Comment by James Mawson, editor in chief, Global Corporate Venturing
What are the limits to the CVC industry? The conclusion seems to depend on the types of shareholders controlling the executives allocating resources to the innovation tool.
When families get involved in corporate venture capital (CVC) investments, success follows. When passive institutional investors get involved, however, firms can cut their CVC investment.
Family-owned corporations with CVC units add more value to their portfolio companies. These portfolio companies are 4.3 percentage points more likely to have successful exits, better market performance after initial public offerings, and more valuable patents after those IPOs.
Family-owned corporate ventures are also more likely to “generate shareholder value for their parent companies” than those not owned by families and produce more patents, according to academic research by Mario Daniele Amore of Bocconi University, Samuele Murtinu at Utrecht University and Bocconi’s Valerio Pelucco.
They used an Eikon dataset of 8,942 US-based venture capital deals from 2000 through 2017 made by 306 parent companies. About a third (2,516) of the deals, worth in aggregate $12.4bn, had a family-owned parent company involved. The researchers defined family-owned parent organisations as those with at least a 5% or higher equity stake owned by family, including firm founders or their descendants.
“Collectively, our findings are consistent with the view that family control entails a mix of risk mitigation and long-term preferences beneficial for venturing activities,” the authors said. During the 2008 financial crisis, families invested twice as much as non-families and made more deals during that time period. “These findings suggest that families’ desire to maintain control and their long-term horizon improve the responsiveness of their firms to hard times,” according to the paper.
This seems to make sense given academics Gary Dushnitsky and Michael Lenox had previously found corporations with CVC units enjoyed a significant increase in their own innovation output and higher firm value while other research led by Thomas Chemmanur at Boston College showed CVC-backed startups are more innovative than independent venture capital-backed startups and access the equity market at an earlier stage in their life cycles and obtain higher IPO market valuation. [See related article, The great Spac mania, by Kaloyan Andonov].
However, Xuan Tian at Tsinghua University, one of Chemmanur’s co-authors, has more recently asked: “Why do not all [publicly-listed] firms establish CVC programs and make CVC investment?”
He and Kailei Ye at University of North Carolina at Chapel Hill point the finger at institutional shareholders, such as pension and mutual funds. “An increase in passive institutional ownership leads to a reduction in the firms’ CVC investment propensity and CVC portfolio size.
“Specifically, a one standard-deviation increase in a firm’s passive institutional ownership leads to a 5.7% decline in the probability of making CVC investment and a 9.5% decrease in the firm’s CVC portfolio size… [as] firms actively write off existing startups in their portfolios.”
This can be considered a good thing if these CVC units were underperforming. Xuan and Kailei Ye at University of North Carolina at Chapel Hill warned of “a dark side” of CVC if corporations “overinvest in early-stage startups and create managerial agency problems, which could destroy shareholder value”.
The paper added: “We find that passive institutional investors induce firms to cut CVC investment in startups that are unrelated to the firms’ core business and are of low quality (evidenced by their low innovation output and eventual successful rates).
“The negative effect of passive institutional ownership on CVC investment is more pronounced if the firms have poor past track record on CVC investment. By doing so, passive institutional investors enhance firm value in both the short run and the long run.”
So how to square the two papers? Partly it is about finding and engaging the right managers and different approaches, whether more personally involved family owners or more passive institutions tackling managers to act in shareholders rather than own interests, can be helpful.
Ultimately, however, efficient allocation of resources to innovation is hard to do well.
As Lee Sessions, executive-in-residence at Global Corporate Venturing (GCV) and former managing director at Intel Capital, the CVC unit of US-listed chip and data company Intel, for almost 20 years said: “For years we have heard the corporate venturing debate about success metrics. No more ‘either / or’, CVC programmes are expected to earn financial returns and corporations are asking their CVC teams to demonstrate strategic impact.
“They have to attract the best startups and help capture insights and value to impact corporate strategy and growth.
“CVs and their portfolios contribute emerging market, technology, business model insights and innovative product ideas. For the best startups, investment capital is accessible. Startup founders ask: ‘Which corporate investors deliver the best value beyond money? What are the best practices to unleash startup innovation and tap into corporate expertise?’
“Achieving the goals of startup founders and corporate parents requires collaboration among CV teams, business units, innovation, R&D and other functions in order to deliver the best value to portfolio companies and to accelerate the strategic impact of CVC programs.
“Research by the GCV Institute shows that successful corporate venturing programmes build mutually beneficial partnerships with these teams to achieve business unit and corporate objectives. CVs and their portfolios contribute emerging market, technology, business model insights and innovative product ideas, while leaders in business units (BU), innovation, R&D and other functions provide market, technical domain and operational expertise and customer access for scalability.”
Nearly two-thirds (65%) of those 100-plus CVC managers surveyed by GCV last year said their corporate venturing units collaborate closely with the corporate M&A division in identifying and buying companies, while almost a quarter (24%) said CVC was a “critically important” way to enhance R&D.
And the broader argument to do something has been clearly won. Four-fifths of the Fortune 100 largest listed corporations in 2020 had corporate venturing programmes, according to GCV Analytics.
This growth from less than a third in 2010 and about 10 at the turn of the millennium and the height of the dot-com boom.
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