Part 1 Flashcards
4 Themes of CVC
- Entrepreneurship
- Strategy
- Innovation
- Finance
What is Corporate Entrepreneurship? Definition
Diversification through internal development, requires new resources combination, to extend activities in unrelated areas.
The sum of elements of Corporate Entrepreneurship
- Innovation: create and introduce
- Renewal: revitalizing by changing scope of business, competitive approach, or both. Building or acquiring new capabilities
- Venturing: enter new business by expanding operation in existing or new markets.
Engagement Model: Start-ups & Corporates
Equity Involvement:
Yes= Corporate Venturing (Outside-In)
NO = Start-up Program (Outside-In)
Yes= Corporate Incubation (Inside-Out)
No = Start-up Program (Platform)
External Venturing
Searching for ideas and learning from knowledge sources outside the firm
CVC in the 1960s/70s
CVC for diversification.
Very different approaches, often simultaneously= ventures by own employees, external ventures
Exxon as largest investor
Approx. 4 years duration
CVC in late 70s/90s
CVC for participating in technological advancements , to not “miss out.”
CVC in Mid 90s/2001
The rise of Gloval CVC. Internet as the driver of the ‘thrid wave’ of CVC.
+ Internationalization of CVC, tapping into international markets
+ as an alternative form of R&D: access to technological innovations of start-ups
Balance Sheets (+/-)
+
Flexibility and Control
Strategic Alignment
Simplicity
- Risk Exposure
Resource Intensive
Potential for short-term focus
Dedicated Funds Investmetns (+/-)
+
Risk Management
Professional Management
Long-term Focus
- Complexity and Cost
Potential Misalignment
Less Control
CVC Team
Average size of 9 people ( 6 in investment, 4 senior managers on average)
On average, 10 portfolio ventures per managers.
Endo vs. Exo-isomorphism
Endo:
- Align with corporate parent
- “mechanistic system”
Exo:
- Align with VC world
- “organic system”
Issue: stuck between two worlds. Legitimacy-seeking and professionalisation of TMT members as crucial determinants.
Corporate vs. VC compensation logics
Corporate: salary & corporate bonus and venture performance bonus
VC: carried interest or “carry” (capital gain from the fund or per deal)
–> 15% of CVC with “carry”
Performance-based pay for a CVC investor
–> increase of the CVC-VC performance gap
–> Without performance pay, CVCs will avoid highly risky investments with greater potential for larger returns
–> on average, exit rates of CVCs are 9.7% higher than VCs.
–> This gap increases to 20% when CVCs are awarded higher performance-based initiatives
= carried interest compensation positively influences CVC financial performance
The 4 Motivation factors of Investors
- Gap Filling
- Environment Scanning
- Efficiency Enhancing
- Ecosystem Building
Gap Filling
Of…
- Non-financial resources
- Technology and Capabilities
–> Relatedness between firm’s capability sets and venture’s is crucial!
–> Venture-level learning
3 types of Gap filling investments
- Promoting a standard (Driving)
- Stimulating demand (Enabling)
- Leverage Underutilised, Non-strategical technology (Emergent)
Environment Scanning
Scan the environment to scout for new technologies and markets.
–> market-learning level
–> To access potentially disruptive technologies, investors must invest in ventures unrelated in their own capabilities
Growing Future business with CVC, 3 investment strategies
- Experimenting with new capabilities (Emergent)
- Developing a backup technology (Emergent)
- Exploring strategic whitespace (Emergent)
Efficiency Enhancement
Investors can enhance their internal efficiencies by providing ventures access to corporate resources (unused plant capacities, people, etc).
To better utilize slack corporate resources and generate financial returns.
Ecosystem Building
Firms use CVC investments to stimulate demand for their own product!
- Complementary products
- “Synergistic” demand
- Build an ecosystem of products
- Promote core products as industry standard
Why do some firms prefer CVC over acquisition?
(U)ncertain strategic initiatives
(P)ayoff hard to evaluate in advance
(I)ntegration level low
(C)heaper
(C)ommitment low
(C)hoice / Comparison of initiatives
Corporate Investor characteristics
- Rapid technological change
- High competitive intensity
- Weak appropriability
(- strong tech resources
- marketing resources
- diverse CVC experiences)
CVC vs. Alliances
The number of CVC increases and then decreases with the number of Alliances formed.
The positive relationship between CVC investing and Alliances diminishes as firms invest in their own internal resources and gain experience
Forming too many alliances may drain a firm’s resources, making it difficult to grow CVC activity.
To who does CVCs report?
- CEO
- Head of Strategy
- CFO
Investment Approval Process
- Deal Sourcing (CVC Team)
- Decicison to forward deal (CVC Team)
- Evaluation and approval/vetoes (Investment Committee)
Contractual Preferences
- Pro-rata rights - 92%
- Venture Board Rights - 77%
- Right of First Notice (ROFN) - 50%
- Right of First Refusal (ROFR) - 12%
- Investment Position - lead 10%
