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Corporations and the Financing of Innovation: The Corporate Venturing Experience. Paul A. Gompers Harvard Business School May 3, 2002. Agenda. Corporations and venture capital: The History. Key lessons. Results. The continuing challenge. Corporate Venture Capital.
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Corporations and the Financing of Innovation: The Corporate Venturing Experience Paul A. Gompers Harvard Business School May 3, 2002
Agenda • Corporations and venture capital: The History. • Key lessons. • Results. • The continuing challenge.
Corporate Venture Capital • Three waves of venture capital. • Very volatile inflows. • Most recent wave was particular strong. • U.S. and foreign.
The First Wave • Many VC-backed winners in 1960s: DEC, Raychem, Memorex, Scientific Data Systems, etc. • Big firms sought to emulate. • Most common mechanism was “New Venture Division”: >25% of Fortune 500.
Rapid Decline • Dramatic growth in VC in early 1980s; much publicity around Apple, Genentech, Compaq, etc. • Corporations again set up internal and external programs. • By 1986, external corporate programs were 12% of VC pool.
The Second Wave • Dramatic growth in VC in early 1980s; much publicity around Apple, Genentech, Compaq, etc. • Corporations again set up internal and external programs. • By 1986, external corporate programs were 12% of VC pool.
Similar Pattern • Decline in public market values and activity in 1987; dramatic drop in VC fundraising. • Almost 40% of corporate programs abandoned in 4 years. • Corporate funds fell to 5% of venture pool by 1992
The Third Wave • High returns to independent venture funds in mid-1990s. • Opportunities and challenges posed by the Internet and other information technologies. • Over 100 programs launched since 1996 alone.
Lessons from the First Two Waves • Cyclical element: venture capital went into and out of fashion. • But three key design problems limited the success of corporate programs. • Multiple objectives. • Unstable structure. • Inadequate incentives.
Problem 1: Multiple Objectives • Many programs sought to accomplish multiple objectives: • Window on new technologies. • Identifying acquisition candidates. • Generating financial returns. • Outsiders often saw these multiple goals as a sign of weakness.
Lesson 1: The Importance of Clearly Defined Objectives • Traditional venture funds have a simple goal: to make profits. • Corporate programs, by definition, have more complex objectives. • Corporate venture programs must: • Clearly define their goals in advance. • Think about implications of the goals. • Insure that all understand goals.
Problem 2: Poor Structures • Corporate venture programs were often quickly abandoned as a result of: • Failure to first understand VC. • Top management turn-over and/or infighting. • Resistance from R&D personnel and corporate lawyers.
Lesson 2: The Need for a Strong Foundation • Finding the right partners was crucial. • Venture funds have a formal legal structure, with a clearly understood mission; corporate programs often didn’t. • The apparent lack of permanence limited their ability to find investments or partners. • A formal structure and a strong internal champion are important.
Problem 3: Inadequate Incentives • Corporations were reluctant to commit to large payoffs to their venture mangers and internal entrepreneurs. • Successful risk-taking was often scarcely rewarded; while failure was Heavily punished. • Recruitment and retention were frequent concerns.
Lesson 3: The Importance of Aligning Incentives • A powerful aspect of the venture capital model is that when an investment is successful, everyone is successful. • Corporations were often limited in designing compensation by worries about fairness. • Corporate programs must define in advance clear rules that govern the compensation of its venture investors.
Data • VentureOne • 32,364 investments. • Information: • Amount. • Location. • Stage. • Investors. • CVC. • Independent VC.
What determines relatedness? • Control for: • Stage. • Location. • Firm age. • Time trend. • Increasing relatedness over time. • Early stage is more related.
Success of CVC vs. Independent VC • Notion that CVC is less successful that independent VC firms. • Independent VCs take advantage of corporations by showing them only the bad deals. • Is that true? • Look at success as defined by IPO or acquisition as a fraction of investments.
Determinants of CVC Success • Are CVC investments less successful? • CVC vs. independent VC. • What determines success? • Relatedness. • Stage.
Conclusions • CVC is an important element of financing new firms. • Corporate venture capital groups seem to be learning over time. • CVC investments appear to be quite successful. • Especially those in related industries.
Four Key Recommendations • Think about related investments. • Corporations must be sensitive to legacy of mistrust by independent VCs. • Need to carefully articulate structure. • Building a strong structure and addressing incentive issues are key.
