Corporate Venture Capital: Who Adds Value?

Corporate Venture Capital: Who AddsValue?

DODO ZU KNYPHAUSEN-AUFSEßUniversity of Bamberg, Bamberg, Germany

(Accepted 19 August 2004)

ABSTRACT Corporate venture capital (CVC) is a phenomenon that has received changing levelsof attention in the last two decades. To understand the varying performance of CVC activities, itis important to analyse the value added CVC firms provide to investee start-up companies. Thisanalysis in itself is an important contribution to existing literature. This paper argues thatdifferent CVC firms rely on different resource bases. Thus, different ‘types’ of CVC providers canbe distinguished. Empirical case studies serve to illustrate these different types. A number ofpropositions are derived in order to answer the question which of these CVC investors may be bestsuited to add different kinds of value to the start-up firms. The derived propositions may leadempirical research in the future.

KEY WORDS: Corporate venture capital, value-added, entrepreneurial spirit, strategy,technological capability, social capital

Introduction

During the past years, many large companies have invested significant resources incorporate venture capital (CVC) activities. However, this is not the first wave of suchactivities. In the 1980s, there was a peak of investments that receded during the crisisin the venture capital industry at the end of the 1980s (McNally, 1997). In the pastthree years (2001 – 2003), CVC investments have been reduced significantly and anumber of CVC units have disappeared (Ernst & Young, 2002).1 In January 2002,for instance, Lucent sold an 80 % stake of its until then very successful Lucent NewVentures Group (Chesbrough 2000) to secondaries specialist Coller Capital, and inOctober 2002, GE Capital announced to cease investing and to wind up its existingfund investments. On the other hand, there are also examples of companies that onlyrecently engaged in—and are still committed to—the CVC business, especially in thepharmaceutical industry, such as Merck or Eli Lilly (Van Brunt, 2002). The suddengrowth and then reduction of CVC investments suggests that firms might be simplyfollowing market trends in order deal with technological uncertainties (Gompers &

Correspondence Address: University of Bamberg, Feldkirchenstrasse 21, 96045 Bamberg, Germany. Fax:

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Venture Capital,Vol. 7, No. 1, 23 – 49, January 2005

ISSN 1369-1066 Print/1464-5343 Online/05/010023-27 # 2005 Taylor & Francis Ltd

DOI: 10.1080/1369106042000335610

Lerner, 1999: 118 – 119) and free cash flow (Mishra & Gobeli, 2000; Ernst & Young,2001), rather than building such activities into the core of an integrated innovationmanagement process (Hamel, 1999; McGraph & MacMillan, 2000; Arora et al.,2001; Leifer et al., 2001; Ernst & Young, 2001; Mason & Rohner, 2002; Chesbrough,2003; Mackewicz & Partner, 2003). Consequently, there is a danger that firms mightget rid of their activities too early and in an unreflected manner, and vice versa, in thenext future bubble. At least, decisions to reduce or to deploy investments should bebased on a detailed analysis of the possibly lost or gained opportunities that mightgo along with these activities. Firms should know what they can contribute to thesuccess of their portfolio firms (see Christensen & Raynor, 2003) and whether CVCactivities can serve as a viable part of the parent firm’s innovation network. Thecentral conjecture that motivates this paper is that the ‘value-added’ of CVC isdependent on the resources and capabilities that different types of parent companiespossess and transfer to start-up firms. Thus, the research question to be answered inthis paper is how different types of CVC parent companies influence the creation ofvalue for their portfolio companies.

This exploratory paper is structured as follows. First, a review of the ‘state of theart’ findings on ‘corporate venture capital’ is given in section 2. Section 3 describesthe research methodology which is based on a multiple case study approach. Insection 4, the results of my case studies are presented. In section 5, a number ofresearch propositions are derived, which could serve as a basis for subsequent work.Furthermore, two additional points are discussed that came up in the case studies:the transfer of resources/capabilities and the incentive problems that may hindercorporate investors to fully exploit their capacities. Section 6 draws the conclusionsof this paper.

Background: What is ‘Corporate Venture Capital’ and how does it Create ‘Value

Added’?

