Strategies of Corporate Venture Capital Managers Vary Greatly
Faculty Focus • by Robert Preer
Starting in the 1990s, many large U.S. companies started setting up in-house investment units to gain a stake in promising start-ups, which have the potential not only to make money but also to give the larger corporation access to important new technologies, patents and intellectual property.
By 2001, more than 300 U.S. firms had established corporate venture capital units. The corporate share of venture capital rose from 2 percent in 1994 to 17 percent in 2000 at its peak, with a total of $100 billion invested in venture capital. In the years 2002 to 2006, the share leveled off at 6 to 8 percent.
But corporate venture capital investment strategies, goals and outcomes vary greatly depending on the backgrounds of their investment managers, according to new research by Assistant Professor Gina Dokko.
In an analysis of the corporate venture capital units of 93 U.S.-based information technology firms, Dokko and her co-author, Vibha Gaba, an assistant professor at INSEAD, found that if managers had private venture capital backgrounds, they tended to invest in start-ups with high-growth prospects—and had less regard for the start-ups’ technological or strategic “fit” with the corporate parent.
On the other hand, if managers came from inside the corporate parent, or had a strong technical background themselves, they tended to invest in start-ups that could fill a strategic need of the larger corporation.
The finding affirms that the experiences of the people who work for an organization shape its functions in important ways—and that this is true not just at the top.
“It is widely understood that the leaders of corporations have strong effects on the organizations, but we show that individuals at lower levels can also affect the way organizational practices are conducted,” said Dokko.
Dokko and Gaba’s paper, “Venturing into New Territory: Career Experiences of Corporate Venture Capital Managers and Practice Variation,” is forthcoming in the Academy of Management Journal.
Using corporate websites, LinkedIn and other sources, Dokko and Gaba mapped the career backgrounds of the 311 corporate venture capital/investment managers at 93 firms. They looked at whether the managers had worked for independent venture capital firms, had been hired from within the corporation or had technical backgrounds.
Using venture capital databases, the researchers then determined the approach of the units to the timing and industry focus of investment, as well as their orientation toward financial or strategic goals. Statistical analysis showed how the managers’ backgrounds affected the approaches and goals of the venture capital units.
“We saw that corporate venture capital man-agers with an independent venture capital background are more oriented toward financial goals,” Dokko said.
“We also found that they are more likely to make investments in earlier-stage start-ups. They tend to be less focused about the industries they invest in. They’re just looking for something that appears very promising.”
Those with technology backgrounds, however, showed a different investment pattern.
“Managers who came to the job with technology backgrounds or from within the corporation tended to invest in a narrower range of start-ups, typically with a technological orientation that could help the larger firm,” Dokko noted.