Class 11-14 - Corporate Venture Capital Flashcards
WHY do spinouts prefer to hire from parents and local incumbents?
- Inherence of technical knowledge
- Ability to market product
- The original idea of the founder has been created with former colleagues (less asymmetric information in labour market)
- Geographical proximity to the parents (reduced mobility costs)
What is a spin out?
A spinout refers to a company or business unit that is spun off from a larger corporation, often with funding or support from the parent company’s venture capital arm.
The parent corporation typically identifies a technology, product, or innovative idea within its existing operations that has potential as a standalone business.
By creating a spinout, the corporation aims to capitalize on this potential by giving the new entity independence to operate and grow, often with CVC backing.
WHY do spinouts with industry experience perform better?
Longer survival
Faster Growth
Larger profits
More funding
Higher evaluation
More innovative
Assumption: Transfer of knowledge from parent firm
HOW do spinouts with industry experience perform better?
Knowledge:
* Managerial (especially small firms parent effect)
* Technical: being at the frontier due to parent’s effort
Reputation and relationships:
* Prior employment as signal for funding
* Co-workers as friends as easier hiring possibilities
Motivation:
* Disagreement on pursuing project or expected value at novel ideas
* Expropriation: leveraging better HC
Who leaves, where to, and why worry? Paper
- Top employees are less likely to leave the company
- Conditional on mobility, top employees are more likely to join a spinout
- Negative effect of moving employees are stronger if the move happens to spinout
- Top employees moving to spinout are amplifying negative effect for incumbent firms.
This graphic shows the balance of bargaining power between employees and firms, based on:
Employee’s Ability to Recreate or Transfer Assets (y-axis): How easily an employee can replicate the firm’s resources after leaving.
Importance of Firm’s Assets to Value Creation (x-axis): How crucial the firm’s resources are to success, relative to the employee’s skills.
Employee Advantage (Top Left): Employees can replicate assets easily, and the firm’s assets are less crucial, giving employees leverage to leave or negotiate better terms.
Firm Advantage (Bottom Right): Firm assets are vital and hard to replicate, making it easier to retain employees.
Bilateral Bargaining Power (Middle): A balance where both parties rely on each other, leading to more mutual negotiation power.
CVC definition
“investments by established firms in privately owned entrepreneurial ventures”
Professional investment team, capital provided by the corporation, access to corporate infrastructure including R&D as well as manufacturing facilities, dedicated units to manage national and international regulatory demandss
Innovation framework
Outlines a firm’s innovation strategy, dividing it into Internal and External approaches, each with different mechanisms and focuses. The framework is used to guide how firms leverage resources for innovation, improve performance, and assess the outcomes.
Internal:
R&D: In-house development of new products and technologies.
Employee Initiatives: Incentivizing employees to innovate through a supportive culture and skill development.
Corporate Spin-outs: Creating independent entities to develop innovations that may not align with core business, leveraging specialized talent and networks.
External:
Alliances and Acquisitions: Partnering with or acquiring companies to quickly access new technologies or markets.
Corporate Venture Capital: Investing in startups to explore emerging technologies, with strategic selection and integration of ventures.
Performance Assessment (financial, innovation, and organizational outcomes) is used to measure the effectiveness of these strategies and adjust the firm’s innovation approach accordingly.
Recent trends in CVC
- 221 new CVCs (53% increase)
- Global CVC-backed funding: from $70.1B in 2020 to $169.3B in 2021 (142% increase) => all-time
high - Average and median CVC-backed deal size increases reaching a new record
Tech trends in CVC
- Climate Tech
- Frontier Tech (semiconductors, robotics etc.)
- Crypto & Web 3.0 (NFT, Metaverse etc.)
- AI/ML
- Big Data
- Healthtech & Biotech
Top CVCs
Intel’Capital’Corp
GE’Commercial’Finance’;’Equity
Cisco’Systems’Inc
Google’Ventures
Johnson’&’Johnson’Innovation;JJDC’Inc
Comcast’Ventures
Microsoft’Corp
@Ventures
Actua’Corp
Motorola’Solutions’Venture’Capital
Sapphire’Ventures’LLC
Qualcomm’Ventures
Dell’Ventures’LP
Novartis’Venture’Funds
Safeguard’Scientifics’Inc
Novo’A/S
What are the industries that mostly attract investments?
Internet Specific
Computer Software
Biotechnology
Communications
Semiconductor
Medical / Health
Computer Hardware
Performance Implications of CVC
This matrix shows how the performance of corporate investors and new ventures varies based on financial and innovative outcomes:
Corporate Investor - Financial Performance: Increases, but depends on the industry.
Corporate Investor - Innovative Performance: Increases, but depends on involvement in the venture.
New Venture - Financial Performance: Positive, mainly at exit value, especially in IPOs.
New Venture - Innovative Performance: Increases, but depends on the transfer of complementary assets from the corporate investor.
This suggests that financial and innovative gains for both parties are conditional on specific factors like industry, involvement, and asset transfer.
External CVC
ECV as “investments [of capital] that facilitate the founding and/or growth of external businesses outside the parent company’s organizational domain
three main forms:
1. Acquisitions of young entrepreneurial startups
2. CorporateAccelerators
3. Corporate Venture Capital
Why startup acquisitions?
- access new innovative ideas and boost firms’ innovative performance (Ahuja & Katila, 2001; Cefis & Marsili, 2015; Xie et al., 2018)
- remove competitors (Santos & Eisenhardt, 2004)
- fasten entry into new international markets (Vermeulen & Barkema, 2001)
Why corporate accelerators
Definition: Time-limited programs that support a selected cohort of startups through the sharing of corporate tangible and intangible resources (Kohler, 2016)
- Explore recent market trends and test new business ideas
- Engage with young entrepreneurial teams at the startup formation phase (Kanbach & Stubner, 2016)