The North-American National Venture Capital Association (NVCA) defines‘corporate venture capital’ as:

‘direct investing’ in portfolio companies by venture capital programs orsubsidiaries of nonfinancial corporations. These investment vehicles seek to findqualified investment opportunities that are congruent with the parentcompany’s strategic technology or that provide synergy or cost savings. (NVCA2001)

The NVCA states that there are two basic characteristics that distinguish corporateventure capital from other types of venture investment vehicles. One is thatcorporate venturing is usually performed with corporate strategic objectives in mind,such as increasing the demand for the company’s own core products or theacquisition of new technologies (Fast, 1978; Siegel et al., 1988). In contrast, otherventure investment vehicles typically have investment return or financial objectivesas their primary goal. This is, by and large, confirmed by empirical investigationswhich found that most CVC units are at least dominated by strategic goals (Kann,2001; Tyebee, 2001; Mackewicz & Partner, 2003). Secondly, corporate venture units

24 D. Z. Knyphausen-Aufseß

usually invest their parent’s money while other venture investment vehicles investexternal investors’ capital.

According to the literature (Gompers & Lerner, 1999; Kann, 2001; Maula, 2001;Maula & Murray, 2001; Dushnitzky & Lenox, 2003a, 2003b), there are five maintypes of contributions made by corporate venture capital in addition to the fundsprovided: (1) reputation effects resulting from the co-operation with an establishedplayer (‘corporate certification’); (2) stimulation of business by initial orders; (3)access to distribution channels; (4) support of R&D; and (5) arrangement of(national and international) industry relationships. There are, however, differentanswers to the question as to which contribution is of most relevance. Bain &Company (2000) emphasize the importance of industry relationships. A study byMackewicz & Partner (1997) shows that start-up companies prefer CVC units toindependent VC companies because of their contributions (2) to (5). Finally, in astudy of Red Hat, Maula & Murray (2001) point out the special importance of‘corporate certification’ (see also Kelley & Spinelli, 2001; Maula, 2001; Maula et al.,2003, 2005).

In addition to the positive effects of CVC, there are some inherent risks (Maula &Murray, 2001). For the start-up company, integrating a corporate investor maymake it more difficult for the investor’s competitors to become customers orpartners. There is also the risk that corporate investors might exploit the start-ups’know-how without giving the promised input. A favourable business model (Alvarez& Barney, 2001) and clearly defined patent rights could help to reduce this danger(Kann, 2001).

What is the overall effect of the above-mentioned positive and negative aspects ofvalue creation on the performance of start-up companies and, thus, on the revenueof CVC activities?2 Gompers & Lerner (1999) state that compared to independentVC-financed start-ups, CVC-financed start-up companies are more likely to reachthe IPO stage and less likely to be liquidated, especially if there is a high ‘strategicfit’ between the parent company and the start-up. Furthermore, their researchshows that the pre-money evaluation of start-ups with a CVC investment is higherduring the different investment rounds than with an independent VC investment.However, their data do not allow for a conclusion as to whether this highervaluation is due to a higher value contribution of the CVC investment or to adifference in the terms of the contract. On the basis of a sample of 1998 and 1999NASDAQ IPOs by information and communication technology companies, Maula& Murray (2001) confirmed both of their hypotheses. They found that compared tostart-ups in which only independent VC companies invested, the (post-money)valuation was higher when one or more CVC investors were involved. However, thelatter case may bring some complications. For example, in the open source softwareindustry, two of Red Hat’s corporate investors, Intel and IBM, were also involvedin Red Hat’s competitor SuSE (now part of Novell) through investments and salespartnerships. The market power of IBM and Intel is so strong that neither Red Hatnor SuSE can claim an exclusive relationship. A real danger for start-up companiesis that their know-how will be extracted and possibly even be made available tocompetitors. As a result, neither Red Hat nor SuSE would be interested in a veryclose relationship with their corporate investor, even at the expense of other valuecontributions.3

Corporate Venture Capital: Who Adds Value? 25

The extant research on corporate venture capital suffers from two problems. Thefirst problem is that this research does not, or at least not sufficiently, systematicallytake into account which value contributions (apart from money) are really neededfrom the perspective of the start up-firms. The second problem is that the extantliterature does not attempt to answer the question whether there are possibledifferences between CVC providing firms with respect to these ‘real’ demands ofstart-up companies, and how their contribution of ‘value-added’ may actually work.

