fundamental goals at the same time (Chesbrough, 2002), (Winters & Murfin, 1988). The first goal is the strategic benefit. In this case the venture capital corporation is willing to accept lower returns from its investment. In turn, other strategic benefits might be obtained. Unlike pure financial investments, CVIs provide the investing company with future growth opportunities (Lin & Lee, 2011). Corporate Venturing is initiated by many corporations as a mechanism to enhance entrepreneurial capability and sustain innovative activities (Miles & Covin, 2002). A venture capital investment with strategic objective might open the gates to emerging technologies, organizational learning, acquisitions, technology licenses, product marketing rights, contacts and synergies (Winters & Murfin, 1988), (Lin & Lee, 2011). CVC might become the vehicle for screening disruptive technologies that either might threaten or complement the core business (Dushnitsky & Lenox, 2006). The new venture could be the basis for developing a new product, a new market or both and thus expand the size and the horizons of the investing company. Whereas new technologies pose a risk to develop and to invest in, missing or neglecting new technological developments might jeopardize the competitiveness of the company. Corporate Venturing can lower both risks. A corporation can gain an insight into a wide range of technologies by making for instance a direct minority investment in several promising start-ups and thus diversify its risk (Markham et al., 2005). Fresh and genuine ideas come mostly from the external environment. That explains why this new business resides outside the corporation's boundaries. The second investment objective is financial. An organization investing in other start-up companies for financial reasons aspires to financial gains. There are many corporations, which identified the opportunity to obtain an attractive return on investment by investing in venture capital (Winters & Murfin, 1988). Having a strong balance sheet and possessing a deep knowledge of markets and technologies corporations may pose a serious challenge for private venture capital investors. Whereas financial goals are crucial, strategic objectives seem to dominate over financial objectives. However, most CVC's investments are undertaken by taking financial criteria into account (Rauser, 2002). At this point, it is worth mentioning that the start-up company being funded is benefited as well. Newly constituted enterprises are usually characterized by the following weaknesses: 1. Scarcity of resources (financial, material, personnel) 2. Small experience in essential business areas such as marketing, production and general management 3. Cost disadvantages due to the initially small lots, 4. A narrow or non-existing reputation in the market 5. A low ability to diversify risk. The cooperation with a well-established firm, willing to invest in a start-up might be a good solution to overcome the aforementioned weaknesses (Schween, 1996). Several studies in the finance literature claim that the monitoring and certification functions of reputable underwriters enhance the new venture value and create complementary resources between new firms and large corporations (Jain & Nag, 1996), (Rauser, 2002). Many researchers mention that CVC-backed ventures receive higher valuations at IPO, due to their connections with a strong brand (Dushnitsky & Lenox, 2006). Further, depending on the level of the linkage with the investing company, the start-up company might profit by the brand, the assets or the infrastructure of its investor. A strong linkage between investing corporation and venture capital financed company might lead to acquisition, which has always been a significant exit-route for the first party (Winters & Murfin, 1988). Venturing Objectives There is a variety of reasons, which leads companies to corporate venturing. Campbell et al. investigated the objectives of corporate venturing and presented four corporate venturing business models, which showed high degrees of success. The results of their analysis (nearly 100 venturing units were investigated) are listed below. Ecosystem Venturing Companies which are strongly depended on their ecosystem, i.e.
Always on Time
Marked to Standard
suppliers, agents, distributors, franchisees, technology entrepreneurs or makers of complementary products can provide venture capital to its entrepreneurs, in order to give a boost and support the entrepreneurs in the community. Funding entrepreneurial ventures, which develop complementary products and services, might enhance the demand for current and future corporate products (Dushnitsky & Lenox, 2006). A well-known example is Johnson & Johnson Development Corporation (JJDC) which has been delivering substantial financial returns for almost thirty years (Campbell et al., Fall2003). JJDC invests in a wide range of start-up companies, in areas of its technological interest, so as to support these new technological fields and obtain a "window on new technologies". The "window on new technologies" investment model is very promising because new products and great business growth areas have been generated by innovative small companies (Sykes, 1990). The direct investment in either new companies or venture funds provides corporation with an opportunity of a wide screening of technologies, which might be very profitable in the future (Markham et al., 2005). Further, the business plan reviewing offers the company the possibility to gain an insight into the current market and extend its market intelligence (ibid.) Ecosystem venturing makes sense when the existing business depends on the vibrancy of
its ecosystem and the entrepreneurs of the community are not financially well-supported yet to establish new technologic areas. Moreover, the investing company should keep an eye on competition. By stimulating the market, the appetite of new entrants might be triggered. Therefore, companies which enjoy a big market share are encouraged to undertake this type of investment. Campbell and his team point out that, investing companies need to have a clear focus as far as objectives are concerned and avoid the temptation of investing in a wider deal stream. Staying focused means keeping a balance between financial and strategic goals and tracking success by implementing performance measures or having a significant influence over the new venture. Innovation Venturing Innovation venturing is undertaken, in order to support the functional activity of research and development. In order to foster innovation and creativity, managers create a separate unit, whose objective is to invest in many projects and thus spread risk, develop links with the venture capital industry and investigate joint ventures possibilities. Researches claim that CVC aiming at innovation venturing might lead to essential increase in the internal innovation rate of the investing firm (Dushnitsky & Lenox, 2006). This type of investment is recommended when the R & D sector underperforms and needs to be supplemented. The unit created to support this function should accept an entrepreneurial behavior and hence should show a willingness to take more risks. Innovation venturing should not be employed when the organization lacks of entrepreneurial spirit in general (Campbell et al., Fall2003). It should rather be implemented, in order to support an existing function. In order to avoid this mistake, the innovation venturing unit, being parted from a small senior-level team should be connected to and report to the function being supported but at the same time it should have certain authorities, such as its own operating budget and decision making freedom (Campbell et al., Fall2003). Harvest Venturing Harvest venturing is a way of generating cash from selling or licensing
