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How do corporate venture capitalists do deals? An exploration of corporate investment practices

With academic interest in the process considerable, this study documents and explains aspects of CVC investment that diverge from standard practices of independent venture capitalists.

Author(s): Professor Vangelis Souitaris - Cass Business School; Dr Stefania Zerbinati - Cass Business School;

Corporate venture capital (CVC) can be simply defined as the minority equity investments by established corporations in privately held entrepreneurial ventures. While independent venture capital (VC) funds declined during the 2000 to 2010 decade CVC saw an upswing, sparking increased academic interest in the process.

CVC represents an important and growing source of capital for entrepreneurs. The aim of this study was to investigate how CVCs invest and whether they do deals differently to independent VCs.

Using a multiple case study design, the researchers conducted an intensive data collection process which took place over a decade and comprised of two sets of data. Six case studies were conducted in 2002 and seven in 2011-12 to ensure that the results were broadly replicable across two temporal ‘waves’ of CVC. The dataset included 45 interviews with 23 senior CVC executives, complemented by archival data and independent expert validation. The data from the CVC case studies was compared to the extant literature on venture capital investment.

Eight ‘corporate investment practices’ that are unique to CVCs and not associated with independent VCs were identified.

They are:

  • Referrals from business units – although both CVCs and VCs rely on referrals from trusted external sources, it emerged that CVCs also receive referrals from business units within their parent corporation. These referrals are regarded as trustworthy, requiring less due diligence, and can be progressed very quickly.
  • Strategic potential for the parent – VCs assess investments on the basis of their financial potential. CVCs also consider the strategic potential for their parent.
  • Feedback of information to the parent – CVCs feed back to their parent on both focused matters relevant to a specific business unit, and on a broader strategic basis.
  • Internal technical due diligence – VCs tend to employ external consultants to perform technical due diligence. CVCs often rely on their own corporate business units for this task. This view is useful in advising on what is compatible with the parent company’s technology.
  • Securing a sponsor – although not always a formal requirement, CVCs sometimes secure a deal-specific sponsor within their parent corporation in an area where there is strategic value.
  • Syndication with complementary funds –Unlike VCs, CVCs do not focus their networking efforts on similar entities but prefer to syndicate with independent VCs, which offer complementary benefits and resources.  Other CVCs bring their own strategic interests with them, which can create conflict.
  • Corporate involvement in deal approval – CVCs tend to involve their parent organisation in the approval of a deal, whereas VCs tend to have the autonomy to make the final decision.
  • Linking the venture to the parent – CVCs facilitate the investment entity’s access to the parent company’s resources, such as technical and marketing capabilities, to help improve its knowledge and reputation. VCs do not offer such resources in this manner.

We see that these practices reflect pressure on the CVC units for strategic fit and engagement with the corporation but also an opportunity to utilise parental resources. Not all units perceived these pressures and opportunities to the same extent however. CVCs vary their emphasis on corporate investment practices between two distinct investment logics. Those that align with the norms of the parent to a greater extent follow what this study terms an ‘integrated’ investment logic. Where there is less parental pressure, less desire to utilise parental resources, and where there was greater alignment with VC norms, an ‘arm’s length’ investment logic could be said to be observed.

CVC managers often do not recognise the differences in investment practices between CVC and VC funds, or choose to downplay them. This study concludes that by understanding these differences set out above, CVC and VC practitioners may benefit from improved understanding of each other’s practices, and potentially from improved collaboration.

A peer-reviewed edition of this research paper is available for download at the link below. The final version was published in Strategic Entrepreneurship Journal.

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