The first issue is certainly easier to access since the entrepreneurship literatureoffers some insights. For example, Lee et al. (2001) and Hitt et al. (2001) considerfour categories of resources or capabilities to be important to a start-up company:(1) entrepreneurial orientation; (2) the capability to develop and implementstrategies; (3) technological capability; and (4) social capital. Doubtless, entrepre-neurial orientation plays a major role in the development of young companies(Schumpeter, 1934, 1947). However, attempts to base entrepreneurship on singlepersons and their characteristics have failed (cf. Martinelli, 1994). Instead, recentstudies relate entrepreneurial orientation to the company as a whole (Lumpkin &Dess, 1996). This view comprises three elements: (1) the power of innovation, whichmeans the company’s ability to develop innovative ideas, to experiment and to investin R&D; (2) the willingness to take risks, i.e. to invest a major part of the resources innew, insecure ventures; and (3) the capability to develop new markets in a proactiveway. Also, complimentary to this entrepreneurial orientation is the capability todevelop and implement strategies: ‘As such, entrepreneurial actions entail creatingnew resources or combining existing resources in new ways to develop andcommercialize new products, move into new markets, and/or service new customers.On the other hand, strategic management entails the set of commitments, decisions,and actions designed and executed to produce a competitive advantage and earnabove-average returns’ (Hitt et al., 2001: 480). Technological capability describes thepossibility to develop a technology and ‘actually make it work’. Finally, social capitalmeans the ability to pose as a legitimate ‘player’ in the relevant economic market andactivate other actors for the further development of one’s own business activities(Coleman, 1988; Nahapiet & Ghoshal, 1998).

Given these hints, how can we relate them to different types of corporate venturecapital providers in order to deal with the second issue raised above? Is there anyviable typology of firms engaging in this activity at all? What might the process of‘value-adding’ look like? Those are the questions which are much more difficult toanswer on the basis of the extant literature. The rest of this paper will deal with thesequestions in order to derive some preliminary propositions that could guidesubsequent research.

Research Methodology

Although, as we have seen in section 2, some research has been conducted on thevalue created by the corporate investors for their portfolio firms, we are far awayfrom a sound theoretical basis to understand the contribution of value fromdifferent types of parent firms and the resulting performance implications both forthe corporate investor and the portfolio firms (Christensen & Reynor, 2003).Therefore, I followed the recommendations of Glaser & Strauss (1967); Yin (1984);


Pettigrew (1979, 1990) and Eisenhardt (1989) and conducted a number of casestudies to develop theory in this research area. Two methodological points areimportant. The first is that the case studies were structured by some ‘guiding lights’that were derived from the existing literature but also left space for new insightsthat came up in the research process and had to be aligned with theoreticalconsiderations afterwards. Secondly, it ‘makes sense to choose cases as extremesituations and polar types in which the process of interest is ‘‘transparentlyobservable’’’ (Eisenhardt 1989: 537).

The differentiation between those polar types or ‘categories’ is an importantingredient to theory building (Christensen & Raynor, 2003). The challenge is,however, to derive a meaningful typology or categorization that helps tounderstand the universe of possible cases. Since this research is based on a smallnumber of case studies, any statistical classification procedure such as clusteranalysis (see, for example, Miller, 1981) is not applicable. On the other hand, thewell-known typology of firm archetypes developed by Henry Mintzberg (1981)could not be used as a starting point for my analysis because it simply does notcover the reality of many companies today—e.g. a technology-based start-up iscertainly ‘more’ than the ‘simple structure’ described by Mintzberg. Hence, for thepurpose of this study, I used a rather pragmatic approach based on some historicalobservations (see Figure 1).