corporate resources, such as technology, brands, managerial skills and fixed assets (Campbell et al., Fall2003). The organization exploits existing resources, which have no commercial value by investing in and developing these assets as ventures. Lucent New Ventures Group (NVG) for instance, was established in 1997 with the objective to commercialize intellectual property and technology from its R&D unit, in order to create value for its business. Within a four year time frame, NVG created 35 ventures and collected $350 million of external venture capital (Kanter and Heskett, cited in (Campbell et al., Fall2003)). Nevertheless, 2001 was a difficult year for new ventures and Lucent Corporation sold the NVG unit to a U.K private equity firm, Coller Capital Ltd, due to liquidity problems (Campbell et al., Fall2003). The failure of Lucent has been attributed to the inability of its executives to understand and manage the risks and negative aspects of adopting venturing as a regular part of their firm's business activity (Miles & Covin, 2002). Harvest venturing is appropriate when 1. There are existing, unused resources which might create value when they are exploited, 2. A new venture for coordinating the exploitation of these assets is set up and 3. The resources are not needed either by the current business or as new growth platform. The common pitfall in harvest venturing is again the loss of focus. Although harvest venturing is created for generating cash through a trade sale or initial public offering (IPO), in most cases it engenders additional work for growing the new ventures or "new legs" for the parent company.
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Private Equity Venturing In this type of venturing companies operate as venture capital firms. They invest in startup businesses and the goal is the financial return, typically ROI.
Private equity venturing is a success, when investors invest early and exit before the shakeout (Campbell et al., Fall2003). This type of venturing is appropriate when the venture capital firm has better access to a flow of deals than other independent or private equity companies (Campbell et al., Fall2003). Private equity venturing will probably be a failure, if managers overvalue their skills. For this business model it is recommended that a new venture unit, which is fully separated from the parent company, is set up. This new venture unit should have its own closed-end fund with a short investment period of not more than five years. Further, it should be staffed with experienced managers from the private equity industry, who are rewarded like venture capitalists- based on return on investment and through carried interest in their portfolio companies (Campbell et al., Fall2003). Campbell et al. presented a fifth objective of corporate venturing, the so-called "new leg venturing", which seems to be an unsuccessful business model. This type of venturing strives for the creation of new businesses and growth by incubating a portfolio of new ventures as a low-cost way for strengthening a weak and unsustainable core business. New leg venturing as well as mixed objectives are the reasons for unsuccessful business according to the authors. Their analysis of 100 venturing units shows that the first four business models demonstrate reasonable to high degrees of success, whereas the new leg venturing and the mixed objectives have no success at all. Figure 2: The relative failure rates of different types of venture
unit. Source: (Campbell & Birkinshaw, 2004) Corporate Venturing Forms In this subchapter the different forms of corporate venturing are presented. Rauser (2002) categorized corporate venturing in internal and external venturing and showed realization methods for each category (see Figure 3). Miles & Covin (2002) on the other hand, classified corporate venturing into four generic forms by the focus of entrepreneurship and the presence of investment intermediation. Their study consisted of a series of 24 personal interviews and 21 site visits with executives from 11 firms and aimed at describing and analyzing the primary benefits and risks of each category. They conclude their work with a strategic framework of implementing the appropriate form according to the given circumstances. The corporate venturing forms are given below. Direct-Internal Venturing: Business ideas generated by the company's employees, funded and commercialized within the organization belong to this category. 3M and P&G are two companies, which implement the direct-internal venturing. 3M fosters innovation and creativity, by designating 15 % of its technical personnel's time for creating and developing innovative projects (15 % rule) (3M, 2002), (Miles & Covin, 2002). Procter & Gamble (P&G) implements a formal support program dedicated to motivate "intrapreneurs" to change the organization's product mix on a regular basis and thus keep the innovation spirit going (Miles & Covin, 2002). Doing so, P&G aspires 1. to increase its sales, 2. create new frame breaking brands and 3. promote a change management system that fosters innovation and offers more flexibility. According to Miles & Covin, direct-internal venturing has two main advantages over the other forms of venturing: 1. it can provide the organization with real options by developing and exploiting the company's tangible and intangible resources and 2. the entrepreneurial spirit can act as a motivation for the employees to create and develop new ideas. Further, direct-internal venturing reduces the risk of spoiling the organization's brand equity, when corporations attempt to enter new markets or introduce new technologies. However, this type of venturing has also some disadvantages. Direct-internal venturing demands high managerial involvement. Managers must be aware that there are enough resources willing and able to participate in creative activities. Pinchot (1985), as cited in Miles & Covin (2002) argues that venture intrapreneurs might choose to leave the organization and start a career in a rival business if they are not recognized and rewarded enough. The success of this venturing form prerequisites the willingness to accept risks and allow failures. Direct-External Venturing: This venturing form pertains to the acquisition or purchase of equity in an external entrepreneurial firm without using a dedicated new venture fund (Miles & Covin, 2002). Direct-external venturing, or else corporate venture capital might also include the transfer of technology, resources and capabilities between the businesses, if the linkage between parent and funded company is tight. General advantages of direct-external venturing for the investing company are the following: 1. Access to new markets, technologies and tacit knowledge 2. Enhanced brand image as a result of the partnership with emerging technologies 3. Potential tax benefits in certain regulatory environments 4. High potential for financial returns 5. Greater access to acquisition candidates. The risk in direct-external venturing is the possible legal liability in case of discrepancies in the social, environmental or ethical conduct of the investing firm
