Venture Capital Initiative, Stanford Graduate School of Business

Corporate Venture Capital:

Learnings from
74 In-Depth Interviews

Ilya A. Strebulaev Amanda Wang

Graduate School of Business, Graduate School of Business,
Stanford University, and Stanford University
National Bureau of Economic Research

October 2021 1
1 Introduction
2
Introduction
Corporate venture capital (CVC) has been steadily rising on
the global investing stage. However, little is truly known
about how CVC units operate. The diversity of these units
makes traditional survey methods less effective at
capturing patterns and differences.

We interviewed senior CVC professionals of S&P500

companies and identified 94 CVC units*. Of these 94, we
captured 74 firms, or 78% of all active CVC units in the
S&P500. The average interview lasted 42 minutes and
78%
covered 45 questions. We sincerely thank all participants of active S&P500 CVC
for their time and insights. units interviewed

*Full list of the CVC units in S&P500 can be found in the Appendix

CVC units are incredibly different from one another. 3

Interview Method and Protocol
Interview Protocol
Video interviews
Closely followed pre-determined protocol
Flexibility to consider cross-sectional
variability in responses for a detailed
understanding of the internal operations
A response rate of 78% is significantly higher
than that of traditional surveys, meaning less
sensitivity to self-selection bias in our results
Post-Interview Coding Protocol
Careful coding with numerical, dummy,
Likert-type scale variables, and raw text-
entry
Three independent coders, two of whom were
not present during interviews, with
independent reconciliation. Pair-wise
agreement among coders is 97%
4
40%
CVC Parent Industry Comparison:
S&P500 Sample CVC Parent vs. S&P500
30% 31 31
INDUSTRY CLASSIFICATIONS FROM THE GLOBAL
INDUSTRY CLASSIFICATION STANDARD, 2021
25

20%
20
19 19
16
14 Similar to surveys of institutional
13
10% 12
venture capital (IVC), information
technology (IT) comprises the largest
0%
sector of the CVC interview
participants' parents.
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Companies in the IT, Finance, and Healthcare sectors are more likely to start CVC units. 5
 CVC Geography
30%
50% 27
43 24
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CVC Unit Headquarters S&P500 Parent Headquarters

CVC units are disproportionately located in California. 6

CVC Geography
Location Relative to Parent Company

72% of CVCs are headquartered in the same state as their

parent HQs

66% of CVCs are within one mile of their parent HQs

26% of CVCs are more than 600 miles away from their
parent HQs

Is it more efficient for CVCs to be closer or farther away

7
from their parent companies?
2 CVC Objectives
8
 Strategic vs. Financial
When we were founded, measures of success were one hundred
50% percentstrategic. In fact, to enforce this point, my CFO said I don’t
50
even want you to financially track these investments – I’ll write
every investment off as an R&D expense the day you close the
40% transaction."
- Midwest CVC

30% Ninety-plus percent of the time, it’s the same set of companies
that drive massive change in industry and also derive the financial
gain. You can almost think of the financial performance as a signal
20% 22 of whether it’s strategic or not."
- Finance CVC
16
10% We’re highly focused on the strategic side of the spectrum. We
11 want them to have a positive return and we do measure the IRR but
1 the corporate venture activity that we pursue is really intended to
0% further our parent's strategic priorities."

- IT CVC
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Do these strategic goals conflict with

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financial performance?
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Most CVCs have strategic mandates from their parents. 9

Objectives Horizon

Short term 75

This is where CVC is so funny to me because

to really do true innovation, you have to have
a super long-term horizon, but in reality, we Short to medium term 3
have a super short-term horizon. The long
term is sacrificed for those short-term
needs." Medium-term 7
- Consumer CVC

Medium to long term 5

Do parents shoot themselves in

Long term 10
the foot with short-termism?
0% 25% 50% 75%

Short-term, often quarterly, evaluations of the CVC units are in stark contrast to the 10-
10
year horizons of IVCs.
 Where do CVCs invest?
We asked interviewees how they allocated funds among three
buckets:
the core of what their parent currently does
adjacent markets to the parent's current operations
new and exploratory domains

The most consistent investment bucket is in the adjacent

markets. A third of the sample does not invest in the core,
perhaps for fear of interfering with internal R&D efforts.
Furthermore, 20% do not invest in new domains, countering
the traditional venture capital (VC) investing strategy.

Is investing in a parent's adjacent space efficient? Is it driven by short-term horizons? 11

 O

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12
 Limited Partner (LP) Positions
50%

40% 43
In total, 43% of CVCs will not consider
taking LP positions. 30%

20% 24
For those who do, the rationale is: 19
Exposure to broader geographies 10% 13
Exposure to novel industries 1
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Most CVCs do not see the value in broadening their exposure by investing in IVCs. 13
3 CVC Fund Structure and
Relation to Parent
14
 Stand-alone fund structure: 5 CVCs, or 7%
CVC is a separate legal entity managing an external investment fund for its parent
company, similar to a traditional general partner-limited partner relationship.

