limo B. Poser The Impact of Corporate Venture Capital

Transcription

1 limo B. Poser The Impact of Corporate Venture Capital

2 GABLER EDITION WISSENSCHAFT

3 Timo B. Poser The Impact of Corporate Venture Capital Potentials of Competitive Advantages for the Investing Company Deutscher Universit~its-Verlag

4 Bibliografische Information Der Deutschen Bibliothek Die Deutsche Bibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet uber < abrufbar. Dissertation Wissenschaftliche Hochschule fur UnternehmensfUhrung (WHU) Vallendar, Auflage Marz 2003 Aile Rechte vorbehalten Deutscher Universitats-Verlag GmbH, Wiesbaden, 2003 Lektorat: Brigitte Siegel! Nicole Schweitzer Der Deutsche Universitats-Verlag ist ein Unternehmen der Fachverlagsgruppe BertelsmannSpringer. Das Werk einschlieblich aller seiner Teile ist urheberrechtlich geschutzt. Jede Verwertung auberhalb der engen Grenzen des Urheberrechtsgesetzes ist ohne Zustimmung des Verla.9s unzulassig und strafbar. Das gilt insbesondere fur Vervielfaltigungen, Ubersetzungen, Mikroverfilmungen und die Einspeicherung und Verarbeitung in elektronischen Systemen. Die Wiedergabe von Gebrauchsnamen, Handelsnamen, Warenbezeichnungen usw. in diesem We.rk berechtigt auch ohne besondere Kennzeichnung nicht zu der Annahme, dass solche Namen im Sinne der Warenzeichen- und Markenschutz-Gesetzgebung als frei zu betrachten waren und daher von jedermann benutzt werden durften. Umschlaggestaltung: Regine Zimmer, Dipl.-Designerin, Frankfurt/Main Gedruckt auf saurefreiem und chlorfrei gebleichtem Papier ISBN-13: : / e-isbn-13:

5 To Parissa and Fabienne

6 VII Preface This research project was driven by curiosity about the actual impact of Corporate Venture Capital activities on the investing company. At the end of 1998 when I developed the idea of analyzing CVC further, corporate venturing activities began to increase again after they had gone through two earlier boom and bust cycles. At that time, I did not envision how large the dimensions of CVC investments would become and how sharp the decrease afterwards would be. This latest cycle confirmed my desire to determine the impact of CVC and contribute to the understanding of CVC,in theory and management practice. This research project was accepted as a dissertation by the "PromotionsauBschuss der Wissenschaftlichen Hochschule fur Unternehmensfiihrung (WHU), -Otto-Beisheim Hochschule-", in Vallendar entitled "Impact of Corporate Venture Capital on Sustainable Competitive Advantage of the Investing Firm - A Resource Based Approach" in June I want to thank several people who contributed to this research project. I am grateful to Prof. Dr. Klaus Brockhoff and Prof. Dr. Markus Rudolf for their guidance and support. I want to thank several interview partners from industry for their time and insights. Thanks also to NVCA, EVCA and Asset Alternatives Inc. for the permission to cite Corporate Venture Capital figures. I also want to express my gratitude to other people who supported me: Dr. Andreas Eggert for his perspectives from theory; Oliver Lohfert and Dr. Alexander Moscho for their feedback; Ginni Light for proofreading; Dr. Jiirgen Meffert and Dr. Lother Stein for the impetus and opportunity to explore corporate ventures; Claudia Schiirger, Frank Galenza and Wolfgang Limbeck for many books and articles. Last but not least, my wife for the right mix of patience and pressure that helped me to finish this work. Timo B. Poser