and the new venture and the consequent damage of the corporation's brand equity. Moreover, investments in external units might cause conflicts over capital and other resource allocation within the organization. Finally, the financial risk is higher compared to a VC fund investment (Indirect-External) and its potential in seeing a wide range of technologies is limited, since the focus is placed mainly on a few start-ups (Markham et al., 2005). Overall, Miles and Covin (2002) argue that direct-external venturing is appropriate when both the investing firm and the funded venture have complementary capabilities and resources, which create a beneficial strategic relationship for both parties. Nevertheless, the preferences of stockholders concerning the diversification of the investing corporation should also be taken into account. This means that the investing company should concentrate on strategic, adding value activities and avoid the loss of focus. Too many investments might put the balance sheet of the corporation into risk and dissatisfy its stockholders. Having a clear focus means that the investing company is confident that the new venture fulfills its strategic goals, such as the window on new technology, an access to new markets or other synergies. Indirect-Internal Venturing: This venturing form includes the funding of internal venturing within the company. However, the source of venture capital fund does not come directly from the operating or strategic budget of the company. It could be a "captive fund", owned by the company or a fund provided by external venture capital investors. The advantage of indirect-internal venturing is the support of entrepreneurial spirit. Projects, which do not initially fit to the corporation's main business units, might yet be funded as potential ventures. Kambil et al. (2000) as cited by Miles and Covin (2002) claim that external equity partners with experience relevant to the corporation's new ventures can often accelerate the start-up process. Despite the benefits, indirect-internal venturing might lead to significant financial losses and can cause conflict situations between the new ventures and the existing units. Further, financial rewards from successful ventures will not stay completely to the mother company, but they have to be distributed to the external equity partners. Indirect-External Venturing: In this type of venturing the corporation invests in a venture capital fund aiming at external ventures in certain industrial and technological areas. The venture capital fund might originate outside the corporation and be managed by persons who are external employees or independent venture capitalists. Companies might form a partnership with independent venture capital firms and other co-investors, or engage a venture capital firm to manage an earmarked fund, which the company invests in. The benefits of this venturing type are the access to new markets, technology, potential acquisitions for the investing company and reduced effort to conduct the due diligence process. In addition, intangible assets of the company including reputation, brand equity and intellectual capital are not jeopardized. On the negative site, the indirect-external venturing does not provide a direct transfer of technology and capabilities between the parent company and the new venture and
as a result the benefits of this investment are mostly financial (Miles & Covin, 2002). In addition, the payoff is not as high as the direct-external venturing; since the returns are shared with the VC firms and/or other limited partnerships (Markham et al., 2005). A corporation being involved into CV activities should decide on which way to go. What are the intentions and the strategic goals of the corporation? Is the company intending to make an optimized use of its existing resources (internal investment) or it is rather seeking for new opportunities into untapped markets and technological areas (external investments)? Depending on the corporate venturing objectives, which might be: 1. organizational development and cultural change 2. strategic benefits or 3. quick financial returns and on the corporate management's needs and biases including: 1. the need for control of venture-high/ low, 2. the ability and willingness to commit resources to venturing-high/low and 3. entrepreneurial risk accepting propensity- high/low, Miles & Covin (2002) suggest the following corporate venturing decision framework (see Table 3). Table 3: Potentially Appropriate Forms of Corporate Venturing in Various Corporate Contexts. Adopted from (Miles & Covin, 2002) Corporate Venturing Objectives Corporate Management's Needs and Biases Organizational Development & Cultural Change Strategic Benefits / Real Option Development Quick Financial Returns Need for Control of Venture High Low D-I I-I D-I, D-E I-I, I-E D-E I-E Ability& Willingness to Commit Resources to Venturing High Low D-I, I-I I-I D-I, D-E, I-I, I-E I-I, I-E D-E, I-E I-E Entrepreneurial Risk Accepting Propensity High Low D-I, I-I None D-I, D-E, I-I, I-E I-I, I-E D-E, I-E I-E D-I: Direct-Internal venturing, D-E: Direct-External venturing, I-I: Indirect-Internal venturing, I-E: Indirect-External venturing Figure 3: Corporate Venturing; Direct Investments. Adapted from (Rauser, 2002). Corporate Venture Capital The Corporate Venture Capital (CVC) is a sub-domain of Corporate Venturing. CVC investments are direct-external investments (Napp & Minshall, 2011). The concept of Corporate Venture Capital is mainly financial, whereas the concept of Corporate Venturing is rather organizational and concerns the funding of new, internal, highly-risky activities (Schween, 1996). The CVC refers to the external funding of small and innovative companies or spin-offs and its primary goal is the monitoring of new technologies and markets. Innovation is the key for shaping the market (Schween, 1996). Companies can create a new market and get access to a greater customer base if they are able to come up with new technologies or products. Although R&D is crucial in this respect, its role in innovation is limited at some point. In this regard, CVC is a strategic vehicle for monitoring and leveraging innovative ideas developed by others (Dushnitsky, 2011) (Napp & Minshall, 2011). In other words, large organizations become a kind of venture capital firm, which invests in smaller companies. Further, disruptive technologies might alternate the current market situation by "destroying" or displacing an older technology. Disruptive technologies represent the substitutes in Porter's Five Forces. Companies, whose objective is to survive the competition, need to be ready to put up with such challenges. Nevertheless, being innovative and well above your competitors is quite challenging, especially for well-established firms. This is because well-established, big corporations have a relative complex and inflexible decision making process. Even if a corporation invests heavily in R&D, it is quite uncertain that truly innovative ideas, coming from "intrapreneurs" find their way out to the market. Big corporations have a certain process for investing in new projects and hence ingenious solutions might be judged as too risky. Moreover, the long product development cycle time and the pressure to achieve high margins, in order to compensate high fixed costs impede the entrance into new fields. Provided that innovation is an essential element for creating a competitive advantage, how can corporations create an innovative climate without putting so much effort in alternating their current structure and processes? Corporate Venture Capital could be the right answer. The German term for "Venture Capital" is "Wagniskapital" implying the notion of risk. According to Hartmann (Schween, 1996, p.14) "Venture Capital is the allocation of resources and entrepreneurial mentoring of equity capital earmarked for innovation in a state with high risks but still greatly increasing income." The "Venture Capital" pertains to investments, which have the following characteristics (Schween, 1996): 1. Aims at providing with private equity or quasi-equity (i.e. mezzanine financing) small or medium-size enterprises with high-growth potential. 