1、Making Sense ofCorporate Venture Capitalby Henry W. ChesbroughReprint r0203gHBR Case Study r0203aThe Coach Who Got PoachedIdalene F.KesnerFirst Person r0203bThe Trouble Ive SeenDavid N.JamesDifferent Voice r0203cEverything I Know About Business I Learned from MonopolyPhil OrbanesThe 2002 HBR List: B
2、reakthrough Ideas r0203dfor Todays Business AgendaThe Virtue Matrix: Calculating the Return r0203eon Corporate ResponsibilityRoger L.MartinThe Hidden Challenge of Cross-Border Negotiations r0203fJames K.SebeniusMaking Sense of Corporate Venture Capital r0203gHenry W.ChesbroughThe HBR Interview r0203
3、hEdgar H. Schein: The Anxiety of LearningDiane L.CoutuFrontiers r0203jPredicting the UnpredictableEric BonabeauTool Kit r0203kDo You Have a Well-Designed Organization?Michael Goold and Andrew CampbellMarch 2002 4Copyright 2002 by Harvard Business School Publishing Corporation.All rights reserved.arg
4、e companies have long sensed the potentialvalue of investing in external start-ups. More often than not, though, they just cant seem toget it right.Recall the mad dash to invest in new ventures in thelate 1990sand then the hasty retreat as the economyturned. Nearly one-third of the companies activel
5、y in-vesting corporate funds in start-ups in September 2000had stopped making such investments 12 months later,according to the research rm Venture Economics, andduring the same period,the amount of corporate moneyinvested in start-ups fell by 80%. This decline in invest-ments was part of a historic
6、 pattern of advance and re-treat,but the swings in recent years were even wider thanbefore: Quarterly corporate venture-capital investmentsin start-ups rose from $468million at the end of 1998 to$6.2 billion at the beginning of 2000 and then tumbled to $848million in the third quarter of 2001.While
7、privateVC investments also ebb and ow as the economychanges,the shifts in corporate VC investments have beenparticularly dramatic.ofCorporateLVentureCapitalMaking Senseby Henry W. ChesbroughCompanies have,at best,a mixed record funding start-ups.A newframework,simple in design but powerful in applic
8、ation,can help identify the investments that will yield a return that mattersstrategic growth.Such inconsistent behavior certainly contributes to thelow regard with which many private venture capitalistsview in-house corporate VC operations.In their eyes,thewild swings are further evidence that big
9、companies haveneither the stomach nor the agility to manage invest-ments in high-risk, fast-paced environments. They alsopoint to some high-prole missteps by individual compa-nies to support this conclusion. Those missteps have,in turn, tended to make some companies hesitant tolaunch programs to inv
10、est in external start-ups, even ingood times.A number of companies, however, have deed thisstereotype of the bumbling corporate behemoth and havecontinued to make investments in new ventures.Even assubstantial numbers of corporate venture capitalists haveheaded for the exits in the past year and a h
11、alf,some bigcompaniesincluding Intel,Microsoft,and Qualcommhave publicly committed themselves to continued highlevels of investment. Otherssuch as Merck, Lilly, andMillennium Pharmaceuticalshave actually come in thedoor as others have left.What gives these optimists theircondence? More generally,why
12、 have some companiesforays into venture capital been successful, generating signicant growth for their own businesses?To answer these questions, we need an orga-nized way to think about corporate venture capi-tal,a framework that can help a company decidewhether it should invest in a particular star
13、t-up by rst understanding what kind of benet mightbe realized from the investment.This article offerssuch a framework,one that also suggests whenthat is,in what kind of economic climatesdiffer-ent types of investment are likely to make sense.But rst, lets briey dene corporate venturecapital. We use
14、the term to describe the invest-ment of corporate funds directly in external start-up companies. Our denition excludes investments madethrough an external fund managed by a third party,evenif the investment vehicle is funded by and specically designed to meet the objectives of a single investing com
15、-pany. It also excludes investments that fall under themore general rubric of “corporate venturing”for exam-ple,the funding of new internal ventures that,while dis-tinct from a companys core business and granted someorganizational autonomy,remain legally part of the com-pany.Our denition does includ
16、e,however,investmentsmade in start-ups that a company has already spun off asindependent businesses.Our framework helps explain why certain types of cor-porate VC investments proliferate only when nancial returns are high, why other types persist in good timesand in bad,and why still others make lit
17、tle sense in anyphase of the business cycle. It can also help companiesevaluate their existing and potential VC investments anddetermine when and how to use corporate VC as an in-strument of strategic growth.The Dual Dimensions of Corporate VCA corporate VC investment is dened by two characteris-tic
