In Harvard Business Review (March 2002), innovation theorist Henry Chesbrough argued that a CVC investment could be conceptualised along two dimensions: “its objective and the degree to which the operations of the investing company and the startup are linked.”
The framework Chesbrough advanced contemplated two possible objectives that motivated a large corporation’s investment in a startup. On the one hand, such an investment was strategic if the large corporation viewed the startup as a means “to increase the sales and profit of its own business”. The key determination for the large corporation to make was whether there were any exploitable “synergies between itself and a new venture”. On the other hand, a large corporation could invest in a startup to generate attractive financial returns. If a large corporation invested primarily for this reason, it was effectively acting like an institutional venture capital fund and had similar financial goals and return hurdles.
Along the other dimension was the extent to which a large corporation linked its “current operational capabilities – that is, its resources and processes” with any startup in which it decided to invest. Chesbrough argued that tight integration between a large corporation and a startup could prove advantageous on either or both sides through information transfer, cross-company learning, and, ultimately, business model reengineering.
In defining these two dimensions, Chesbrough created a two-by-two matrix to classify CVC investments into four categories:
- A “driving” investment “advanced the strategy of the [large corporation’s] current business;”
- An “enabling” investment was primarily strategic in purpose, but the linkage between the large corporation and the startup remained loose;
- An “emergent” investment in a startup had a primarily financial objective and involved tight linkage with the large corporation’s current operating capabilities, but the startup was sufficiently different in focus that it did not add much to the large corporation’s current strategy;
- A “passive” investment in a startup was financial in objective, and there existed loose linking with the large corporation’s current operating capabilities, as well as little strategic overlap.
Chesbrough then pointed out that each of these four types had advantages and potential disadvantages.
Challenges to realising strategic value
While Chesbrough’s framework helped to clarify the often muddy, if not nebulous, rationale behind CVC investments, it did not address the more tangible problem that arose after CVCs actually invested. To be sure, ex-ante, poor planning and weak investment theses could, and did, trip up CVCs periodically. But there was an arguably more vexing problem across the industry to realise strategic value from CVC investments ex-post, and it stemmed from inconsistent levels of engagement between the core business operations of the parent corporation and the startups in which the CVCs invested.
This challenge took various forms across large corporations, but the following categories captured, at an abstracted level, the most common issues:
Lack of cross-organisation infrastructure: Although CVCs often made investments in startups to bring new ideas into the parent corporation, surprisingly little formal infrastructure was built, within either the CVC or the parent corporation, to ensure collaboration. The result was startups were usually left to fend for themselves in navigating the processes and internal politics of the parent organisation.
Startups tended to be poorly equipped to do this, because: they simply did not have enough staff to dedicate to these efforts (they had plenty of work just focusing on growing their nascent venture); since employees of the startups generally self-selected into more entrepreneurial work environments in the first place, they often lacked experience in, and (or) had little patience for, highly bureaucratised settings; and the idiosyncrasies of any large parent corporation required company-specific knowledge, and the startups, absent outside assistance, struggled to learn the procedural nuances and political mechanisms that could expedite internal decision-making and influence, if not determine, the all-important allocation of scarce resources.
Internal resistance within the parent: In many cases, especially when the CVC had invested in a startup primarily as a strategic hedge for the parent corporation’s core business, employees within the parent corporation resisted engaging with the startup. Typically, this was because the parent corporation’s employees either disagreed with the viability of the startup’s approach to whatever business problem it was trying to solve or felt threatened by the new venture and feared the implications for their own positions in the company if its technology gained traction internally or in the marketplace.
There were two main ways that the employees of the parent corporation responded. To be sure, they could and often did, voice their displeasure about, if not more aggressively fight, having to work with the startup. This required escalation and the use of some political capital, so an easier way of achieving the same end was to simply ignore the startup or engage with it on such an irregular schedule, or in such an inconsistent manner, to make progress all but impossible. If a startup had an internal champion who could step in to settle disputes or corral sceptical colleagues, that could improve the situation, but the question became the stickiness of the solution. Without consistent pressure applied from somewhere, usually above, the operations of the parent corporation would slide back to their default position, leaving the startup out in the cold. And it often was too much to expect for an internal champion, who had her own role and responsibilities, to persistently monitor the working relationship and ensure compliance by her colleagues in the parent corporation.
Insufficient bandwidth: One of the most vexing problems for internal collaboration with startups was simply that there were too many things going on in the parent organisation. Too often, when a CVC invested in a startup, the parent organisation did not dedicate sufficient resources, particularly personnel, to ensure a productive working relationship formed between the core operations of the business and the new venture. Understaffed engagements with new ventures led to overloaded employees at the parent corporation. After all, the parent corporation’s employees already had full-time jobs in making sure the core business operated smoothly. Faced with even more work, which by its very nature was not directly related to the core business and the performance of their regular job, they often paid insufficient attention to the startup, resulting in the languishment of collaborative projects.