2. The start-ups receiving the investments are legally independent of their investor, which is a clear distinction to other CVC forms such as incubation or spin-out (Napp & Minshall, 2011). 3. Is not limited in terms of financial support solely. Its definition goes beyond the funding term, including the managerial support and mentoring, which is provided by the investing company. 4. Corporate Venture Capital firms are in essence investors, who aspire to obtain financial gains, but unlike typical investors, CVC firms have long-term perspectives. In other words, a part of CVC investments is strategic. The extent of the financial or the strategic part depends on the objectives of the investing organization. Corporate Venture Capital is a powerful instrument for companies aiming at enhancing their innovative strength, their flexibility and the efficiency of their R&D activities. Furthermore, CVC is the vehicle for extending into new high-growth areas, which do not necessarily follow the existing strategic intent of the company (Markham et al., 2005). Markham et al. (2005) presented four basic strategies along with internal venturing, which corporations implement when they participate in the venture capital process. These strategies are listed in Table 4. Well-known examples of Corporate Venture Capital activities are the funding of General Motors from DuPont and General Electric, the financing of RCA from AT&T as well as numerous investments from Xerox, Monsanto, Eastman Kodak and 3M (Schween, 1996). Table 4: Comparison of CVC strategies. Adopted from: (Winters & Murfin, 1988) Strategy People required $ Deal stream No. of portfolio companies Financial return Prospective contacts Key objective 1.Invest in funds Own $5-10M 1,000+ /yr 120 20 % /yr Wide Strategic 2. Fund own subsidiary Experienced $20M 300/yr 20 22,5 + % /yr Fair Financial 3. Venture development subsidiary Own $5-20M 1,000+ /yr 120 (funds) 10-20 direct 22,5 + % /yr Wide Strategic 4. Direct investments in companies Own + experienced $5-20M Low, tough to start Few Probably low Limited Mixed 5. Internal ventures Own ? Few Few High potential/poor record Very narrow Strategic Corporate Venture Capital is not solely a vehicle for innovation for big corporations, but it is also a means for supporting entrepreneurs who have great ideas but lack the capital resources for realization (equity gap) (Sevilir, 2010). The financing stages, in which the Corporate Venture Capital might be needed during a company's development, are presented briefly below. Financing Stages There are five distinctive stages of venture capital funding. The early funding stages, in which the new enterprise is constituted, include the "Seed Phase", the "Startup Phase" and the "First Stage Phase". These three early stages are essential for the survival of the new company. After these stages, the new enterprise begins to grow and a break-even can be potentially reached. The different funding stages are presented below. â€¢Seed Stage In the "Seed Phase" the entrepreneur is occupied with the concept and the development of his idea. At this point, the need for funding is still narrow and most entrepreneurs fund this stage with their own funds or with funds as investments from angel investors. These investors are wealthy individuals, family or friends of the entrepreneur. It is very important that these investors know the entrepreneur personally, since the newly formed enterprise lacks of a track record concerning customers or revenues at this stage. If other capital investors (i.e. banks) would decide to invest in the new enterprise at this stage, they would have to charge very high interest rates, given that the future of the business is very uncertain. In turn, this would mean that the entrepreneur would have to accept smaller financial gains in the future, when he would generate his first revenues. On the contrary, Venture Capital and Corporate Venture Capital are invested in exchange for an equity stake in the business and Corporate Venture Capitalists obtain their returns, when they decide to sell their shares (Schuster, 2003). Startup Stage The "Startup Phase" is very similar to the "Seed Phase". In this phase the entrepreneur is concerned with the development of his product to its final shape. This is the stage, in which the costs of several activities clearly increase, whereas no revenues perspectives are yet to expected. Also this stage is regarded as rather risky and Venture Capital or Corporate Venture Capital represent funding options for the entrepreneurs. However, startup companies that have promising concepts validated by key customers might attract the interest of venture capitalists. Nevertheless, venture capitalists will not invest in companies being located very far from their geographic area, since the need for managerial guidance and monitoring is quite high. Typically, this stage round involve investments of less than $5 million (MPG, 2008). First Stage This is the phase, in which the preparations for the launch of the product take place. This is the stage, in which the most expenses occur (45%-75 % of the total expenses during the whole financing procedures). Due to the lack of liquidity, the entrepreneur takes Venture Capital into consideration. Traditional Venture Capital firms are more likely to invest in the late development stages, whereas Corporate Venture Capitalists tend to invest in the early development stages. Since Corporate Venture Capitalists have also strategic motives and long-term perspectives, they are willing to fund and support the operations of new enterprises being at an early stage. Growth Stage Growth stage investments focus on companies which have already introduced a product on the market and either are already profitable or show a strong potential for a sustainable profitability (MPG, 2008). Although a break-even is already reached, further investments (ca. $5-20 million) are needed so as to enhance the market penetration of the new company. Corporate Venture Capitalists might also be interested to invest in this stage. Disinvestment Phase, Buyouts and Recapitalizations At this stage, technology companies are profitable and stable. This is probably the most appropriate point of time for Corporate Venture Capitalists to check out and obtain high returns. There are many ways