Startup Intellect

Designing Corporate Venture Capital

Successfully
 Startup Intellect is a management consulting company on innovation. We partner with clients
from private, public, and non-profit sectors who target innovation as a top priority strategy to
identify the highest-value opportunities, address their most critical challenges, and transform their
enterprises. Our customized and rigorous approach combines deep insight into the companies'
dynamics, markets, and innovation opportunities. This ensures that our clients achieve a
sustainable competitive advantage.

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Table of Contents

Executive Summary 4

Key Milestones of Corporate Innovation 5

Corporate Venture Capital in Taxonomy of Corporate Innovation 8

A Cyclical Business: Evolution of Corporate Venture Capital 9

New Players and Fast Growth: Recent Facts 11

Key Success Factors of the Performance in the CVC Game 13

How to Design Corporate Venture Capital Successfully 18

Note to the Reader 23

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Executive Summary
Corporate and innovation terms are not an oxymoron. Corporate companies have been innovating for
decades but have more competition from various fronts today. Corporate innovation is an evolving concept.
For more than a century, corporate innovation has evolved with six critical milestones in this journey. The
current juncture is the innovation era of business platforms like Amazon, Apple, and Google. Corporate
venture capital(CVC) is the outcome of corporate innovation's evolution and one of the essential instruments
in the toolbox. Our corporate innovation taxonomy covers six pillars in Startup Intellect, and external
corporate venturing includes corporate venture capital.

 R&D and innovation labs

 Internal corporate venturing and intrapreneurship
 External corporate venturing
 Open innovation

The evolution of CVC is the history of boom and bust cycles. Corporations typically enter the corporate
venture capital market after the independent sector showed signs of success. All too often, however,
corporations overbuilt capacity without carefully thinking out the implications. This strategy invariably leads
to retrenchment. As a result, we have been in the fourth cycle since 2000 globally.

CVC investment has grown globally and is very attractive for new entrants. On the other hand, the CVC life
span is not very long. CVCs are increasing its presence in venture capital investment, with 25% of the entire
VC space. CVC's focus goes to invest in later-stage and mature startups. 60% of CVCs make ten or fewer
investments in their whole life span. Banking and insurance is the most attracted industry to establish a CVC
unit. IT and software industry is the second one.

After reviewing numerous CVC cases and academic research, we suggest four critical success factors for
CVCs.

 Manage the forces of CVC cycles

 Focus on strategic objectives with the balance of financial ones
 Align the structure to the objectives
 Build a mutually complementary relationship with startups

Starting an independent venture capital has its challenges. Corporate venture capital may have less difficulty
in some areas. However, there are problems for a CVC in identifying and sticking with long-term objectives,
developing collaborative governance, and mutual value-adding terms between the startup and the parent
company. This challenge is the main reason for the short life span of most CVCs. They should not imitate an
independent VC's investment focus and operational processes. Otherwise, encountering negative
consequences of CVC cycles is inevitable. In our CVC foundation approach, we suggest four design circles;

 Design Circle 1 - Objectives: A robust strategic focus with necessary financial objectives
 Design Circle 2 - Structure: An aligned structure to the objectives
 Design Circle 3 - Operation: An operation design that makes collaboration, synergy, and due
diligence process effective
 Design Circle 4 - Performance: A performance monitoring that allows improving short term
performance in a long term horizon

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Key Milestones of Corporate Innovation
Today some people view corporate and innovation terms as an oxymoron. In our opinion, they have never
been. Corporate innovation is an evolving concept. Yesterday, it was different and bred IBM, 3M, and
Xerox's numerous innovative products. Today it is Amazon's AWS or Apple's iPhone. Tomorrow, it will be
pretty diverse than today. In this transformation, technologies, players, and products are changing, and the
tools evolve. Corporate venture capital is one of the essential instruments in the toolbox, and it's transforming
as well. First, let's identify the critical milestones of corporate innovation below and in Exhibit 1.

Support Lone Innovators: Industrial revolutions happened thanks to breakthrough innovations in high-impact
commercial areas. The first industrial revolution, the 18th, and beginning of the 19th century, emerged with
the steam engine and textile production inventions. In this period, wealthy business people or financial
institutions supported or recruited skilled engineering inventors. The second industrial revolution, the 19th
century, proliferated electricity, steel production, and oil usage, and the risk capital notion had improved. For
example, Thomas Edison, the pioneer of the incandescent light bulb, conducted early-stage experiments with
capital from some of the leading financiers, including J.P. Morgan. This period was the era of "lone
inventors."

Build Corporate Labs: In 1942, for the first time, the term "creative destruction" has been used by Joseph
Schumpeter to identify the evolutionary process of continuous innovation. After World War II, mainly in the
US, the third industrial revolution created electronics, telecommunications, and computers. Innovation leaders
were corporate R&D houses like IBM, Bell Laboratories, Xerox Parc, and DuPont. They leveraged market
dominance and invested a cascade of cash into their labs and research teams. This period was the era of
"corporate labs." They nurtured a continuous product development pipeline. Some authors called this
innovation process a "Linear Model."1 All in the same company, one does research, research then leads to
development, development to production, production to marketing.