18、s: its objective and the degree to which the operationsof the investing company and the start-up are linked.Al-though companies typically have a range of objectives fortheir VC investments, this type of funding usually ad-vances one of two fundamental goals.Some investmentsare strategic: They are ma
19、de primarily to increase thesales and prots of the corporations own businesses. Acompany making a strategic investment seeks to identifyand exploit synergies between itself and a new venture.For example,Lucent Venture Partners,which invests thetelecommunications equipment makers funds in exter-nal c
20、ompanies, makes investments in start-ups that are focused on infrastructure or services for voice or data net-works. Many of these companies have formal allianceswith Lucent to help sell Lucents equipment alongsidetheir own offerings. While Lucent would clearly like tomake money on its investments i
21、n these start-ups, it iswilling to accept low returns if its own businesses performbetter as a result of the investments.The other investment objective is nancial,wherein acompany is mainly looking for attractive returns. Here,a corporation seeks to do as well as or better than privateVC investors,d
22、ue to what it sees as its superior knowledgeof markets and technologies,its strong balance sheet,andits ability to be a patient investor.In addition,a companysbrand may signal the quality of the start-up to other in-vestors and potential customers, ultimately returning rewards to the original invest
23、or.For example,Dell Ven-tures,Dell Computers in-house VC operation,has madenumerous Internet investments that it has expected toearn attractive returns. While the company hopes thatthe investments will help its own business grow,the mainmarch 20025Making Sense of Corporate Venture CapitalHenry W. Ch
24、esbroughis an assistant professor of businessadministration and the Class of 1961 Fellow at Harvard Busi-ness School in Boston.He can be reached at hchesbroughhbs.edu.Our framework can help companies evaluate their existing and potential VC investments and determine when and how to use corporate VC
25、as an instrument of strategic growth.rationale for the investments has been the possibility ofhigh nancial returns.The second dening characteristic of corporate VC investments is the degree to which companies in the in-vestment portfolio are linked to the investing companyscurrent operational capabi
26、litiesthat is,its resources andprocesses.For example,a start-up with strong links to theinvesting company might make use of that companysmanufacturing plants,distribution channels,technology,or brand.It might adopt the investing companys businesspractices to build, sell, orservice its products.Somet
27、imes, of course, acompanys own resourcesand processes can becomeliabilities rather than capa-bilities, particularly whenit faces new markets or dis-ruptive technologies.1Anexternal venture may offerthe investing company anopportunity to build newand different capabilitiesones that could threaten the
28、viability of current corporate capabilities.Housing thesecapabilities in a separate legal entity can insulate themfrom internal efforts to undermine them.If the ventureand its processes fare well,the corporation can then eval-uate whether and how to adapt its own processes to bemore like those of th
29、e start-up.In rare cases,the companymay even decide to acquire the venture.Four Ways to InvestClearly,neither of these two dimensions of corporate in-vestingstrategic versus nancial and tightly linked versus loosely linkedis an either-or proposition. Most investments will fall somewhere along a spec
30、trum be-tween the two poles of each pair of attributes.Still,over-laying the two dimensions creates a useful framework to help a company assess its current and potential VC in-vestments.(See the exhibit “Mapping Your Corporate VCInvestments”for a depiction of these distinct types of cor-porate ventu
31、re capital.)Driving Investments.This type of investment is char-acterized by a strategic rationale and tight links betweena start-up and the operations of the investing company.For instance,Agilent Technologies created a VC operationto invest in three strategic areaslife sciences, wirelesscommunicat
32、ions, and optical communicationsthat ithas identied as key to its growth. The VC arm worksclosely with the companys existing businesses to share information,qualify investment opportunities,and con-nect portfolio companies to Agilents own initiatives.Forexample,Agilent has recently invested in a sta
33、rt-up com-pany making wireless radio-frequency devices,a productarea Agilent plans to explore in its own business.If this investment is successful, Agilents future business willbenet; if it fails,Agilent will get a valuable early warningabout pitfalls to avoid in that business.Similarly, Microsoft h
