How to Optimize Corporate Venture Capital Investments

Title:
Corporate Venture Capital As an Exploratory Mechanism

Authors:
Gautam Kasthurirangan and Daniel C Robeson  

Publisher:
Rensselaer Polytechnic Institute Working Paper

Date Published: 
2008

Companies, with few exceptions, become more bureaucratic and less innovative as they grow. To counter this tendency, many firms, including the Intel Corporation and IBM, have developed internal corporate venture capital (CVC) arms to supplement their internal R&D efforts. The idea of CVC is to identify and invest in innovative startups, with an eye toward licensing their new technologies or buying the promising companies outright. But does this practice work better than investing more heavily in internal R&D? The authors of this paper suggest that the two approaches should not be mutually exclusive, and that CVC is most effective when companies start with a strong R&D program. Using patent filings as a proxy to measure innovation, the authors conclude that firms with robust R&D teams are better able to assimilate and support the learning gleaned from working with startups funded through a firm’s CVC efforts. They also found that making small CVC investments in a large number of firms was more fruitful than making larger investments in fewer firms.

Bottom Line:
Corporate venture capital efforts are most successful in firms with strong internal research and development programs. Managers tasked with evolving a product line or uncovering new businesses should keep an eye on both internal R&D and external opportunities at startup firms making products that could be licensed or bought.