Exhibit 1
Key milestones in corporate innovation
1880s-1940s
Talented engineer entrepreneurs supported by wealthy people and companies
Support Lone Innovators
1940s-1970s
Deep-pocket corporate innovators in a linear innovation model
Build Corporate Labs
1970s-1980s
Triumph of the venture capital industry and the birth of technology startups
Inspire from VC
1980s-1990s New tools inspired by startups like corporate venturing and corporate entrepreneurship
Develop New Tools
1990s-2010s Inevitable disruption by startups, the collaboration between the corporation and Startup
Open The Innovation 2.0 with new tools of open innovation
After 2010s The most valuable companies are tech startups of yesterday. They exploit their market
Leverage Business Platforms dominance and financial power in every corner of disruption

Source : Startup Intellect Analysis, Harvard Business Review (2012) New Corporate Garage, Michael A.Cusumano (2019)The Business
Platforms

1 Kline, Rosenberg (1986) An Overview of Innovation

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Inspire From VCs: While the corporate R&D mindset had some mixed commercial outcomes, a new chapter
is written by venture capitalist backed companies like Fairchild, Intel, Apple, Sun Microsystems, Genentech,
others by the end of the 1960s and 1970s. Unlike the R&D focus, venture capital funds were looking for
promising ideas with high market potential instead of investing in research. Tom Nicholas' book2 and the
documentary "Something Ventured" explain the birth of venture capital.

With modern venture capital, risk capital has become a structured organization, process, a "hits" business
where exceptional payoffs from a few investments in an extensive portfolio of startup companies compensate
for the vast majority that yields mediocre returns or fail; this is called "long tail" payoffs. This success impelled
corporate executives to question their R&D approach and triggered corporate venture capital funds' birth.

Develop New Tools: In 1985, Peter F. Drucker wrote the "Innovation and Entrepreneurship" book and
defined existing businesses and new ventures as two key innovation areas. He suggested keeping innovation
efforts separate and outside of ongoing managerial business and nurture an "entrepreneurial management"
approach for large corporations. His emphasis included communication upward, advising to groom
corporate entrepreneurs with the proper support from senior management. In 1986, against the Linear
Model, an alternative one was suggested by Stephen J.Kline, "Chain Linked Model." He asserted that
innovation emerges from the interaction of multiple parties. Unlike a linear one, it has complex links and
feedback relationships between firms, markets, science, and technology systems where a single party does
not fully control the process.

New approaches to corporate innovation had emerged in the early 1980s. One of them was corporate
venturing. It was an activity that seeks to generate new businesses for the corporation in which it resides by
establishing external or internal corporate ventures3. Another one was corporate entrepreneurship, where
intrapreneurs take the initiative in the organization. According to Gifford Pinchot, writer of the
"Intraprenuering" in 1985, intrapreneurs are any of the "dreamers who do." Those who take hands-on
responsibility for creating innovation of any kind within an organization. They may be the creators or
inventors but are always the dreamers who figure out how to turn an idea into a profitable reality.4

Open The Innovation: In 2003, as depicted in Exhibit 2, Henry Chesbrough explained the old school
innovation as "closed innovation" and why it failed. Corporations needed to do more than utilizing internal
resources and capabilities. They have to collaborate with universities, startups, public companies, and other
corporations. Since its first publication, many industries have closely engaged the open innovation concept,
from pharmaceutical to manufacturing.

2 VC: An American History, Tom Nicholas (2019)

3 Eric Von Hippel (1977) The sources of innovation.
4 Gifford Pinchot III (1985) Intrapreneuring.

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 Exhibit 2
Factors of closed innovation approach’s erosion and the birth of open innovation

• Increasing availability and mobility of skilled workers in technology

• More capable universities in terms of R&D
• Proliferating of new technology hubs in other places in the world
• Growing access to venture capitalists to startups
• Constant changing conditions of corporate companies

Source : Henry Chesbrough (2013) Open Innovation, The New Imperative For Creating and Profiting From Technology

After the 1990s, as we explained in our previous insight report5, technology startups evolved into a new form,
Startup 2.0. This trend triggered new disruption threats, investment, and collaboration opportunities like
corporate accelerators and many new open innovation practices. Intel's interaction with its ecosystem and
Lucent's New Venture Group are pioneer examples of open innovation.

Leverage Business Platforms: Today, the largest corporate companies are not from oil, banking, or retail.
They are yesterday's technology startups. Google, Apple, Microsoft, Amazon, Tencent are pretty different
from old-school corporate companies. Michael A.Cusumano calls those companies "business platforms."

"These industry platforms function at the level of an industry (or ecosystem). They bring
together individuals and organizations so they can innovate or interact in ways not
otherwise possible, with the potential for nonlinear increases in utility and value."

In 2019, Amazon spent $22 Billion on R&D, which is more than many countries' total R&D spending. Those
platforms have unfair advantages in many ways, and they are entering adjacent industries and distant ones
like mobility, banking, and telecommunication. Incumbent companies in those industries do not have
disruption threats from startups and formidable business platforms.

5 Startup Intellect Insight Report (2020) Designing Corporate Accelerators Successfully

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Corporate Venture Capital in Taxonomy of Corporate Innovation
There are various definitions of corporate venturing and corporate venture capital. In our opinion, corporate
venture capital is one of the tools in external corporate venturing. Others are internal corporate venturing,
intrapreneurship, R&D, innovation lab, and open innovation. They can coexist in a single corporate
environment and a specific innovation initiative. The company should leverage them best and approaches to
accomplishing its innovation objectives.

R&D and Innovation Labs: Internal organizational unit develops and tests business models, value
propositions. Nevertheless, open innovation dominates; internal scientific research is still carried out by
industries like pharmaceuticals, electronics, and business platforms.

Internal Corporate Venturing and Intrapreneurship: Innovation initiatives leverage internal capabilities by
nurturing corporate entrepreneurship culture, processes, and governance.