The horizontal axis makes a distinction between a focus on technology and a focuson synergy or cost savings, a distinction taken from the NVCA’s definition citedabove. Technology-oriented companies such as Xerox or AT&T were clearly thepioneers of the Corporate Venture Capital concept in the 1960s (Gompers & Lerner,1999). As the ‘shadow of venture capital’ (Chesbrough, 2000) became more andmore visible in the late 1990s (see Gompers & Lerner, 2001), however, otherestablished ‘low-tech’ companies, such as financial service firms (which wereexcluded by the NVCA’s definition) and media companies, also became interestedin this concept but certainly claimed other strengths than their technology-orientedpredecessors. Furthermore, there were other followers that do not representestablished industry incumbents in the traditional sense but a new style ofknowledge-intensive management (Martin & Moldoveanu, 2003) (see the verticalaxis of Figure 1). On the one hand, management consulting firms were challenged bythe assumed attractiveness of the venture capital firm’s business model for theirprofessionals and were certainly convinced that they could offer a similar valueproposition to emerging start-up firms. On the other hand, some start-up firms hadabundant resources from their IPO that could be used to support other projects. Notall of these start-up firms were technology-based in a narrow sense, but most of themwere at least technology-affine and used, for example, the internet as an importantelement of their business model.

I do not claim that this typology is mutually exclusive (Accenture, for example,has certainly a strong technology orientation, and Siemens’ focus is not only ontechnology, as we will see below), but it provides a solid starting point for theexplorative empirical work. Hence, I identified my cases from four different groupsof companies which represent (preliminary) ‘types’ of corporate investors, andinvestigated eight companies which belong to one of these groups: (1) Siemens as anexample for a large technology company; (2) JP Morgan and Bertelsmann as


examples for large non-technological companies; (3) Accenture, Bain & Co. andRoland Berger Strategy Consultants (RBSC) as exemplars of management consultantcompanies; and (4) Consors as a start-up firm that invested into other start-upcompanies.

The data for the case studies were obtained through an extensive analysis ofwebsite information, press releases, company presentations and ten personalinterviews with executives and investment managers of the companies, lasting fromhalf an hour to two hours. All interviews were conducted in the last quarter of 2001and the first half of 2002. They were fully transcribed and authorized by theinterviewees.4 Since I analysed external sources until the end of 2002, the caseanalysis covers the ups and downs of the last bubble period (1998 – 2002). Theprincipal unit of analysis is the variety of CVC activities of single firms, although Iincluded some observations of one specific investor – investee relation: Consors’investment in 100world, a German software company located in Nuremberg,Germany. There were two reasons for not focussing on investor/investee pairs ofrelationships. First, the actual need of investee firms can be quite different dependingon its specific resource profile; taking these differences into account would have beenbeyond the scope of this paper. Second, from the investee start-up companies’perspective, it has to be considered that the strengths and weaknesses of differentCVC investors—as well as the specific inputs from independent VC companies—canbe balanced to their own advantage by (1) co-investments (see Maula & Murray,

Figure 1 A typology of CVC investors


2001; Brandner et al., 2002) and (2) choosing different partners in different financingrounds—at least, if their position of negotiation is strong enough.

Case Study Evidence

Overview

Table 1 comprises information for all (types of) companies I analysed for this paper.Obviously, all companies—with the exception of Consors, which was simply toosmall at that point in time to engage in more activities—established a range ofcomplementary activities to foster innovation and to support start-up firms in thebest possible way. Not only did they start traditional CVC activities in the sense ofthe NVCA definition cited above but they also built up incubator (or ‘lab’)organizations in order to get access to very early-stage projects.