for Corporate Venture Capitalists to exit. The most common way is the "going public" process by offering some or all of their shares to the public (Initial Public Offering, IPO) followed by a listing of the shares on a stock exchange. Further, the shareholders might sell their shares to other investing firms (trade sale) or back to the firm founders ("buy back"). Finally, a possible exit for the investing firm would be the integration of the venture-baked company and its acquisition by the parent company. Successful Implementation of Corporate Venturing This sub-chapter aims at describing strategic frameworks suggested by authors, who identified specific cases of corporations for implementing corporate venturing at their benefit. As already mentioned, CVI's may have financial and/ or strategic goals. At this point, the question, which arises, is the following: If corporate venture capitalists distinguish themselves from other capital investing firms by having long-term goals, is it adequate to assess a CVI just by looking at financial figures such as the ROI? Previous research proposes that CVI's should be evaluated from a strategic point of view and not purely from a financial angle (Lin & Lee, 2011). The difficulty is to identify the proper metrics for successful strategies or those factors, which are necessary for the successful execution of a corporate strategy in venture capital investing. However, Winters & Murfin (1988) claim that there is no one and only strategy, which can be applied to any corporation and lead to success. Depending on the nature of the corporations as well as depending on its needs and objectives, researchers tried to delineate the common success factors for corporate venturing. Although corporate venturing has two different objectives, either financial or strategic most management decisions are made by assessing an investment from both sides. Moreover, another attribute of corporate venturing is the level to which venture capital funded companies are linked to the operational capabilities of the investing corporation (Chesbrough, 2002). According to Chesbrough, there are four distinct types of corporate venture capital depending on the corporate objective (strategic or financial) and on the degree of linkage (tight or loose) between the two enterprises. These are the following: Driving Investments: Investments which fulfill strategic goals belong to this category. The term driving investments implies a tight linkage between the investing corporation and the start-up company. This type of investments sustains the corporation's current strategy and it is not recommended in cases, wherein the corporation needs to alternate its strategy and explore new opportunities due to a changing environment. Since driving investments sustain the corporation's current strategy, they are not recommended in cases in which the corporation aspires to gain access to disruptive technologies or enter into new businesses. Enabling Investments: This type of investments is also strategic but the operational link between the start-up and the company is looser. Enabling investments comprise the notion of complementarity. An investing company might invest in its suppliers, customers or third-party developers to stimulate the development of its ecosystem and thus increase the market demand for its products. Enabling investments is what Campbell et al. "Ecosystem Venturing" calls. Intel Capital, for example, a semiconductor producer invested in hundreds of companies whose products required increasingly microprocessors. This increase in product demand gave a boost in Intel's sales and increased the revenues of the company. Whereas, the coordination of hundreds of companies turned out to be challenging and the financial returns were poor, the company sticks to this strategy since it creates an increased demand for Intel's own products. Enabling investments are beneficial only for companies which enjoy a big market share. Otherwise, by increasing the demand in the market the field is wider also for the competitors. Emergent Investments: This type of investment has initially little to do with the current strategy of the company. In turn, the link to operational capability between start-ups and investing company is tight. Emerging investments have initially a financial benefit for the investing firm. However, the actual return may emanate from emerging strategic options. If the business environment shifts or if the company's strategy changes the investments in new ventures might turn out valuable. Disruptive technologies for instance are a good reason for making emergent investments. If new technologies are developed, which will be able to change the current market shape, organizations having a quite rigid and inflexible business model might experience serious losses. The development of a "back-up" technology or the exploring of new business models might be a very useful tool for the company's sustainability. Nevertheless, financial discipline is required in order to manage these investments. A way to achieve financial discipline is to make a partnership with private venture capital funds. Further, the author suggests that emergent investments should be implemented when the economy is booming. This is because, in times where the economy is flourishing, the high financial returns might offset any other risks concerning the strategic fit between investing firm and investee. Passive Investments: Passive investments have a purely financial objective and they are aiming at high financial returns. Siegel et al. (1988) as cited in (Weber & Weber, 2005) showed that CVC's acting like classical venture capitalists, i.e. they tend to have a clear focus on the financial aspect, achieve higher returns on investment (ROI) than CVCs, which are more interested in strategic benefits. However, in case the financial returns collapse, no strategic yield will remain to compensate the losses. Chesbrough (2002) proposes that investing firms should not set financial gains as their one and only goal. Start-ups should have the flexibility to grow, which explains why performance expectations should not focus only on short-term financial metrics. Moreover, the value of potential development of new businesses outweighs the benefit of possible capital gains (Sykes, 1990). The "window on technology" is probably the most strategic benefit that CVC can obtain from such an investment. In conclusion, a corporate venture capital investment will create a greater firm value, when the investing firm focuses more on the strategic benefits, rather than passively look after for financial returns (Dushnitsky & Lenox, 2006). Figure 4: Mapping the Corporate VC Investments, adapted from (Chesbrough, 2002) Block and McMillan (1993) propose following tactics for a successful corporate venturing: Create a venturesome climate: A new venture should be the basis for innovation. The role of the venture manager is to foster an innovative culture, in which the new business development is enabled. Enthusiasm should be cultivated and employees should be encouraged to live and support the new business development. Further, performance evaluations could assist new ventures in retaining the focus of innovation. Finding new ventures: The authors suggest a continuous monitoring of the market and customers' needs. The market per se is dynamic, which means