Open Innovation: A synergy between internal and ecosystem player's capabilities. There are inbound
practices; IP in-licensing, idea&startup competitions, supplier innovation awards, freelance expert
involvement, outbound practices, selling a market-ready product, IP out-licensing, participation in
standardization (public standards), donations to commons or non-profits.

External Corporate Venturing: Investing, supporting, collaborating, creating financial and strategic benefits,
synergies with startups, corporate companies, partners, and competitors.

Exhibit 3
Taxonomy of Corporate Innovation for Startup Intellect

R&D and
Innovation Lab Inside Out

Corporate
Entrepreneurship
and Intrapreneurship
Internal Corporate
Corporate
Venturing and Open Innovation Outside In
Innovation
Intrapreneurship
New Business
Development

External Corporate Coupled

Venturing

Corporate Incubator
and Accelerators
Venturing Alliances
(Non-Equity Alliances, Transformational
Corporate Venture
Direct Minority Arrangements
Capital Investments, Joint (Acquisitions, Spin-offs)
Ventures)

Source : Startup Intellect Approach, Philipp Dauderstadt (2013) Success Factors in Strategic Corporate Venturing

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A Cyclical Business: Evolution of Corporate Venture Capital6
The first corporate venture funds emerged in the mid-1960s. Since then, corporate venturing has undergone
three boom-and-bust cycles that closely track the independent venture capital sector. The independent
venture capital is cyclical too. There is a supply and demand relationship between venture capital(supply)
and entrepreneur requests for investment(demand). The supply of venture capital is determined by the
willingness of investors to provide funds to startups. Investors' willingness to commit money to venture capital
funds depends on the expected return rate against other investment instruments. Higher expected return
leads to a greater desire of investors to supply the venture capital funds. However, this equilibrium generally
happens with a lag; the number of funds provided may not shift rapidly. Josh Lerner explains7;

The adjustment of venture capital funds is often relatively slow and uneven, leading
to substantial and persistent imbalances. Moreover, when the quantity provided does
react, the shift may "overshoot" the ideal amount and lead to further problems.
This cyclicality impacts CVC funds. Corporations typically enter the corporate venture capital market after
the independent sector showed signs of success. All too often, however, corporations overbuilt capacity
without carefully thinking out the implications. This strategy invariably leads to retrenchment. In our opinion,
for more than two decades, we are in the fourth cycle of boom globally.

The first wave: Traditional venture capital funds fueled the appetite of corporations. They began establishing
divisions that emulated venture capitalists. During the late 1960s and early 1970s, more than 25 percent of
the Fortune 500 firms set up such programs.

Large corporations financed new firms already receiving venture capital from independent venture capital
organizations at one end of the spectrum. At the other end of the spectrum, companies sought to promote
new ventures internally. These programs encouraged the companies' product engineers and scientists to forge
ahead with their innovations and provide financial, legal, and marketing support.

In 1973, the market for new public offerings, the primary avenue through which venture capitalists exit
successful investments, dried up as small technology stocks experienced inferior returns. As a result, returns of
independent venture funds shrank, and commitments to the independent venture capital sector fell. In
addition, corporations, in light of the declining market, began scaling back their venturing initiatives. As a
result, a typical corporate venture program that started in the late 1960s was dissolved after just four years.

The second wave: The independent venture industry's prospects brightened again in the late 1970s and early
1980s with the aforementioned innovations, like personal, computer, hardware, and software. Two regulatory
changes dramatically impacted venture capital commitments in the US, the top capital gains tax rate
reduction and eased pension investment restrictions. As a result, the flow of funding into the venture capital
industry grew, and the number of active venture organizations proliferated.

Corporate venturing increased shortly after that. By 1986 corporate funds managed $2 billion, or nearly 12
percent of the total venture capital pool. Whereas the earlier wave of corporate venturing aimed at a broad
range of investment opportunities, high-tech and pharmaceutical companies now led the charge.

6 Paul A.Gompers (2002) Corporations and the Financing of Innovation:The Corporate Venturing Experience, Startup Intellect
Analysis
7 Josh Lerner (2003) Boom and Bust in the Venture Capital Industry and the Impact on Innovation

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The boom of the early 1980s, however, was soon followed by another retrenchment. In 1987, the stock
market crashed in the US, and the market for new public offerings again deflated. This time, corporations
scaled back their commitment to venture to invest even more dramatically. By 1992 the number of corporate
venture programs had fallen by one-third.

The third wave: The venture capital industry expanded once again in the late 1990s, fueled chiefly by
telecommunications and internet-related companies' apparent successes. As rates of return on venture capital
investments rose, corporations once again became attracted to corporate venturing. These organizations
began exploring other ways to access new ideas, including joint ventures, acquisitions, and university-based
collaborations. Corporate venture programs allowed corporations to capitalize on these relationships.

The rapid internet diffusion and its power to either enhance or cannibalize "bricks-and-mortar" businesses
intensified this interest. Corporations everywhere realized that e-commerce presented both an opportunity
and a threat.

However, valuations and deal volume had inflated for independent and corporate venture capital in 1999
and 2000. The dot-com market crash ended the third bust period in corporate venture capital as well.
Corporate companies wrote down $9.5B venture-related losses alone in the second quarter of 2001.

The fourth wave: In 2014, corporate venture capital reached back pre-dot-com crash investment level($16B).
Recovery had taken more than a decade with many new entrants. Qualcomm has started its venture capital
arm in 2000. In 2007, Microsoft Ventures invested $240M for 1.6% share of Facebook for $15B valuation
with current valuation of $800B. In 2008, Google established Google Ventures. Today along with those
names, Salesforce, Intel Capital are among the most active corporate venture capital companies. Most
active CVCs are technology companies that are familiar with technology business, investing. They are looking
for strategic benefits of investments relating to their software, hardware, and other technology domains.