Multi-year commitment from the parent: 26 CVCs, or 35%

The parent has earmarked, announced, or allocated a specific multi-year fund
arrangement to its CVC unit.
Investing directly
off the parent's
balance sheet
Single-year commitment from the parent: 16 CVCs, or 22%
The CVC unit and its budget are reevaluated annually by the parent company.

Opportunistic: 27 CVCs, or 36%

CVC units without an approved budget who must seek budget allocation for each
investment they wish to make, on an ad hoc basis.

Most CVC units lack full-scale, long-term commitment from their corporate sponsors. 15
 To whom in the parent CVC units report
Reporting Structure
Chief Strategy Officer 29
We all report to the person who started the group who
has since moved on to be head of [different
CEO 15
department]. The only reason we report to [this person]
is because s/he is the one who started the group, but
Head of CorpDev 13
then a year after, she got promoted to head a bigger
division."
CFO 12 - CA CVC

Head of BusDev 10 I can’t overstate how important it is at the end of the

day to have the right internal support for the activities
Head of Innovation 10 because it’s those stakeholders that are the gating
item if you deliver strategic value or not. You could
COO 5 have the best idea of strategic value but if that
stakeholder isn’t comfortable or dubious about your
Other 6 intentions or just doesn’t like you, they’ll find every way
0% 10% 20% 30%
to block that sort of success."
- Industrials CVC

In many cases, CVC units have not found a natural home within their parent. 16
 Two-Stage Deal Approval Process
Step 1: Internal CVC Team Step 2: Investment Committee (IC)
93% of CVCs have an investment committee
The internal investing teams must agree on
comprised of parent company executives.
what to bring forth to their investment
82% of CVCs consider it a real authority, rather
committee.
than a rubber-stamp vote.

Unanimous 29 Unanimous 49
Consensus 21
Majority 19
Consensus 10

Head of Ventures 19 Majority 25

Lead Partner 8
Executive Sponsor 4 Other 16
0% 10% 20% 30% 0% 10% 20% 30% 40% 50%

Internal Voting Rules IC Voting Rules

17
 Who's on the IC?
CFO 54
CEO 38 The average IC has
CVC Rep. 34
four members.
Business Unit 26
Head of Legal 16
Head of Strategy 12
R&D Exec. 12 27%
CTO 11 of CVCs feel one vote on the IC is the
pivotal decision maker, rather than a
Head of CorpDev 9
true consensus or vote.
COO 7
President 5
0% 20% 40% 60%

In most CVCs, parent-controlled investment committees must approve of every deal. 18

Does your parent understand venture norms?
No, they don’t understand follow-on
investments, not having a ROFR, why you
wouldn’t put handcuffs on a startup if
we’re helping them... to be honest, they
don’t really care."
- CA CVC
Yes. I don’t know that this is the case in
another industry, but our senior execs are
regularly exposed – 50% of the pipeline is
through M&A if not more than that. So they
have a very active evaluation activity which
fills that pipeline. And then venture funds
make it their business to wear their sale-
side hats any time they meet with a
potential buyer, so there’s a whole rhythm
to this that is well-established."
- Healthcare CVC
Is it optimal for parent company executives to approve and veto deals?
I think they understand better now than they
did four years ago when we were trying to
61%
explain what venture investing is. Now,
whether they understand it well enough to
weigh in on investment decisions or things like
that, I have my doubts. But they seem to
understand venture investing and even the of senior
why behind doing it a little better now than
four years ago."
executives feel
- Southern CVC that their parents
do NOT
Maybe they understand, but quite
honestly, if something came to us understand the
completely fresh with a 6-week deadline,
unless it was so obvious I could get all norms of the
hands on deck support, I wouldn’t ruin our
reputation by pretending we could do it. I’d
venture space.
say this is for someone else."
- Industrials CVC
19
 Business unit requirement to go ahead with a deal
Business Unit Sponsorship
Required and fully responsible ex-post 15

Required 29 Business units consistently play a

large role in the decision-making
and deal process for CVC units.
Involved in diligence/approval 28

Only 14% of the CVCs act

Involved in relevant deals 14 independently of their parent
company's business units.
Not involved 14

0 10 20 30

CVC units are better positioned to help their parent companies in core and
20
potentially adjacent but not truly disruptive domains.
4 Human Capital and
Compensation
21
CVC Team
12% of the CVCs do not have anyone
Composition 3
working full-time on ventures.

The average CVC team has nine 4 CVC units have 10 portfolio
1
people, including six investment companies per each senior
team members. investment team member.