7 IX Table of contents List of illustrations List of tables Abbreviations and terms 1. Introduction 1.1. Relevance of topic 1.2. Open issues and research objective 1.3. Structure and Approach 2. Theoretical foundation XIII XVII 2.1. Sustainable competitive advantage 9 XIX DefInition of sustainable competitive advantage Market-based view Resource-based view Resource types Attributes of sustainable competitive advantage Integrated view on attributes of sustainable competitive advantage Resource-based vs. market-based view Venture capital DefInition of venture capital Situation in the venture capital market Venture capital investment process Raising capital Generation of deal flow Assessment of investment opportunities Investment in start-ups Interaction with start-ups Exit investments Corporate Venture Capital: definition and objectives DefInition of corporate venture capital Objectives of Corporate Venture Capital Build technology and market knowledge Change attitude towards innovation and change Acquire skills and increase company attractiveness for employees Build and leverage a partner network Source and leverage technologies Create additional revenue by leveraging company resources Benefits as resources Theoretical reasoning for Corporate Venture Capital Corporate Venture Capital process Process of setting up Corporate Venture Capital activities

8 X Setting Corporate Venture Capital objectives Corporate Venture Capital investment approach Direct vs. indirect investment approach Investment strategy Additional issues regarding the investment approach Organizational linkages Role of the organization in the Corporate Venture Capital process Positioning of Corporate Venture Capital inside the organization Corporate Venture Capital staffing and compensation Staffing Corporate Venture Capital managers Compensating Corporate Venture Capital managers Corporate Venture Capital monitoring Process of running Corporate Venture Capital activities Generation of deal flow Assessment of investment opportunities Investment in start-ups Interaction with start-ups Monitoring and supporting start-up development Realizing strategic benefits through interaction with start-ups Exit investments Monitoring Corporate Venture Capital activities Challenges for generating benefits through Corporate Venture capital Overview of previous research on Corporate Venture Capital eve-impact-model CVC-Impact-Model: linking CVC to sustainable competitive advantage Operationalizing the CVC-Impact-Model 164 3,2.1. Operationalizing variable I: Level of CVC activity Operationalizing variable 2: Level of benefits Operationalizing variable 3: Level of potential to create competitive advantage Attributes determining sustainable competitive advantage Testing CVC activities vs. CVC benefits Testing benefits vs. sub-benefits Ways to impact sustainable competitive advantage Limitation to identifying resources that may impact sustainable competitive advantage Testing benefits from single cases vs. CVC results overall Measuring attributes Critical activities for impacting sustainable competitive advantage ease studies Research approach Objectives of case studies Case study interview design 188

9 Quality ofresearch design Case study targets XI Company background Intel Capital- Background Media X Venture Capital - Background Philips Corporate Venturing - Background Novartis Venture Fund - Background CVC activity Intel Capital- CVC activity Media X Venture Capital - CVC activity Philips Corporate Venturing - CVC activity Novartis Venture Fund - CVC activity Overall firidings on the level ofcvc activity Targeted and realized benefits Intel Capital- Targeted and realized benefits Media X Venture Capital- Targeted and realized benefits Philips Corporate Venturing - Targeted and realized benefits Novartis Venture Fund - Targeted and realized benefits Overall findings on the level ofcvc benefits Operationalization of determining level of CVC benefits Targeted benefits Realized benefits Potential impact on sustainable competitive advantage Intel Capital- Potential impact on sustainable competitive advantage Media X Venture Capital- Potential impact on sustainable competitive advantage Philips Corporate Venturing - Potential impact on sustainable competitive advantage Novartis Venture Fund - Potential impact on sustainable competitive ~advantage Overall findings on potential impact on sustainable competitive advantage Operationalization of level of potential impact on sustainable competitive advantage Results on assessment of attributes of sustainable competitive advantage for CVC sub-benefits Sub-benefits potentially meeting attributes of sustainable competitive advantage Further findings on attributes of sustainable competitive advantage CVC challenges Intel Capital- CVC challenges Media X Venture Capital- CVC challenges Philips Corporate Venturing - CVC challenges Novartis Venture Fund - CVC challenges Overall findings on CVC challenges Assessment of CVC challenges 254