Currently, an upward trend is still going on. According to Pitchbook, CVC investment reached $55B in 2019,
and Covid19 does not seem to make a significant impact. In Q2 2020, the investment size is slightly larger
than in Q2 2019.

CVC history predicts a highly likely retrenchment relating to the fourth bust period globally, only we don't
know when.

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New Players and Fast Growth: Recent Facts
Since 2001, CVC investment has grown globally; the US is the pioneer, followed by Europe and Asia.
Germany, UK, Japan, and China are leader countries in those regions. As Exhibit 4 depicts, CVC is attractive
for new entrants. On the other hand, most newness indicates that the CVC life span is not very long,
elaborated in the next section.

While investment growth keeps surging, CVCs increase their presence in the venture capital investment with
%25 of the entire space. CVC's focus goes to invest in later-stage and mature startups. More than half of the
deals are later stage. According to CB Insights, the average CVC deal size is half larger than independent
VC deals.

Exhibit 4
North America leads the CVC penetration globally, and they are more active than other regions. Also, there are
many new entrants to the CVC market in the last five years that shows the corporate appetite.
Regional Distribution of CVCs
57%
Age Breakdown Brackets of CVCs
Total # of CVCs : 787
43%
43%

29%
23% 24% 22%
19%
11%
8% 6% 7%
2.1% 1.6% 0.7% 3%
0.7% 0.3% 0.1%

North Europe Asia South Ocenia Africa 0-5 6-10 11-15 16-20 21-25 26-30 30>
America America Number of Years Since Foundation of CVC
Share in # of CVC Share in # of Investment

Global CVC investment grew faster than the VC ecosystem and did not have a significant hit from Covid19. Also,
for capital size, the majority of the interest is the later stage, the majority is the early stage in terms of deal count.

Global CVC Investment ($B) and CVC CVC Investments Breakdown Based on
Participation in VC Ecosystem Deal Stage

60 55.6 57.1 50% Other, 11.9% Other, 10

50 40% Later Stage,
36.2 31.9% Later Stage,
40 32.1 30.8 31 30% 53.9
30 25%
21% 21% 23% 20%
20 19% Ealy Stage,
10% 56.2% Ealy Stage,
10
36.3
0 0%
1 2 3 4 5 6 Share in Invested Capital $ Share in Deal Count
Series1 Series2

Source : CB Insights, Pitchbook, Corporateventuringresearch.org, Startup Intellect Analysis

As demonstrated in Exhibit 5, more than 60% of CVCs make ten or fewer investments in their entire life span.
That means the majority of the CVCs do not have the intention to cultivate a crowded investment portfolio.

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Banking and insurance is the most attracted industry to establish a CVC unit. Citi Ventures, American
Express, and Royal Bank of Canada are active investors with more than 50 investments. The IT&software is
the second most dynamic one in setting up a CVC. Microsoft, Google, and Salesforce are also very active.
Besides, Comcast, Bennet Coleman, and Maven are leading investors in the media industry.

Intel, Google Ventures, and Softbank are the most exit recorded CVC funds. Intel has 403, Google Ventures
152, and Softbank 98.

Large CVCs dominate the investment environment. For example, 12 CVCs, who have 50 or more exits, count
around 33% of the total number of exits of more than 700 CVC funds.

Exhibit 5
The majority of CVC goes up to five investments, while Intel Capital and Wayra are the most actives ones. Also, the
banking and insurance industry is very interested in set up a CVC by IT&Software.

CVC Breakdown Based on Number of CVC Breakdown Based on Home

Investments Per CVC Industries of Corporations
1 19.34%
2 9.23%
42.9% 3 9.06%
4 7.84%
5 7.67%
6 5.75%
7 5.57%
8 5.40%
9 5.23%
10 4.88%
11 2.79%
12 2.61%
13 2.09%
16.2% 14 1.74%
14.9%
15 1.74%
11.2% 16 1.74%
17 1.39%
7.0% 18 1.39%
4.9%
19 1.22%
1.6% 1.2% 20 1.05%
21 0.87%
0-5 6-10 11-20 21-40 41-8081-150 151-300 300 and 22 0.70%
more 23 0.70%
Number of Investments Per CVC

Source : Crunchbase, Startup Intellect Analysis

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Key Success Factors of the Performance in the CVC Game
There have always been critics from independent venture capitalists and industry analysts toward
corporations who get into the venture capital market when the market is at its peak and exit that market
when returns decline. "Dump money" is recalled to articulate this distaste; acclaimed VC Fred Wilson quoted
this term again in 2016.

Corporate investing is dumb. I think corporations should buy companies. Investing in

companies makes no sense. Don't waste your money being a minority investor in
something that you don't control. You're a corporation! You want the assets? Buy it.
The average CVC life span comparing to independent venture capital funds intensifies this perception. The
average tenure of a CVC program is 3.8 years8 – half of the independent venture capital funds' average life
span. However, according to the same research, the average CVC life span is getting longer, coming from
2.0 years. As we presented above, more than 50% of CVCs have been in operation for five years or longer.
A shorter life span does not mean less successful CVC investing capability directly, but it's essential to
understand their life cycle. Our study identified four different success factors for CVCs.

Key Success Factor 1: Manage The Forces of CVC Cycles

The main reason for the shorter life span of CVCs is the difficulty of avoiding the business's cyclicality.
Although he focused on internal corporate venturing, Stanford University Professor Burgelman manifests
cyclicality in his study too. According to him, there are two indicators to determine the locus of a cycle.