2 40% of CVC investment 5 34% of the CVCs have a business

professionals had previously development team member
worked in a non-venture role at dedicated to aiding their portfolio
their parent company. companies post-investment.
22
Human Capital: CVC vs. IVC Practitioners
Comparison between 306 CVC professionals and 336 matched partners at IVC firms

CVC IVC

15% have past CVC experience 3% have CVC experience

29% have IVC experience
15% have entrepreneurial experience
61% have an MBA degree
17% have a non-MBA graduate degree
The average practitioner has spent six
years at his or her CVC unit
40% have past IVC experience
28% have entrepreneurial experience
47% have an MBA degree
12% have a non-MBA graduate degree
The average practitioner has spent eight
years at his or her firm

CVC and IVC human capital are very different. 23

Human Capital: CVC vs. IVC Firms
Comparison between 74 interviewed CVC units and 74 randomly matched IVCs
CVC
Average CVC unit has six full board seats
46% of CVCs have at least one team member
with past CVC experience
54% of CVCs have at least one team member
with IVC experience
40% of CVCs have at least one team member
with entrepreneurial experience
45% of CVCs have at least one team member
with a top undergraduate degree
IVC
Average IVC has 14 full board seats
11% of IVCs have at least one team member with
CVC experience
80% of IVCs have at least one team member with
past IVC experience
64% of IVCs have at least one team member with
entrepreneurial experience
63% of IVCs have at least one team member with a
top undergraduate degree
24
Compensation
Only 15% of the CVCs have a carried interest
profit-sharing arrangement. The other 85%
receive a standard corporate salary and bonus.
Only 31% of the CVCs fund performance
influences bonuses.
Performance influence on bonus
Synthetic carried interest 15
0% 10% 20%
Do CVCs have the right incentives to
invest in bold, high-growth companies?
Do CVCs struggle with retention,
especially those with a successful record?
For leaders of CVC units, this is the biggest
challenge: trying to convince the organization you
need to have some kind of shadow carry or
something else to attract talent. If there’s
31 something that’s really kept me up from a
business operation standpoint, I don’t have the
tools today to retain my talent.”
- Finance CVC
I think fundamentally to attract quality talent, you
need to have that independence and rigor, not just
glorified business development function. I don’t
think we’re going to get there, but in terms of
30% 40%
compensation and carry-like structures, to attract
the best people, you need to have this strong VC
thinking."
- CA CVC 25
5 Relationships with
Startups
26
Commercial Agreements
For 32% of the CVCs, commercial agreements between startups and parents are
important, and 30% actively sign them after the deal.

Required for deal 4 100% 9

Expected 27 70+% 21

Actively seeking 32 30-70% 21

Secondary consideration 30 Up to 30% 8

No requirement 7 None 1
0% 10% 20% 30% 40% 0 5 10 15 20 25

Required Pre-Investment Signed Post-Investment

27
 Board Representation Preferences
40% 38 50%
46 The most important is getting
board visibility because we are
40%
30% strategic – we want to learn and
24 31 know what is going on. Initially,
30%
19 the board observer was very
20%
15 important because being a big
20%
16 public company, we thought let’s
10% take that seat. But then we
4
10%
6 realized that as a board
1 observer, you still don’t get
0% 0%
control. Of late, we started

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important."
Full Board Seat Board Observer - CA CVC

CVC units differ greatly concerning board memberships: some strongly prefer full voting
28
representation while others are even indifferent to board observer positions.
 Only lead 2 Deal Terms
Prefer to lead 8
92% of CVCs always require pro-rata rights.

Indifferent 33

12% of CVCs require a Right of First Refusal

Prefer to follow 42 ("ROFR").

15
Only follow
50% of CVCs require a Right of First Notice
0% 10% 20% 30% 40% 50% ("ROFN").

Lead or Follow Preference

55% of CVCs require other, non-standard
Does the desire of many CVCs to get preferential deal terms.
terms make them lose more competitive deals? 29
 The percentage of portfolio companies eventually
acquired by the parent company Acquisitions
50% 48

40% 39
78% of CVCs never have or do not
30% intend to have their parent company
acquire any portfolio company.
20%

12
10% 8
2
0%
Over 40% 20-40% 10-20% Up to 10% None

Attitudes toward buying portfolio companies contradicts an existing CVC reputation

30
among entrepreneurs.
6 Impact of COVID-19
31
COVID-19 Impact Positive 8
CVC units report resilience to COVID
macro shocks.
Neutral-to-positive 35
I hate to say this but for us, COVID has been
quite positive. Our business has soared during
COVID. Trends we're looking at are only Neutral 44
accelerating.”
- East Coast CVC
Neutral-to-negative 13
COVID has made it easier in terms of sourcing
deal opportunities. It's expanded our geographic
reach, which has been really helpful."
Negative
- Finance CVC

0% 10% 20% 30% 40% 50%

All positive changes for our investments. Better
deals, higher valuations -- it hasn’t hurt in any
way." CVC units report resilience similar to that
- CA CVC reported by IVCs. 32
Concluding Observations

Before we commenced our interviews, we knew CVCs

were different from one another. But we were still
surprised by the diversity and differences we discovered.
Many CVC policies are inconsistent with the principles the
most successful VCs have practiced.

33