Inappropriate incentives: closely related to insufficient bandwidth was poor incentive alignment. The vast majority of large corporations with CVCs had not found a way to motivate their employees to work with startups. What typically happened was simply the assignment of more work, in the form of mandated interaction with startups, to full-time employees. However, since the mandated and the mandators knew that the fate of the startup was only loosely linked to the core business and that their own compensation was largely, if not entirely, a function of the core business’s performance, the parent company employees were inappropriately incentivised at operational and middle management levels. The result too often was that operational teams did not work consistently with the startups, and middle managers did not apply sufficient pressure to ensure collaboration.
Poor formulation and communication of strategic vision: It was not uncommon for the parent corporation to have only a partially formed vision for why and how the company would interact with startups in which the CVC invested. And even if a cogent strategic rationale existed, communication of this vision from the top-down was not always successful in coordinating and motivating action by employees. Ultimately, problems of formulation and communication of strategic vision stemmed from either senior executive management, the board, or both. However, regardless of source, these problems resulted in a situation where the employees of the parent corporation, as well as those of the startups, operated in a hazy strategic context.
In effect, the people responsible for collaborating with one another did not receive sufficient guidance on how to structure and implement the terms of engagement. The lack of a fully developed and (or) fully communicated strategic context often compounded the incentive problems discussed above: employees were not sure what to do, and even if they were, they were not incentivised to act.
A model to improve strategic collaboration
As of 2019, the aforementioned issues of integration remained daily problems for large corporations with CVC arms. That is not to say that the situation was monolithic, however. In fact, some companies, such as JetBlue Airways, had learned from these challenges and incorporated a number of fixes in their own CVC activities. Still, no perfect solution existed, although the search for one continued, in industry and in academia.
One approach that showed promise was developed by Professor Robert Burgelman of Stanford and Amit Sridharan of Mahindra Partners. Burgelman and Sridharan used a process model to dissect the problem and offer a potential solution. Their analysis was helpful in part because of its realism, for it assumed at the outset, as is general practice across the CVC industry, “the dual nature of the CVC subsidiary”, that “the unit has to be a financial investor driving returns, but on the other end it has to be extremely strategic in driving benefit to the corporation”. They also made the reasonable assumption that the parent corporation’s “core business strategy is clearly defined and well-understood throughout the organisation”. From an organisational design point of view, “the structural context for the CVC-corporate relations” was assumed to be “robustly designed”.
Ultimately, the Burgelman-Sridharan model was about the flows of information and activity that needed to happen for external innovation, provided by a startup that had received investment from a CVC arm, to be successfully integrated into the parent corporation, thereby allowing full strategic value of the investment to be realised. The multi-dimensional activities occurred at different levels of management and involved a variety of processes. Tying things together were the flows of information and activity across the levels of management and processes.
While the model had many nuances, its key conclusions were:
Corporate management: corporate management defined the strategic and structural contexts of the parent corporation. In turn, these contexts informed how the definition and impetus processes worked (that is, they set the rules of the game and guided activity, even when direct supervision was not possible). In addition, corporate management was involved in high-level monitoring of both the CVC arm and collaboration between startups and operating groups within the parent corporation. In some cases, corporate management also provided impetus through major resource allocation decisions, formal course-correction, and ad hoc involvement through resolution of disputes that could not be handled at lower levels.
Senior and middle management: senior and middle management interfaced with corporate management and operations-level management. This layer ensured transmission of strategy from above and voiced needs and concerns from below. In most situations, leaders at this level of the parent organisation had enough clout to drive priorities, resolve disputes, and ensure that investments made by the CVC were receiving adequate attention from operating groups. They were also involved from an investment perspective, making most of the decisions with respect to writing the first cheque to a startup, participating in additional rounds of venture financing, and assisting with budgets for pilot projects. Simply put, senior and middle managers were the stewards tasked by the chief executives and the board to ensure that both strategic and financial value were being reaped from CVC investments.
Operations management: these managers, as leaders of the operating groups within the parent organisation, had three primary roles. First, since they were close to, and thoroughly understood, the operations of the parent organisation, they performed critical need linking activities, which “involved the matching of new technical solutions to new, or poorly served, market needs.”
In other words, they knew what the external customer needs were, which, of course, was a necessary condition for the development of innovative solutions. Second, they helped secure deployment of a startup’s technologies in the parent organisation, which was crucial for institutional learning and further iterations of product/service development. Third, and perhaps most importantly, they created a feedback loop with the strategic and structural contexts of the company by communicating back up the chain of command the key learnings about the marketplace and the ability of a startup’s solution to serve market needs. Over time, the institutionalised accrual of these learnings could influence the future strategy setting of the parent corporation, as well as the organisational design that it architected and implemented to execute on this evolving vision.