 Prospect of the mainstream business: Whether the mainstream business is sufficient to meet the
company's profitable growth objectives or not.
 Status of uncommitted resources: Whether the company has uncommitted financial resources
assigned to corporate venturing.

Also, there are four forces to determine the length corporate venturing cycle.

 Annual budgeting and three-year rolling budgets: Budgeting may contribute to the cycle by
establishing a one to three-year time horizon, which puts perverse pressures on ventures to "grow big
fast."
 Risk of staying too long for executives: Ventures need ten to twelve years before the investment
return. However, staying in business for a long time for an executive carries severe career risks if the
venture becomes unsuccessful. As a result, they may consider staying that long unattractive.
 The career path of executives: Frequent changes in the executive sponsor were detrimental to the
commercial success of disruptive innovation and corporate venturing.
 Measuring the managerial performance: Without an effective process to measure organizational
performance in terms of clearly established milestones, executives may focus on achieving short-term
results at the expense of building the necessary infrastructure for long-term development.

8 Gary Dushnitsky (2011) Riding The Next Wave of Corporate Venture Capital

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Understanding the location of the company's cycle and managing the cyclical forces is critical in increasing
the life span of the CVC and success rate.

Key Success Factor 2: Focus Strategic Objectives

Although CVCs may retain a cyclicality and shorter life span, it does not make sense to claim its investment
performance "dumb," as Fred Wilson quoted. According to multiple research, as in Exhibit 5, CVC
investments perform well if their strategic focus is intense. Financial objectives leverage company expertise,
contacts, and reputation to achieve financial returns from an investment portfolio. The strategic direction of a
CVC contains the below categories;

 Building technology and market knowledge

 Change attitude toward innovation & change
 Nurture network and generate option
 Source & leverage technologies (licensing, co-development)
 Create additional revenues by leveraging company resources

Exhibit 6 covers three examples of a research study that supports the strength of CVC's strategic focus.

Exhibit 6
Influential profiles in academic faculty have exercised extensive studies for corporate venture capital
performance. The main result is to suggest strategic aspects rather than financial and taking the CVC as
complementary for the larger context of corporate innovation activities

Corporate ventures investments in entrepreneurial firms appear to be at least as successful(using such

measures as the probability of the portfolio firm going public) as those backed by independent
venture capital funds, particularly when there is a strategic overlap between the corporate parent
Strategic Focus and the portfolio firm.*
Makes CVCs
More CVC is likely to create firm value only when pursued strategic reasons. A financially oriented firm is
Successful less likely to be able to benefit from such investment activity as structural deficiencies (misaligned
incentives, internal conflicts, and incompatible objectives) are likely to overshadow CVC potential
advantages.**

CVC is CVC investing should not be studied merely as an asset class with the public and private equity
complementary markets. The strategic dimensions of CVC deserve more attention to the broader context of corporate
to overall innovation activities. CVC investment can complement the other corporate innovation initiatives,
innovation effects that are not measured in the analysis of the financial returns of CVC portfolio investment.***
process

Sources *Paul A.Gompers (1998) The Determinants of Corporate Venture Capital Success
**Gary Dushnitsky (2006) When Corporate Venture Capital Investment Creates Value
***Henry Chesbrough (2004) Corporate Venture Capital In The Context of Corporate Innovation

That observation does not assert that all financially focused CVCs fail. On the contrary, financially focused
CVCs are more successful than strategic focus CVCs in some research studies. In our opinion, the critical
aspect here is to have a clarified objective and construct an aligned organizational structure and operational
process. Carrying both goals in a vague environment create complication due to the requirements of both
sides.

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However, if a CVC targets pure financial objectives, it loses valuable leverage of corporate resources and
capabilities, and it endangers itself by trying to imitate independent venture capitalists.

Key Success Factor 3: Align The Structure To The Objectives

Internal structures and management systems used by corporate venture capital unit is a function of their
strategic role, and their performance is higher when these interior elements are aligned. Financial objectives
require a more autonomous CVC structure, which simulates an independent venture capital fund. On the
other hand, strategic goals need a more integrated corporate venture capital unit in leveraging corporate
resources and capabilities. As some CVCs may prefer a balanced approach between strategic and financial
objectives, the structure should be accordingly.

Exhibit 7 explains the relationship between strategy and structure.

Exhibit 7
The objectives of CVC should be aligned with the structure and operational design. Integration requires
a structured approach to collaborating with the parent company. VC alike approach entails more
autonomy with a limited degree of integration.
Strategy and Structure Alignment Relationship

Parent Integrated
Investment Logic Criteria VC Alike CVC
CVC
Fewer, managed A few big wins
Portfolio approach
Mainly Dependent

success covering losers

Organizational Structure & Processes

Strategic More dispersed

Scope
Parent Integrated CVC Loose Aligned CVC opportunities investments in markets
Promising Not Promising Corporate referrals Strong Moderate
Strategic potential as a
Strong Moderate
screening crtierion
Mainly Independent

Feedback to parent Focused Broad scope

VC Alike CVC Internal unit due diligence Strong Moderate

Loose Aligned CVC
Not Promising Promising Securing a sponsor Strong Moderate

Syndicate with VCs or CVCs CVCs VCs

Mainly Strategic Involve parent in deal approval Strong Moderate

Mainly Financial
Link the portfolio company with
Corporate Investment Objectives / Goals Strong Moderate
parent

Source : Startup Intellect Analysis from multiple academic research

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Key Success Factor 4: Build Mutually Complementary Relationship

Let's say there are two term sheets on a founder's table, one from a CVC and the other is from an
independent VC. Whom does a startup prefer? Apart from providing investment, what is the difference
between the perceived benefits of corporate venture capital and independent venture capital?