opportunities and threats arise steadily. The new ventures managers should have an understanding for the changing behaviors and needs of the customers and explore promising new business ideas. Choosing a development strategy: Depending on the risk, which the investing company is willing to take, two main strategies can be followed. The revolutionary strategy (completely new technology to enter new markets) should be employed in cases in which the firm focuses solely on specific key technologies that might bear a high risk but offer high returns in turn. The other option is to expand the existing know-how by investing in complementary and near to the current business technologies. This so-called by the authors "evolutionary" strategy, does not offer high financial returns, but it is a lower-risk investment. Directing the process: The decision upon the location of the corporate venture within the company is critical for its success. Block and McMillan (1993) suggest the composition of a division, being responsible for venturing activities and for facilitating and supporting the new ventures. This team being responsible for value-creating investments should be consisted of experienced personnel in the investment and industrial-technological sector. These active investors will be able to identify lucrative investments and interfere if needed, to make substantial changes and protect their investments. Sykes (1990) recommends that the corporate venture capital group should have certain autonomy and a committed source of funds. Having a dedicated investing group enables a fast decision-making in new investments and hence increases the potential of highly profitable deal flows. Markham et al. (2005) claim that the investing group should be able to act fast, "typically three months from receiving a prospectus to cutting the check". Ensuring the venture's long-term survival: A sound business plan is a prerequisite for a new venture's long-term survival. Standard financial ratios and benchmarks should be applied, so as to evaluate a new-venture idea. In general, following benchmarks are recommended: a.) A break-even time of less than three years, although this might not be the case for break-through technologies or new markets. b) A stable gross-margin of 20 % - 50 %. c) After-tax profit potential of 10 % - 15 %. Further, other data such as a minimum market share and growth potential are good indications for risk aversion. Typical financial metrics might be considered in a well prepared and predefined due diligence process (Markham et al., 2005). All these hard facts should not be considered alone, neglecting the strategic fit of the new-venture to the firm. Markham et al. (2005) points out the necessity of having clear objectives, in order to implement the appropriate strategy. Typically organizations have multiple objectives. However, managers need to set priorities. If the objective is to gain access into new technologies, investments in VC funds would provide the ability to screen and filter a wider range of deal flows. On the other hand, if specific technical areas and markets are targeted a direct investment, which allows a tighter control would be the right strategic path to follow. If the organization wishes
to support and grow its business, a direct- external investment would be recommended, in order to ensure that the firm objectives are properly communicated and followed. Further, if an acquisition of the new venture is intended the direct-external investment will allow a more immediate control. Nevertheless, immediate control means also greater amount of financial liability. Corporations, which have more strategic than operational objectives tend to take minority equity investor positions instead of being liable for the new venture. Finally, an indirect-external investment is recommended if the VC group does not have the expertise or the time to take over the nurturing of the portfolio companies. The authors (Markham et al.) suggest numerous tactics and practices for pursuing a successful strategy in corporate venturing. The tactics and practices pertain to a series of issues, such as: 1. Governance: The ability to evaluate the success of a corporate venturing program should be provided. A way to measure to success is to implement specific financial and strategic metrics to track the performance of the CV efforts. Markham et al. (2005) recommend the metrics given in Table 5 as a checklist for managers planning a CV activity. Again, the decision-making process is essential for the successful outcome of a CV. The authors suggest the level of complexity in making investment decisions should be as low as possible. Moreover, the external new venture should have the ability to communicate and have access to the decision makers, but it should not be dominated. However, regular reviews to track performance are essential to identify weaknesses and possible failures. 2. Corporate funding: The assignment of venture costs and the source of CV funds are crucial for the success of a CV activity. The venture costs can be either assigned to business-unit (BU) income statements or to the corporate balance sheet. In order to decide on which way to go, management should consider what its strategic objectives are. If the objective is to grow the business through new products or markets, then it would be wise to engage the BUs to establish accountability and streamline the introduction of new products and markets to the current business. On the other hand, assigning venture costs to the corporate balance sheet services longer-term objectives and it is appropriate for acquisitions. In this case, the accountability is lowered and the financial performance of the company might experience some damage, since start-ups and early-stage companies need a certain period of time until they get cash positive. 3. Intellectual property protection: Firms aiming at gaining a window on technology should be rather careful with intellectual property (IP) issues. Typically small companies will try to protect their new technology from abuse. However, large companies face the risk of losing their IP position by viewing the small company's technology. Both parties may run into problems if proper firewalls are not set. A recommended practice is to use personnel from within the company, in order to conduct the due diligence process. Further, the use of corporate technologists instead of business-specific technologists is recommended. The corporate technologists can take over the interaction with the portfolio companies taking care of IP issues. 4. Human resources: Human resources is always a crucial issue in a business's success. Recruiting and staffing the right people poses a serious challenge for management. The authors suggest two approaches. The first approach pertains to internal hires of promising internal personnel and providing them with on-the job training. The second approach refers to external hires, preferably professionals from the VC area or experienced entrepreneurs. In both cases the compensation is the most critical issue. A competitive compensation system, including high salaries and stock incentives
is the key not only for hiring but also retaining the best people. Table 5: Corporate Venturing Metrics. Adapted from (Markham et al., 2005). Corporate Venturing Metrics Consolidated financial metrics Portfolio IRR.
