Equity investments by large corporations in external startup companies through corporate venturing (CV) provides new firms with both necessary financial resources and the opportunity for both the parent firm – the investing company – as well as the nascent business to generate and capture strategic value resulting from overlaps in the business activities of the companies. This article presents findings in how to operate CV programmes from an in-depth study of nine programmes.
From the investing company’s perspective, the strategic motivation for making investments is generally both to explore and to exploit new opportunities. The explorational value of CV thus lies in the generation of general insights into the development of markets and technologies, whereas the exploitational value lies in enabling specific, applied combinations of new technologies and resources for the parent firm, such as through gaining access to complementary technologies from start-ups.
From the perspective of the portfolio company, the CV relationship can add value to their company in general, through management advice, operational support and added reputation and credibility, referred to as company-related value, or to specific products, through access to complementary technologies and by gaining easy access to channels to market, referred to as product-related value. While it can be observed that companies place an increased emphasis on the strategic value of CV activities, it seems to be an important issue for companies to set up the right operational linkages to capture the strategic value of the investments.
A study conducted at the Centre for Technology Management at the University of Cambridge addresses this challenge through giving evidence of operational linkages between the CV unit, the parent firm and the start-ups in the CV portfolio. The study relies on observations of nine in-depth case studies involving the well-established CV programmes of large multinational companies. The diagram on the next page gives a comprehensive and cumulative overview of the observed linkages. This overview reveals a number of issues which should be considered by companies setting up CVC programmes.
In general, the diagram groups observed operational linkages with respect to their purpose for transferring strategic value and – through the colour coding – also explains at what stage of the investment process linkages are typically active. It should be noted that although certain linkages are typically in place at the colour-coded stage, they are not exclusively limited to that time period. The arrows in the figure highlight the direction of communication as well as the purpose of particular operational linkages and thus reflect the importance of bidirectional, iterative, crossfunctional and cross-hierarchical interactions between parties.
They show that some linkages are aimed at exchanging or delivering information to a particular group, whereas others are intended to spread or collect information from and to a wider audience. More specifically, the diagram offers insights regarding the use of operational linkages at different investment stages for capturing the different dimensions of value.
Explorational value for the parent firm is mainly transferred at a pre-investment stage through direct linkages between the CV unit and the strategic management of the parent firm. These linkages comprise meetings to align scouting fields, the development of strategic roadmaps, the presentation of interesting business cases, both from the CV unit to the parent firm and vice versa. Company-related value for the start-up is mainly provided by direct links between the CV unit and the management teams of the portfolio companies.
To establish a relationship and to provide guidance and strategic advice, investment managers of the CV unit usually take an observer seat on the board of the start-up and have regular meetings with the start-up. These linkages are normally in place over the complete investment process.
Soon after an investment is made (and sometimes even beforehand) the CV unit has to activate operational linkages to foster an independent relationship between business units of the parent firm and the start-up. This can be done by establishing initial contacts between potential partners and through workshops and roadshows to allow exposure of both companies to each other.
Furthermore, training and coaching of people involved in building a relationship and creating transparency for both parties through mapping of decision structures can help to bridge (cultural) gaps between the two companies. These activities typically take place in the early stage of the investment process and are continued throughout the process.
Exploitational value for the parent firm and productrelated value for the start-up are typically transferred at a later stage, depending on how successful the activities of the CV unit are in establishing a relationship between the start-up and the parent firm. Nonetheless, as early as possible, targeted meetings between the different operational functions of business units and start-ups are arranged to allow informal exchange of knowhow and to explore and realise potential for more formalised collaborations, such as joint development agreements or joint marketing agreements.
Having arranged those formal collaborations, the main value is then captured through interactions on a personal level and through collaborations in various independent projects.
In conclusion, operating a CV unit involves a complex and wide range of linkages which have to be managed to enable capture of the maximum strategic value. It also shows that the role of the CV unit is not just to provide channels for the flow of information and knowledge, but also to create transparency, trust and interest across a wide range of functions.
This is part two in a series featuring research into strategic value in corporate venturing. The first part, on the metrics for strategic value, was published in the July issue of Global Corporate Venturing.
If you are interested in findings from this research project, email johann.j.napp@cantab.net and jmawson@ globalcorporateventuring.com