The main difference in CVCs' perceived benefits is their expertise in the industry, technology, customer,
distribution channels, and partnerships. As a result, they provide more excellent value in delivering value for
building commercial capacity, credibility, and corporate resources access. However, independent VCs are
experts in sensing the market potential, advising on product and value proposition strategy, endorsing other
VCs' networks, and supporting key positions. Exhibit 8 demonstrates the difference in value add between
independent VCs and CVCs.

Exhibit 8
Independent venture capitalists are strong in endorsement, strategy, and product value add, managing
key parameters of startup growth. CVCs provide value vertically in industry and technology domains.

Independent VC Value Add CVC Value Add

• Strategy/ Product
• Team
• Customer/Partnerships
• Syndicate
• Raise Additional Finance
• Industry Support
• Exit
Advising on pivot, iterate and value Sharing distribution channels insight,
proposition building commercial capacity
Develop HR process and recruiting Develop HR process
key employees
Help to understand the market Help to build commercial credibility
better and develop partners and access to distribution channels
Syndicate with other VCs Syndicate with other CVCs
Endorse, network and support
Building a finance function
for other rounds of investment
Support in managing the
R&D and technological support
growth
Advisory next round finance and
Advisory acquisition options
acquisition options

Source : Startup Intellect Analysis, Markku Maula (2006) Corporate Venture Capitalists and Independent Venture Capitalists: What do They
Know, Who do They Know, and Should Entrepreneurs Care, Leslie Pratch (2005) Value-Added Investing: A Framework for Early Stage
Venture Capital Firms

As depicted above, there are overlapping aspects in value add between independent VC and CVCs. Their
incentives are tied to their objectives. Independent VCs look for pure financial goals, whereas CVC's focus
might be strategic, and they have dependencies on their parent company. Startups and CVCs should prefer
a complementary relationship. When there is a lack of collaboration, the right side of the below seesaw is
unhealthy, and principal-agent problems frequently emerge between the CVC and the startup. Here are
some examples of principle agent problems;

 Startup as an agent in adverse selection: Startups may not disclose some of CVCs' critical
information and intentions during due diligence and negotiation.

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  Corporate business units as agents in moral hazard: Business units don't prefer to collaborate with
startups, and CVC units have limited control in the process. The business unit expects strategic
information input in exchange for equity investment only.
 CVC unit as an agent in moral hazard: CVC unit may access critical information on the startup's
business and technology during the due diligence process with a hidden agenda like a unilateral
corporate desire for acquisition.
 Business unit or startup as an agent in moral hazard: Business units and startups may behave
opportunistically without committing to a long-term horizon.
 Startup as an agent in a hold-up in contracting: As all contracts must be assumed to be incomplete,
especially in highly dynamic environments, startups can exploit contractual gaps and act counter to
the corporation's interest.

In avoiding the principal-agent problems, the best strategy is to develop a situation where both sides win. For
example, a higher term sheet valuation for a startup or a better deal term for a CVC should always be a
question mark in this kind of problematic relationship. Another essential point is a collaborative approach
between the CVC, business, technology teams, and startups. In Exhibit 9, we develop a framework for
assessing the CVC deal's attractiveness for the startup.

Exhibit 9
Selecting a CVC term sheet is more viable if there are synergy and learning potential for a startup. Both a
CVC and a startup should be interested in an investment relationship if the right side of the seesaw is strong.
Otherwise, a startup and independent VC relationship will be more viable for both the startup and the CVC

Seesaw to Assess When The CVC Term Sheet Is More Attractive

Independent VC Term Sheet CVC Term Sheet

+ Substitute product for parent + Complementary product for parent

+ Weak intellectual property regime + Strong intellectual property regime
+ Weak alignment between CVC, business + Strong alignment between CVC, business
unit and overall innovation strategy unit and overall innovation strategy
+ Ambiguity in due diligence and + Structured due diligence and
collaboration procedure with CVC and collaboration procedure with CVC,
business units business units
+ Limited value add potential from + Strong value add potential from
technology, customer access, distribution technology, customer access, distribution
channels and partner sources of channels and partner sources of
corporation corporation
+ Short investment horizon, 2-3 years, not + Long investment horizon, 5-6 years,
mirrored incentives with executive team mirrored incentives with executive team

Source : Startup Intellect Analysis

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How to Design Corporate Venture Capital Successfully
Starting an independent venture capital has its challenges in raising funds, developing an investor reputation,
executing an effective deal sourcing, due diligence process, and providing value add to the startups in
examples like recruitment, product, and growth strategy. Corporate venture capital may have less difficulty in
raising funds and developing a network. However, there are problems for a CVC in identifying and sticking
with long-term objectives, developing collaborative governance, and mutual value-adding terms between the
startup and the parent company. This challenge is the main reason for the short life span of most CVCs.
Therefore, they should not imitate an independent VC's investment focus and operational processes.
Otherwise, encountering negative consequences of CVC cycles is inevitable.