Number of investments begun. Number exited. Capital deployed. Individual investment metrics Fit with strategic objectives. Milestones defined and their status. Cash flow history. Revised projections for additional investments. Probability of success. Strategic metrics Number o f contacts between corporate personnel (outside the CV group) and portfolio company or VC firm. Number of new customer/ market/ technology contacts made via investment. Breadth of portfolio and alignment of portfolio with strategy. Process metrics Personnel development Use of project management tools Quality of communication with key stakeholders. Time necessary to reach investment
decisions Sykes (1990) stresses the importance of a good relationship between CVC team and portfolio companies as a strategy to succeed. Therefore, it is essential that both parties have mutual supportive objectives, which foster long-term relationships. Portfolio companies' expectations include not only funding at the initial start-up phase, but also managerial support and guidance in exchange for offering a "window on technology". Corporations dealing with CVC should be aware of the fact that successful investments in external enterprises require dedicated resources and significant time, in order to evolve. Accepting and respecting these expectations from the CVC party creates a "business partnership" with high strategic value. This strategic partnership is fostered, if there is a certain level of operations' "complementarity" between the investing firm and the investee. In addition, an effective cooperation can be achieved if a separation of duties or responsibilities is established. According to a research (Schween, 1996), both parties can make the most out of their business relationship, if they can retain their initial roles. In other words, synergies and effectiveness can be achieved, if the investing company does not immense interfere in the operations of the investee. This might be a contradiction to the general concept of corporate venture capital, since "managerial guidance" and "performance monitoring" is inherent in CVC. Nevertheless, if the objective of the investing company is the "window on technology", then it should provide its portfolio companies with a certain degree of freedom. Finally, crucial for the success of a CV program is the role of the CV unit as coordinator and intermediator for delivering strategic value to the parent firm. (Napp & Minshall, 2011). The CVC unit is responsible for creating and communicating explorational benefits to the parent firm. Through proper engagement and cooperation of the business units, the CVC unit can provide support and managerial advice to the start-up and thus exploitational benefits can be generated and captured. The key role of the CVC unit as "matchmaker" is illustrated at Figure 5. Figure 5: The CVC unit is the intermediator between parent firm and start-up. CVC investments capture strategic value for the parent firm. Adapted from: (Napp & Minshall, 2011). At this point it is essential to mention factors that could possibly lead to unsuccessful CVC programs. As already mentioned, the loss of focus is crucial. Top management often fails to identify the right composition of strategic and financial goals and tends to stick longer to losing investments than venture capitalists, since there is also a strategic interest behind the investment (Rauser, 2002). On the other hand, a tight timeline and an institutional pressure from the parent company for immediate returns might lead CVC managers to a hasty retreat from the venture capital market and hence the strategic benefits might get lost. Therefore, the evaluation of venture investments should be conducted after a certain period of time (typically 3 to five years). Further, if the decision-making process of the CVC's is impeded by bureaucracy and inflexible conditions this will probably lead to less successful investments. In addition, if top CVC managers are not compensated in a manner that gives incentives, they will probably abandon this field. Moreover, internal conflicts within the investing firm are also addressed as a reason for potential failures (Dushnitsky & Lenox, 2006). Further implications might include corporate conflicts of interest objectives between the CVC's and the portfolio companies such as a one-sided intention for acquisition or a pure exploitation of the portfolio company in exchange for equity funding (Sykes, 1990). Finally, information asymmetries about the entrepreneurial venture might lead to an unsuccessful investment (Dushnitsky & Lenox, 2006). Entrepreneurial ventures might hesitate to share information about their know-how and technology with the investing firm as a result of mistrust that their intangible assets might be expropriated. A problematic business relationship between CVC's and investee might impede an adequate performance monitoring of the latter party and might result in insufficient managerial support from the CVC side. Methodology This chapter deals with the research strategy, which was followed in order to identify the successful factors in corporate venturing. A case study based on interview and a questionnaire survey to the CVC managers of the 3M New Ventures were considered as plausible methods, in order to provide insights into how successful corporate venture capital can be achieved. The objective of this chapter is to describe the aforementioned research methods and to explain the reasons for preferring them among others. The research method chosen for this master's thesis was a qualitative method. It took me a lot of time and effort to decide on this method because of the "unscientific" feel it has. Whereas a quantitative research has a straightforward data collection and analysis, the nature of qualitative data has implications for both its collection and its analysis (Saunders et al., 2003). However, depicting a complex concept, such as a successful pattern of corporate venturing, with numbers might be extremely challenging and blurry. According to Dey as cited in (Saunders et al., 2003, p.378) "The more ambiguous and elastic our concepts, the less possible it is to quantify our data in a meaningful way." Since this master's thesis is targeting first of all at gaining a deep understanding of a successful corporate venturing model, the opportunity to explore this subject in a real manner as possible, should be provided. Qualitative data are more appropriate for providing the researcher with the necessary understanding about factors and mechanisms of a process (Saunders et al., 2003). Further, the qualitative approach allows the researcher to investigate new factors, which might have been unknown so far and were identified during