10 XII Conclusions from assessment ofcvc challenges 4.7. Overall applicability 5. Summary 5.1. Implications for research 5.2. Implications for management 5.3. Limitations and outlook Appendix - Questionnaire Bibliograpby

11 XIII List of illustrations Figure 1-1: US eve investments 2 Figure 1-2: US ve investments 3 Figure 2-1: Two main theories explain the sources of competitive advantage 11 Figure 2-2: Comparison of views on attributes of sustainable competitive advantage 20 Figure 2-3: Combination of resource-based and market-based view 32 Figure 2-4: Capital coi11iilitted to and disbursed by ve funds 43 Figure 2-5: Capital under management in US venture funds 44 Figure 2-6: US ve disbursements 2000 by industry 46 Figure 2-7: ve commitments in limited partnerships in the US during the year 2000 by investor type 48 Figure 2-8: Three resources that impact venture capitalists' competitive advantage 50 Figure 2-9: Approaches to generate deal' flow 59 Figure 2-10: Venture capitalists' characteristics important to start-ups 60 Figure 2-11: Attributes of eve investments 86 Figure 2-12: Potential benefits of eve 93 Figure 2-13: Benefits of eve as resources 103 Figure 2-14: Processes of setting up and running eve 110 Figure 2-15: Activities of setting up eve III Figure 2-16: eve investment approach options 114 Figure 2-17: Linkages of eve, the organization and the external world 123 Figure 2-18: eve benefits for and support requirements from the organization 125 Figure 2-19: Sources of potential conflicts about eve activities 125 Figure 2-20: Involving the organization in eve 127 Figure 2-21: Different skill sets of eve managers 133 Figure 2-22: Activities of running eve - Investing in start-ups 139 Figure 2-23: Exit decision matrix of eve 150 Figure 3-1: eve-impact-model: Hypotheses 162 Figure 3-2: Items for measuring variable 1 - level of eve activity 165 Figure 3-3: Measuring targeted and realized eve benefits (112) 168 Figure 3-4: Measuring targeted and realized eve benefits (2/2) 168 Figure 3-5: Attributes of SeA applied to eve activities and benefits 173 Figure 3-6: Example for measuring variable 3 182

12 XIV Figure 3-7: Figure 3-8: Testing role of CVC activities for impacting sustainable competitive advantage (112) 185 Testing role of CVC activities for impacting sustainable competitive advantage (2/2) 185 Figure 3-9: Possible conclusions from analysis of CVC challenges 186 Figure 4-1: Intel Capital's level ofcvc activity 199 Figure 4-2: Media X,'s level of CVC activity 200 Figure 4-3: Philips Corporate Venturing's level ofcvc activity 201 Figure 4-4: Novartis Venture Fund's level ofcvc activity 202 Figure 4-5: Intel Capital's CVC objectives 204 Figure 4-6: Intel Capital- Targeted and realized CVC benefits (1/2) 207 Figure 4-7: Intel Capital- Targeted and realized CVC benefits (2/2) 207 Figure 4-8: Media X's CVC objectives 208 Figure 4-9: Media X Venture Capital- Targeted and realized CVC benefits (112) 211 Figure 4- I 0: Media X Venture Capital - Targeted and realized CVC benefits (2/2) 211 Figure 4-1 I: Philips' CVC objectives 212 Figure 4-12: Philips Corp. Venturing - Targeted and realized CVC benefits (112) 215 Figure 4-13: Philips Corp. Venturing - Targeted and realized CVC benefits (2/2) 215 Figure 4-14: Novartis' CVC objectives 216 Figure 4-15: Novartis Venture Fund - Targeted and realized CVC benefits (112) 218 Figure 4-16: Novartis Venture Fund - Targeted and realized CVC benefits (2/2) 218 Figure 4-17: Comparison of targeted and realized benefits (112) 222 Figure 4-1 &.: Comparison of targeted and realized benefits (2/2) 223 Figure 4-19: Intel Capital - Attributes of sustainable competitive advantage 225 Figure 4-20: Media X Venture C. - Attributes of sustainable competitive advantage 228 Figure 4-2 I: Figure 4-22: Philips Corporate Venturing - Attributes of sustainable competitive advantage 232 Sub-benefits that may have the potential to impact sustainable competitive advantage 239 Figure 4-23: Intel Capital - Challenges for generating CVC benefits (112) 243 Figure 4-24: Intel Capital - Challenges for generating CVC benefits (2/2) 243 Figure 4-25: Media X Venture Capital - Challenges for generating CVC benefits (112) 246 Figure 4-26: Media X Venture Capital- Challenges for generating CVC benefits (2/2) 246 Figure 4-27: Philips Corp. Venturing - Challenges for generating CVC benefits (1/2) 249 Figure 4-28: Philips Corp. Venturing - Challenges for generating CVC benefits (2/2) 249