Corporate companies need to design four circles in harmony as depicted in Exhibit 10;

 Design Circle 1: A solid strategic focus with necessary financial objectives

 Design Circle 2: An aligned structure to the objectives
 Design Circle 3: An operation design that makes collaboration, synergy, and due diligence process
effective
 Design Circle 4: A performance monitoring that allows improving short term performance in a long
term horizon

Exhibit 10
In our approach, there are four circles in the foundation of corporate venture capital

Objectives
Corporate Venture Capital Foundation Approach
Strategic and financial objectives to
focus benefit of the corporate
Performance innovation positioning

Operation Structure
The configuration is where and how
Structure to build of CVC. Locus of
opportunities, collaboration with
parent
Objectives
Operation
How the deal sourcing, due diligence,
negotiation, synergy, and exit
structure will be operationalized

Performance
It is about how to measure the
success of the CVC within the overall
innovation process of the company

Source : Startup Intellect Analysis

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Circle 1: Corporate Venture Capital Objectives

Corporations target financial and strategic objectives with CVCs. However, the research9 concluded that
most CVC programs in Germany reached neither strategic nor financial goals, and 75% were planned to
discontinue at the research year. Therefore, objectives are crucial in setting, running the CVCs, and
monitoring the performance. In Exhibit 11, we demonstrate our approach toward financial and strategic
goals. All emphasized strategic objectives may not be targeted, but the critical success factor is to define a
relevant focus to strategic objectives with the correct balance of financial ones.

Exhibit 11
Circle 1 - Objectives: A corporate venture capital should identify long term objectives that will direct the
structure, operation, and performance
Corporate Venture Capital Objectives Framework

Financial Objectives Strategic Objectives

Leverage company expertise, contact and reputation for Objectives from accessing technology to ecosystem
achieving financial returns from the investment portfolio development

Change Attitude Create additional

Build Technology and
Market Knowledge
•Gain insights into new
development early on
•Identify specific new
opportunities
•Support decisions to
move or not to move
into new fields
•Scan for and assess
potential acquisition
targets
•Scout new startups,
products, and
technologies that
might complement
the parent company
Nurture Network and Source & Leverage
Towards Innovation & revenues by leveraging
Generate Option Technologies
Change company resources
•Create sensitivity for •Develop a network • Improve internal • License out
the need for with VC, startup processes technologies that not
innovation community, • Improve the be needed by core
•Improve ability to educational system, customer value of business
deal with change and public sector their products • Leverage sales
•Develop •Use ‘minority equity • Enable the channels
entrepreneurial commitment’ as a capability to move • Outsource R&D
culture, motivating, credible signaling tool into new fields facilities and invest
and retaining high- for real options on • Enhance less in R&D costs
potential employees. partnering and later technological through economies
•Generate innovative M&A deals capabilities that may of scale
ideas and projects •Identify and develop be important in the • Leverage
•Setup new customers, future manufacturing
intrapreneurship business partners and capabilities
process and suppliers in existing or
governance adjacent industries

Source : Startup Intellect Analysis, Timo B.Poser (2003) Impact of Corporate Venture Capital

Circle 2: Corporate Venture Capital Structure

If corporate venturing is to endure more than the average CVC life span10, it must offer structural
advantages over independent venture capital. One difference is a longer time horizon than independent
VCs. VC funds generally have seven to eight years of life. Corporations, in contrast, have an indefinite life
span. When there is no end of fund pressure to gain liquidity for venture positions, CVCs may find an

9 Karsten Schween (1996) Corporate Venture Capital

10 Henry Chesbrough (2000) Designing Corporate Ventures in Shadow of Private Venture Capital

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advantage in investing in longer-term projects, or potential ventures have yet to either be sold or go public.
Another advantage is the ability to scale the investment larger and faster than independent VCs. While
independent VCs only syndicate with other VCs if a large sum of investment is needed; however, CVC can
deploy large sums of money if there is a strong appetite. A CVC structure is to define investment approach,
organizational governance, and collaboration with the parent company. As depicted in Exhibit 12, we
suggest an eight-building block of the structure.
 Investment fund type: Independent venture capital funds externally manage Indirect CVC funds.
Direct CVC funds directly subscribe to minority equity stakes of the startup. In indirect funds,
corporate investors are not active in fund management, but they play a hands-on role or establish
further strategic partnerships with portfolio companies. Indirect CVC funds, corporate investors
undertake all responsibility. Also, the horizon of the fund is an essential element to define.
 Convergence opportunity: A CVC needs to identify how much the target startup's technology and
market expertise overlap the corporate capabilities. If it is very close or far away from the core
business, there will be an imbalance in creating a complementary positioning and mutual
contribution.
 Investment focus: A CVC can invest in various stages in seed, early-stage, and growth stages. As the
life cycle of the startups varies, due diligence, collaboration, and synergy scenarios change.
Generally, very early-stage deals are not preferred by CVCs because it is more convenient to
pinpoint the mutual contribution with later-stage startups.
 Decision-making autonomy: A CVC's decision-making in sourcing, due diligence, negotiation, and
investment needs to be as fast much as possible. The best practice on the duration of decision for
independent VCs is around one month. Therefore, an effective decision-making mechanism should
be designed via necessary provided autonomy to the CVC unit.

Exhibit 12
Circle 2 - Structure: Configuration is connecting the strategy to crucial decisions of where
and how to establish the corporate venture capital
Corporate Venture Capital Configuration Framework

Portfolio Approach
Investment and Fund Type
Does the CVC portfolio look like many
How will CVC invest in the ventures,
investments to look for a few winners
indirect or direct?
or a couple of well-managed startups?

Convergence of Opportunity Focus of Screening Work

How far will the opportunities Is the selection process closer to
converge to core business and business development or due
technology? diligence?

Investment Focus Collaboration Governance

What is the focus of the stage of the How will organizational linkages and
venture? collaboration be designed?

Decision Making Autonomy Compensation of CVC

What is the autonomy of CVC in Is the compensation policy closer to
decision making, traditional hierarchy, corporate compensation or equity/risk
or venture board structure? reward?