34、as earmarked more than $1 bil-lion to invest in start-up companies that could help ad-vance its new Internet services architecture,“.Net.”ThisMicrosoft technologywhich will enable its Windowsplatform to provide a variety of Internet servicesis acontender to set the standards for the next generation
35、ofproducts and services over the Web.Microsoft is fundingstart-up rms that will exploit its architecture and,in sodoing, promote the adoption of the Microsoft standardover rival approaches from Sun Microsystems and IBM.The start-ups are tightly linked to Microsofts operationsthrough the Windows soft
36、ware and tools that the com-pany provides to them for the development of their ownproducts.The strategic value of Microsofts .Net investments ishighlighted by the companys decision to make them inthe shadow of earlier VC investment losses.The companyhas written off staggering sums$980million in the
37、thirdquarter of 2000 alonein its corporate VC portfolio.Butrather than backing off,Microsoft is charging ahead withnew .Net investments.Because they could help the com-pany win the battle over the next Internet services stan-darda major strategic victoryit is willing to risk sub-stantial nancial los
38、ses.Although its clear that many driving investments canadvance a corporate strategy,there are limits to what theycan achieve.The tight coupling of these investments witha companys current processes means that these invest-ments will sustain the current strategy.They will be un-likely to help a corp
39、oration cope with disruptive strategiesor to identify new opportunities when the company mustgo beyond its current capabilities to respond to a changein the environment.If a corporation wants to transcendcurrent strategy and processes,it should not rely on driv-ing investments,which are ill suited f
40、or these tasks.Enabling Investments. In this mode of VC investing,a company still makes investments primarily for strategicreasons but does not couple the venture tightly with itsown operations. The theory is that a successful invest-6harvard business reviewMaking Sense of Corporate Venture CapitalW
41、hile corporate VC investments have generated decidedly uneven nancial returns,they should not be judged primarily on that basis.They should be thought of as important ways for a company to fuel the growth of its business.ment will enable a companys own businesses to benetbut that a strong operationa
42、l link between the start-upand the company isnt necessary to realize that benet.This may seem too good to be true.How can a companysstrategy benet if its operations are not tightly linked to the venture? One answer lies in the notion of comple-mentarity: Having one product makes a person want anothe
43、r.A company can take advantage of this notion byusing its VC investments to stimulate the development ofthe ecosystem in which it operatesthat is,the suppliers,customers, and third-party developers that make goodsand services that stimulate demand for the companysown offerings.Intel Capital,the inve
44、stment arm of the semiconductorgiant, is a paradigmatic example of a company making enabling investments.Back in the early 1990s,long beforecorporate venture capital was fashionable,Intel realizedit could benet from nurturing start-ups making com-plementary products: Demand for them could spur in-cr
45、eased demand for Intels own microprocessor products.So Intel invested in hundreds of companies whose prod-uctssuch as video, audio, and graphics hardware andsoftwarerequired increasingly powerful microproces-sors inside the computers they ran on,thereby stimulat-ing sales of Intel Pentium chips. Whe
46、reas Microsofts VC investments in start-ups seek to establish a new stan-dard, in Intels case, the investments have mainly beenaimed at increasing its revenue by boosting sales withinthe current Wintel operating system standard.march 20027Making Sense of Corporate Venture CapitalIntel Capitals enorm
47、ous VC investment portfolio hasbeen the subject of some derision. Critics charge thatIntel engages in “drive-by investing.”They argue that thecompany cannot possibly coordinate with its own opera-tionsor even effectively monitorthe more than 800investments it has made in the past decade.But this cri
48、t-icism misses the point of Intels investment strategy.Thestrategic value to Intel lies not in its ability to coordinateits operations with the companies in its investment port-folio but rather in the increased demand for Intels ownproducts generated by its portfolio companies.Intel neednot closely
49、manage every investment because it typicallycoinvests alongside VC rms that direct the venturesgrowth and monitor their performance.Intel itself may have added to the confusion about itsinvestment rationale by widely touting the nancial returns it earned in recent years.The high returns were in fact secondary to Intels strategic objectives, merelymaking Intels investments more affordable.The strategicbenets of these enabling investments have spurred Intelto continue with this type of funding,despi