13 Figure 4-29: Novartis Venture Fund - Challenges for generating evc benefits (1/2) 251 Figure 4-30: Novartis Venture Fund - Challenges for generating evc benefits (2/2) 252 Figure 4-31: Comparison of assessment of challenges (112) 256 Figure 4-32: Comparison of assessment of challenges (2/2) 256 Figure 4-33: Conclusions from analysis ofcve challenges (1/2) 259 Figure 4-34: Conclusions from analysis of cve challenges (2/2) 259 xv

14 XVIl List of tables Table 1-1: Examples of companies currently active in CVC by industry 2 Table 2-1: Resource types 18 Table 2-2: Table 2-3: Summary of different views regarding attributes determining sustainable competitive advantage 19 Attributes of resources determining competitive advantage and sustainability 28 Table 2-4: Isolating mechanisms discussed in the literature 31 Table 2-5: Attributes of Venture Capital 37 Table 2-6: Number and size of US VC firms and funds 45 Table 2-7: Number of companies receiving funding in the US 45 Table 2-8: VC investment stages 52 Table 2-9: Follow-on investment of US VC disbursements 68 Table 2-10: Targeted IRR per stage 69 Table 2-11: Number and value of venture-backed trade sales in the US 77 Table 2-12: Number of venture-backed IPOs in the US 78 Table 2-13: IRR of US VC funds 79 Table 2-14: CVC objectives discussed in the literature 90 Table 2-15: Coverage of benefits in the CVC literature 94 Table 2-16: Roles of venture capitalists and CVC investors in direct and indirect investments Table 2-17: Advantages and challenges of direct vs. indirect investments 1I6 Table 2-18: evc managers' ideal skill sets 132 Table 2-19: Comparison of compensation options 135 Table 2-20: Investment criteria most frequently rated as essential by corporate venture Capitalists vs. independent venture capitalists 144 Table 2-21: Challenges of setting up and running CVC activities 152 Table 2-22: Summary of empirical CVC studies 153 Table 3-1: Description of attributes of sustainable competitive advantage 170 Table 3-2: Possibilities for meeting the attribute rareness 172 Table 4-1: Case study targets 193 Table 4-2: Number of targeted benefits realized 224 Table 4-3: Possible substitutes of CVC benefits realized by Media X 230 Table 4-4: Distribution of assessment of CV C challenges 255 1I5

15 XVIII Table 4-5: Number of eve activities by criticality for realizing sustainable competitive advantage 258

16 XIX Abbreviations and terms CVC Deal Deal flow Due diligence EVCA!PO IRR IT MBI MBO NVCA SCA MBV RBV VC - Corporate Venture Capital - Term used by venture capitalists to describe an investment opportunity or an investment - Term used by venture capitalists to describe their access to investment opportunities (incoming deals per time period) - Term used by venture capitalists, investment bankers and others to describe the process of thorough investigation of an investment opportunity - European Venture Capital Association - Initial Public Offerin,.g - Internal rate of return - Information technology - Management buy-in - Management buy-out - National Venture Capital Association - Sustainable competitive advantage - Market-based view - Resource-based view - Venture capital