Source : Startup Intellect Analysis

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  Portfolio approach: Some CVCs have more than 100 investments and expect many failures with few
big wins that make the entire fund a positive return. Some have five investments in their lifetime and
prefer to create value as much as possible from fewer assets.
 The focus of screening work: Independent VCs make due diligence with only financial return
expectations. However, CVCs have broader objectives. Due diligence in assessing the team skills,
product, and the market potential is essential, and business units join the process to understand the
prospect of a future relationship. Sometimes this may go to a business development contract where
both sides are engaged in a proof of concept rather than due diligence.
 Collaboration governance: After a sealed deal, post-investment collaboration happens. This process
is related to monitoring progress and assigning corporate people from different domains and
seniority levels to manage the relationship. Structured but flexible governance to manage the
relationship is critical as a startup's environment changes very fast.
 Compensation of CVC: Compensation is one of the most complicated aspects of CVC. The system
should sufficiently motivate the CVC unit and business units in the long term but should not
disseminate the perception of compensation disparity to the broader company. One extreme option
is to design CVC managers' compensation in line with the peer group in the corporate company. The
other one is to make it like independent VC funds. An independent VC team generally receives 2%
of the fund as a management fee, including all expenses and salaries. In addition, their performance
is tied to carry interest to share of return after the fund's return has been distributed to its limited
partners. A balanced approach can be applied again, based on objectives.

Circle 3 – Corporate Venture Capital Operation

Corporate venture capital operations are the backbone of the value chain, and it's about managing the life
cycle of the startup relationship with the CVC unit and parent company. Key players in the process are the
CVC team, contact points from the company's business, and technology. CVC team is the main responsible
for overall operation. On the other hand, business and technology units can involve deal sourcing, due
diligence, and interaction with startups based on the selected collaboration linkage governance approach.
Exhibit 13 displays the entire life cycle of a CVC and a startup's relationship.

Exhibit 13
Circle 3 - Operation: Operational design is to run the program effectively and fulfill the objectives and
configuration requirements.
Corporate Venture Capital Operational Design Framework

Screening and Due Negotiation and Interact With

Deal Origination Monitor and Exit
Diligence Invest Startups

• Manage • Screen the deal • Discuss, negotiate, • Provide value at • Monitor the
reputation funnel to identify and deal with market, progress of
• Develop promising ones contractual terms technology startups,
networking and • Assess the startups and commitments. strategy, product collaboration, and
scouting channels with parent • Develop mutual and syndication. benefits of synergy.
for referrals and collaboration benefits. • Collaborate with • Adjust activities
inbound calls. based on • Close the startups and and future
• Use outbound structured due investment create the synergy investment and
approach if diligence of strategic exit plan
necessary benefits accordingly
Team and Skills
Required skills, people to be onboarded in CVC and as contact points in business and technology units
Source : Startup Intellect Analysis

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An essential team-building suggestion for a CVC is to onboard a VC experienced person and pair with CVC
executives to gain valuable VC practices, markets, technology, and network.

Circle 4 – Corporate Venture Capital Performance

In principle, performance can be measured on a portfolio company level or directly on the CVC unit level.
We suggest four main performance monitoring aspects for CVC, financial, innovation, operation, and
corporate metrics. CVCs should apply relevant ones to objectives, structure, and operational design.
Performance metrics should provide a long-term horizon to all CVC stakeholders, but the short-term
capability to monitor the progress and take performance improvement actions.

Exhibit 14
Pillar 4 – Performance: To measure the success of the corporate venture capital, four main section KPIs
should be defined aligned with objectives, structure, and operational design
Corporate Venture Capital KPI Framework

Financial Metrics Innovation Metrics Operational Metrics Corporate Metrics

• Change in market share • Number of patents and • Number of investments
(relative and absolute) cross patents made
• Net Profit • Number of licenses • Number of co-investments
• ROI • Number of developed / lead investments
• IRR technologies • Number of cooperation’s
• Capital gains • Number of developed agreements between
• Cross-selling values products business units and startups
• Concentration level • Business unit share of
(investment stage, revenue of startup
technology, region) on • Number of received
total fund volume business plans with the
strategic fit
• Number of due diligence
of business plans
• The standard deviation of
due diligence duration
from the target value
• Number of ventures in the
portfolio
• Perceived corporate image
as an innovator (public
survey)
• Employee satisfaction
(survey) and employee
turnover rate
• Cumulated development
time in person-years of
technology R&D of
startups
• Cumulated venture capital
experience of the
investment team in years
• Number of press mentions
and conference speeches

Source : Philipp Dauderstadt (2013) Success Factors in Strategic Corporate Venturing, Faisst (2002) Performance Measurement in Corporate
Venturing

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NOTE TO THE READER

About Startup Intellect

Startup Intellect is a management consulting company on innovation. We partner with clients from private,
public, and non-profit sectors who target innovation as a top priority strategy to identify the highest-value
opportunities, address their most critical challenges, and transform their enterprises. Our customized and
rigorous approach combines deep insight into the companies' dynamics, markets, and innovation
opportunities. This ensures that our clients achieve a sustainable competitive advantage.

About the Authors

Deniz Kayahan is the founder and senior innovation advisor in Startup Intellect.
Mertcan Kaya is an analyst in Startup Intellect

For Further Contact

If you would like to discuss this report, please contact the author.

Deniz Kayahan
Founder and Senior Innovation Advisor
+90 532 637 78 58
deniz@startupintellect.com

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 www.startupintellect.com

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