limo B. Poser The Impact of Corporate Venture Capital

limo B. Poser The Impact of Corporate Venture Capital

GABLER EDITION WISSENSCHAFT

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

Bibliografische Information Der Deutschen Bibliothek Die Deutsche Bibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet uber <http://dnb.ddb.de> abrufbar. Dissertation Wissenschaftliche Hochschule fur UnternehmensfUhrung (WHU) Vallendar, 2002 1. 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. www.duv.de 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-13:978-3-8244-7776-0 001: 10.1007/978-3-322-81468-5 e-isbn-13:978-3-322-81468-5

To Parissa and Fabienne

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 2002. 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

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 2.1.1. DefInition of sustainable competitive advantage 9 2.1.2. Market-based view 11 2.1.3. Resource-based view 13 2.1.3.1. Resource types 15 2.1.3.2. Attributes of sustainable competitive advantage 18 2.1.3.3. Integrated view on attributes of sustainable competitive advantage 27 2.1.4. Resource-based vs. market-based view 32 2.2. Venture capital 34 2.2.1. DefInition of venture capital 35 2.2.2. Situation in the venture capital market 42 2.2.3. Venture capital investment process 46 2.2.3.1. Raising capital 47 2.2.3.2. Generation of deal flow 58 2.2.3.3. Assessment of investment opportunities 61 2.2.3.4. Investment in start-ups 66 2.2.3.5. Interaction with start-ups 71 2.2.3.6. Exit investments 73 2.3. Corporate Venture Capital: definition and objectives 81 2.3.1. DefInition of corporate venture capital 81 2.3.2. Objectives of Corporate Venture Capital 87 2.3.2.1. Build technology and market knowledge 94 2.3.2.2. Change attitude towards innovation and change 96 2.3.2.3. Acquire skills and increase company attractiveness for employees 97 2.3.2.4. Build and leverage a partner network 98 2.3.2.5. Source and leverage technologies 101 2.3.2.6. Create additional revenue by leveraging company resources 101 2.3.2.7. Benefits as resources 102 2.3.3. Theoretical reasoning for Corporate Venture Capital 103 2.4. Corporate Venture Capital process 108 2.5. Process of setting up Corporate Venture Capital activities 110 1 5 7 9

X 2.5.1. Setting Corporate Venture Capital objectives 112 2.5.2. Corporate Venture Capital investment approach 113 2.5.2.1. Direct vs. indirect investment approach 113 2.5.2.2. Investment strategy 119 2.5.2.3. Additional issues regarding the investment approach 121 2.5.3. Organizational linkages 122 2.5.3.1. Role of the organization in the Corporate Venture Capital process 124 2.5.3.2. Positioning of Corporate Venture Capital inside the organization 128 2.5.4. Corporate Venture Capital staffing and compensation 131 2.5.4.1. Staffing Corporate Venture Capital managers 131 2.5.4.2. Compensating Corporate Venture Capital managers 134 2.5.5. Corporate Venture Capital monitoring 136 2.6. Process of running Corporate Venture Capital activities 138 2.6.1. Generation of deal flow 140 2.6.2. Assessment of investment opportunities 142 2.6.3. Investment in start-ups 145 2.6.4. Interaction with start-ups 146 2.6.4.1. Monitoring and supporting start-up development 147 2.6.4.2. Realizing strategic benefits through interaction with start-ups 148 2.6.5. Exit investments 149 2.6.6. Monitoring Corporate Venture Capital activities 151 2.7. Challenges for generating benefits through Corporate Venture capital 151 2.8. Overview of previous research on Corporate Venture Capital 153 3. eve-impact-model 161 3.1. CVC-Impact-Model: linking CVC to sustainable competitive advantage 161 3.2. Operationalizing the CVC-Impact-Model 164 3,2.1. Operationalizing variable I: Level of CVC activity 164 3.2.2. Operationalizing variable 2: Level of benefits 166 3.2.3. Operationalizing variable 3: Level of potential to create competitive advantage 169 3.2.3.1. Attributes determining sustainable competitive advantage 169 3.2.3.2. Testing CVC activities vs. CVC benefits 171 3.2.3.3. Testing benefits vs. sub-benefits 173 3.2.3.4. Ways to impact sustainable competitive advantage 174 3.2.3.5. Limitation to identifying resources that may impact sustainable competitive advantage 176 3.2.3.6. Testing benefits from single cases vs. CVC results overall 177 3.2.3.7. Measuring attributes 178 3.3. Critical activities for impacting sustainable competitive advantage 182 4. ease studies 187 4.1. Research approach 187 4.1.1. Objectives of case studies 187 4.1.2. Case study interview design 188

4.1.3. Quality ofresearch design 4.1.4. Case study targets XI 191 192 4.2. Company background 194 4.2.1. Intel Capital- Background 194 4.2.2. Media X Venture Capital - Background 195 4.2.3. Philips Corporate Venturing - Background 196 4.2.4. Novartis Venture Fund - Background 197 4.3. CVC activity 198 4.3.1. Intel Capital- CVC activity 198 4.3.2. Media X Venture Capital - CVC activity 199 4.3.3. Philips Corporate Venturing - CVC activity 200 4.3.4. Novartis Venture Fund - CVC activity 201 4.3.5. Overall firidings on the level ofcvc activity 203 4.4. Targeted and realized benefits 204 4.4.1. Intel Capital- Targeted and realized benefits 204 4.4.2. Media X Venture Capital- Targeted and realized benefits 208 4.4.3. Philips Corporate Venturing - Targeted and realized benefits 212 4.4.4. Novartis Venture Fund - Targeted and realized benefits 216 4.4.5. Overall findings on the level ofcvc benefits 220 4.4.5.1. Operationalization of determining level of CVC benefits 220 4.4.5.2. Targeted benefits 221 4.4.5.3. Realized benefits 223 4.5. Potential impact on sustainable competitive advantage 225 4.5.1. Intel Capital- Potential impact on sustainable competitive advantage 225 4.5.2. Media X Venture Capital- Potential impact on sustainable competitive advantage 228 4.5.3. Philips Corporate Venturing - Potential impact on sustainable competitive advantage 231 4.5.4. Novartis Venture Fund - Potential impact on sustainable competitive ~advantage 234 4.5.5. Overall findings on potential impact on sustainable competitive advantage 235 4.5.5.1. Operationalization of level of potential impact on sustainable competitive advantage 235 4.5.5.2. Results on assessment of attributes of sustainable competitive advantage for CVC sub-benefits 236 4.5.5.3. Sub-benefits potentially meeting attributes of sustainable competitive advantage 239 4.5.5.4. Further findings on attributes of sustainable competitive advantage 240 4.6. CVC challenges 242 4.6.1. Intel Capital- CVC challenges 242 4.6.2. Media X Venture Capital- CVC challenges 245 4.6.3. Philips Corporate Venturing - CVC challenges 248 4.6.4. Novartis Venture Fund - CVC challenges 251 4.6.5. Overall findings on CVC challenges 254 4.6.5.1. Assessment of CVC challenges 254

XII 4.6.5.2. 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 257 261 263 263 266 268 271 279

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

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

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

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

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

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