Corporate Venture and Corporate Venture Capital K. McNally Master in Engineering Policy and Management of Technology (2001) Bernardo Rodrigues, Carlos Mora, Nuno Constantino

Agenda Definitions and Concepts Nature and Forms Venture Capital Industry Potential Benefits Case Studies

Definitions and Concepts Corporate Venture Capital or Corporate Venturing A variety of techniques used by large companies seeking business growth and expansion

Nature and Forms (1) ICV - Internal Corporate Venturing –entrepeneurial activity within the company with corporate sanction and resource commitment ECV - External Corporate Venturing –structured relationship between large firm with small, unquoted usually innovative firm CVC - Corporate Venture Capital –equity stake is taken by large firm in small, unquoted usually innovative firm

Nature and Forms (2) CVC - Corporate Venture Capital –Externally Managed (indirect) Pooled Funds (financial benefits) US increase between 1979 and 1986 up to 100 funds in 1987 US decrease from $484M (1989) to $84M (1992) because of recession Client Based/Dedicated Funds (financial+strategic benefits) US growth from 31 (1982) to 102 (1987) because of strategic unsatisfaction Advent Internation manages 14 funds (RJR Nabisco, Apple)

Nature and Forms (3) CVC - Corporate Venture Capital –Internally Managed (direct) In-House Corporate Managed Funds (strategic, structured, may involve direct support) 1990/2000 ABB, AT&T, Intel, SmithKline Beecham Ad-hoc/One-off Investments (strategic, unstructured/opportunistic, may involve direct support) 1980/1990 Exxon made, Apple received 1990s investments by 5 largets electronics and 10 largest pharmaceutical corporations in US

Venture Capital Industry (1) Venture Capital Funds –In USA focus on TBFs versus science based projects –In UK tend to be reluctant in TBFs –Barriers: the rigorous investee selection process –Implications: move away from early stage deals Business Angels –invest small amounts, usually in startups

Venture Capital Industry (2) Public Markets –Disadvantages: High fixed costs in underwriting, accounting fees and printing costs criteria's for listing imply sufficient size and a trading record

Potential Benefits Large Firms Training –junior, middle and (“therapy” to) senior management New Market –new products, services and new technologies $$$$$$ –less costs, less costs R&D and capital gains Fundamental reasons for CVC: Flexibility, adaptation and innovation. Empirical data

Potential Benefits Small Firms Financial benefits –Initial funding to investigate –Profits insufficient to meet capital requirements –Survival Barriers to growth

Potential Benefits Small Firms Strategic benefits –Management assist (Short term problems, recruiting, corporate assist) –Mentor or confidant - social or supportive role –Strategic network (tax lawyers, patent agents…) CVC gives small firms the necessary structure to compete in the aggressive market

M£ Recession (…) Venture capital depends on the alignment of incentives to VC Investors, V capitalists and Entrepreneurs Potential Benefits Independent Venture Capitalists

Levels of CVC activity - USA Well-established and widely accepted Less concern with acquisition and more focus on strategic collaboration Trend to start in externally funds and move to direct investments Indirect CVC: 100 US firms with $413 million

Levels of CVC activity - USA Dedicated funds are increasing 31 firms (1982) to 102 in 1987 ex: Monsanto with $50 million Internal management programmes are common 72 US firms + 27 foreign investing $500 million Several hundred of adhoc invest. each year Digital Equipment, Compact Spin-outs are flourishing

Levels of CVC activity - UK Extremely low level of investment of major corporations in CVC Indirect CVC are increasing at low rate Foreign firms like Elf Aquitaine and Molson Companies (in Alta-Berkeley Lmtd) Internal managed funds represent a low amount Pilkingston’s Rainford VCF with £2,5 million

Reasons for underdeveloped nature of UK CVC Lack of motivation of large companies predilection for alternative strategies concentration on core business organisation, structure and culture Lack of motivation of small companies Entrepreneurs are not aware of CVC Loss of identity and ownership Lack of investment opportunities Reluctance of sacrifying secure jobs Information gap

Corporate Venture and Corporate Venture Capital