the research procedure. Finally, the small sample size which was available for testing (the 3M new Ventures group) did not allow a quantitative analysis. The qualitative method, which was followed, had the elements of an exploratory and descriptive study. "Exploratory" studies are a valuable means of finding out "what is happening; to seek new insights; to ask questions and to assess phenomena in a new light" (Robson, 2002 as cited in (Saunders et al., 2003, p.96)). Exploratory studies are recommended to researchers, whose objective is to clarify their understanding of a problem. The exploratory research can be conducted by following three principal ways: Conduction of a literature research. Talking to experts in the subject. Conducting focus group interviews. All three recommended principles have been followed, in order to conduct the research. First of all, a comprehensive literature research was conducted, in order to gain a deep understanding of the Corporate Venturing as a strategic tool for corporate growth. The search engine ATLAS, an electronic library provided by 3M Corporation was used for literature research in journal articles and articles in scientific periodicals. The focus of the research was placed mainly on the strategic aspects of Corporate Venturing and the key words such as Corporate Venturing and Corporate Venture Capital in combination with successful factors were used, in order to gather valuable information about the topic. Since Corporate Venturing has become an important innovation's tool for corporations since 1983, numerous journals and articles, which deal with CV and CVC, could be found. The challenge of conducting the literature research was to find common factors and patterns which could lead to a successful corporate venturing. It was found out, that there are indeed some financial and strategic aspects, which are crucial for the assessment of an investment. Nevertheless, one size does not fit all and it must always be taken into account that every corporation is different and its objectives are very specific. Therefore, the objective of conducting a literature review was to provide an overview of the different shapes and forms of the Corporate Venturing, the diversified corporations' objectives for implementing Corporate Venturing as a growth tool and the various strategies, which can be followed as a function of the corporation's objectives. The second step was to develop a questionnaire, which could capture all essential aspects of corporate venturing. Having gathered data from the literature research, the most important success factors were collected and questions which would confirm or reject these factors were formulated. Talking to experts was considered as a very meaningful way to shed some light into this specific area. The 3M New Ventures managers were a very valuable source of data and information, which could heavily assist at creating a "theory" about successful Corporate Venturing. Finally, the conduction of focus group interviews was the last step to collect qualitative data from a real life aspect. The object of "descriptive research" is to "portray an accurate profile of persons, events or situations" (Robson, 2002 as cited in (Saunders et al., 2003, p.97)). The descriptive research is used as a complementary method to answer types of questions like "how" and "why". This method might help the researcher to find out reasons, factors and correlations enacting in a process. Since the purpose of the master thesis is to develop a theory rather than to investigate it, no quantitative method is applied (Rauser, 2002). For this master thesis the "grounded theory" was adopted. The grounded theory is proposed when 1) the process in not thoroughly understood 2) the number of factors and mechanisms which are involved is large, 3) the quantification of factors and responses is difficult and 4) the size of the data sample is limited (Rauser, 2002). For designing a research project two possible research approaches may be followed. These are: the "deductive" and the "inductive" process. The deductive approach starts from a theory and moves from theory to data and is rather recommended for highly structured problem statements and quantitative data analysis (Saunders et al., 2003, p.89). On the other hand, the "inductive" approach facilitates a deep understanding of the research context, enables a more flexible structure, which allows changes as the research progresses and emphasizes the collection of qualitative data (ibid.). The design of this research project follows an "inductive approach", in which primary and secondary data are collected and a theory is developed as a result of this data analysis (Saunders et al., 2003, p.85). The "grounded theory" is the best example of this approach. The data, which are initially collected, constitute a theoretical framework, which allows the generation of predictions. The outcome of the research is the validation or the rejection of the initial framework (Saunders et al., 2003, p.93). Figure 6: Deduction & Induction approach. Adapted from (Trochim, 2006) Research Strategy The main research strategies are: "experiment, survey, case study, grounded theory, ethnography and action research" (Saunders et al., 2003, p.105). These strategies do not exist in isolation and hence a combination of those may be applied, in order to fulfill several purposes. Therefore, a grounded theory case study approach was followed. Robson (2002:178) as cited by (Saunders et al., 2003, p.93) defines "case study" as "a strategy for doing research which involves an empirical investigation of a particular contemporary phenomenon within its real life context using multiple sources of evidence". This strategy is appropriate, when the objective of the study is to gain a deep and comprehensive understanding of the context of the research and the processes taking place (Saunders et al., 2003, p.93). Further, the case study strategy provides the researcher with valuable information, since it generates answers to the questions "why?", "what?" and "how?". The case study aims at answering the following questions. Why is Corporate Venturing an important innovation tool? What are the key factors for a successful Corporate Venturing? How can corporate venture capitalists create value for their corporations by implementing Corporate Venturing? Telephone interviews were conducted with three investment managers involved in CVC activities. A questionnaire was prepared three weeks before the interviews and was sent to the 3M New Ventures managers per email. The time needed for conducting the telephone interviews was about 40-45 minutes. The use of interviews is a helpful way to gather valid and reliable data, whi