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
 Very
 Most
waves of venture capital.
volatile inflows.
recent wave was particular strong.
 U.S.
and foreign.
Lots of Earlier Exploration in
Fortune 100
25
20
15
10
5
0
1961-62
1965-66
1969-70
1973-74
1977-78
1981-82
1985-86
1989-90
1993-94
1997-98
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.
Top CVC Groups in 2000
Corporate Sponsor
Electronic Data Systems
General Electric
Andersen Consulting
Comdisco
Time Warner
Times Mirror
Visa International
Intel Corporation
AT&T
Hikari Tsushin
News Corporation
ValueVision International
Comcast
PECO Energy
Siemens
Capital Under
Management
$1,500
1,500
1,000
500
500
500
500
450
348
332
300
300
250
225
210
CVC Activity
Year
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
Number of Rounds
53
91
139
129
152
179
202
233
249
214
198
193
65
101
229
391
936
Dollar Volume of Rounds
193
369
708
1,449
7,968
Fraction of VC that is CVC
12%
Percent of Investments
11%
10%
9%
8%
7%
6%
5%
4%
1987
1988
1989
1990
1991
Year
1992
1993
1994
CVC vs. Independent VC
Entire
Sample
Status at Time of Investment:
Start-Up
Development
Beta
Shipping
Profitable
Re-Start
Location of Firm:
All Western U.S.
California
All Eastern U.S.
Massachusetts
Industry of Firm:
Medical
Computer Hardware
Communications
Computer Software/On-Line Services
Other
Corporate
Corporate VC and
Independent
VC Only
Strategic Fit
VC Only
9.8%
30.5
4.1
45.5
7.6
2.4
7.1%
33.6
5.5
44.4
6.9
2.5
6.4%
35.9
6.4
42.9
5.6
2.8
10.4%
31.2
4.1
44.8
7.3
2.3
59.7%
51.6
24.1
12.8
63.7%
53.7
25.2
14.0
59.6%
51.3
29.1
16.5
60.8%
52.7
23.4
12.6
25.5%
16.7
14.5
15.1
28.1
25.9%
17.0
14.2
15.1
27.9
24.2%
16.2
22.1
14.0
23.5
24.2%
16.8
15.5
16.2
27.3
CVC vs. Independent VC
Entire
Sample
Round of Investment:
Mean
Median
Age of Firm at Time of Investment:
Mean
Median
Amount Invested in Venture Round:
Mean
Median
Corporate
Corporate VC and
Independent
VC Only
Strategic Fit
VC Only
2.4
2
2.8
3
2.9
3
2.4
2
3.9
3.0
4.0
3.3
4.2
3.4
3.8
2.8
6.1
4.3
6.2
4.5
6.0
4.7
5.7
4.2
Fraction of Corporate VC Investments in
Related Industry
Fraction of CVC in Related
Industries
78%
76%
74%
72%
70%
t
68%
66%
64%
62%
1987
1988
1989
1990
1991
Year
1992
1993
1994
What determines relatedness?
 Control
for:
 Stage.
 Location.
 Firm
age.
 Time trend.
 Increasing
relatedness over time.
 Early stage is more related.
Fraction of CVC in Related
Industries
Was the Corporate Investment In
A Related Industry?
Age of Firm at Time of Financing
Time Trend
Firm is in Development Stage?
Firm is in Beta Stage?
Firm is in Shipping Stage?
Firm is in Profitable Stage?
Firm is in Re-Start Stage?
Firm Based in California?
Firm Based in Massachusetts?
Log Likelihood
2-statistic
p-Value
Number of Observations
0.0105 [1.16]
0.0351 [2.38]
0.524 [2.96]
0.697 [3.02]
0.184 [1.02]
-0.180 [-0.72]
0.456 [1.54]
-2878.1
67.71
0.000
2,032
0.0116 [1.28]
0.0358 [2.42]
0.506 [2.86]
0.6860 [2.97]
0.179 [0.99]
-0.176 [-0.70]
0.463 [1.56]
0.098 [1.05]
0.362 [2.92]
-2880.8
70.01
0.000
2,032
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.
CVC vs. Independent VC
Entire
Sample
Status at End of Analysis:
Initial Public Offering Completed
Registration Statement Filed
Acquired
Still Privately Held
Liquidated
31.1%
0.7
29.0
20.6
18.7
Corporate
VC Only
35.1%
0.2
29.0
21.1
14.6
Independent
VC Only
30.6%
0.7
30.3
19.7
18.7
Corporate VC and
Strategic Fit
39.3%
0.3
27.5
18.3
14.7
Determinants of CVC Success
 Are
CVC investments less successful?
 CVC
 What
vs. independent VC.
determines success?
 Relatedness.
 Stage.
CVC, Relatedness, and
Success
Age of Firm at Time of Financing
Round Number
Corporate Venture Investment?
Independent Venture Investment?
Corporate Investment and Strategic Fit?
Firm Based in California?
Firm Based in Massachusetts?
Firm is in Development Stage?
Firm is in Beta Stage?
Firm is in Shipping Stage?
Firm is in Profitable Stage?
Firm is in Re-Start Stage?
Log Likelihood
2-statistic
p-Value
Number of Observations
Observations are Investments
Did Firm Go Public?
Did Firm Go Public, Register,
Or Have Favorable Acquisition?
-0.02 [5.52]
-0.02 [0.50]
-0.02 [6.17]
-0.02 [6.13]
0.13 [11.39]
0.13 [11.18]
0.13 [11.48]
0.13 [11.29]
0.15 [2.54]
-0.19 [1.31]
0.12 [2.15]
-0.23 [1.64]
-0.003 [0.09]
-0.002 [0.07]
0.07 [2.54]
0.07 [2.56]
0.52 [3.15]
0.57 [3.55]
0.30 [9.29]
0.29 [8.96]
0.23 [7.44]
0.22 [6.98]
0.36 [7.83]
0.36 [7.75]
0.24 [5.26]
0.23 [5.04]
0.44 [7.73]
0.42 [7.27]
0.38 [6.99]
0.35 [6.41]
0.25 [2.83]
0.22 [2.50]
0.14 [1.60]
0.11 [1.24]
0.38 [6.28]
0.36 [5.95]
0.30 [5.20]
0.28 [4.82]
1.32 [17.08]
1.30 [16.61]
1.10 [14.77]
1.08 [14.27]
-0.56 [4.20]
-0.56 [4.19]
-0.43 [3.64]
-0.45 [3.71]
-14743.6
-14252.0
-15477.4
-14973.7
2409.9
2362.4
2065.5
2025.7
0.000
0.000
0.000
0.000
24,515
23,740
24,515
23,740
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.