Siemens and Bertelsmann also maintained relations to third-party venture capitalfirms that they originally helped to establish, although, at least in the case ofBertelsmann, with a fading commitment. Accenture, Bain & Co. and RBSC, thethree consulting firms, on the other hand, actively promoted collaboration withventure capital firms, in the case of Bain with a solid background since this companywas heavily involved in consultancy of private equity activities for a long time.5 Bainfounded Evolution Global Partners in 2000, together with the established VCcompany Kleiner Perkins Caufield & Byers and Texas Pacific Group, a privateequity company, to support spin-offs of established companies which meet certainrequirements (www.ecopartners.com; accessed January 2003). RBSC, anotherleading management consulting firm in Europe, had quite a different approach,with a sophisticated business logic. In July 2000, the company strategically alliedwith the publicly traded VC company bmp AG and took a 10% equity stake in it.According to a press release on the occasion of the conclusion of the contract, thecompany expected an impetus of ‘consulting for equity’, which is an ideal basis forbusiness relations for start-ups in their tight financial situation. In principle, bmpbuys the equity stake from the consulting firm thus creating a flow of fees. This leadsto the creation of networks: the client receives consulting plus capital as a bundledservice, the co-investor (bmp) increases its chance of higher valuation through abetter knowledge of the invested objects. Finally, the consultancy benefits fromsecuring its liquidity through the fee-financing via bmp, thus being able to augmentits attractiveness as an employer for its consultants by sharing capital gains withthem from its 10 percent investment (cf. press release, 11 July 2000).6

Given this infrastructure, what, then, are the resources the different firms cancontribute to start-up firms in order to make their endeavours as successful aspossible? To answer this question, I use the four categories mentioned above(entrepreneurial spirit, strategy development and implementation, technologicalcapability and social capital).

Entrepreneurial Spirit

All of the case study companies were thrilled by the entrepreneurial spirit thataccompanied the e-business wave in the late 1990s. Siemens, for example, actively


Table 1. Descriptive information about case study companies

Type of CVC investor& Selected companiesfor case study research

Technology-orientiedindustry incumbents

(Siemens AG)

Non-technology orientedindustry incumbents (J.P.

Morgan Chase, Bertelsmann)

Management consultingcompanies (Accenture, Bain,

Roland Berger StrategyConsultants)

Growth-oriented start-upfirms (Consors)

Selected company Global powerhouse in J.P. Morgan Chase: All three companies are German online brokerageinformation electrical engineering and

electronics, headquartered inMunich, Germany.

One of the worldwide leadingfinancial service companies,headquartered in New YorkCity

leading consulting firms,Roland Berger StrategyConsultants with a strongfocus on Europe (Munich

pioneer, headquartered inNuremberg, Germany.Founded in 1994, IPO in1999.

Bertelsmann: office as nucleus of theOne of the worldwide leadingmedia companies,headquartered in Gutersloh,Germany

company), the others withroots in the U.S.. Accenturehas a strong IT focus andemploys approx. 75 000people, far more than allother consulting companies.

CVC vehicles during Siemens Corporate Venture J.P. Morgan Chase: Accenture: Consors Capitaltime of investigation Capital (SVC) as corporate

venture capital unit; otherJ.P. Morgan Partners; LabMorgan

Accenture TechnologyPartners, in connection with

CVC units on the divisional Bertelsmann: 22 Business Launch Centers;level; different incubators &accelerators; Fund-in-Fundinvestments

Bertelsmann Valley,Bertelsmann CapitalVentures, (BV Capital;independent; Bertelsmann

GameChange as a network ofincubators (in co-operationwith Softbank VentureCapital)

as fund-in-fund investor). Bain & Co.:In addition: CVC unit in onedivision (Gruner and Jahr)

Evolution Global Partners(Joint Venture with twopartner firms); BainlabRoland Berger Strategy C.:10% equity stake at bmp, apublicly traded VC firm

(continued)

30

D.Z.Knyphausen

-Aufseß

Table 1 (continued)



(Siemens AG)






Strategic goals Window on technology J.P. Morgan Chase: Window on technology Feeding new companies toGain reputation as reliableand innovative partner in

New customers for financialservices

Access to new businessmodels

the stock market in order tosupport brokerage business

VC networks Input for own business Generate new consulting Use synergies for ownExploit non-core technology model transformation’ business e-finance conceptsbase Hinder ‘brain drain’ Hinder ‘brain drain’

Bertelsmann: Exploit marketWindow on technology opportunities

Investment focus Information & J.P. Morgan Chase: Mainly software and Mainlycommunication technologies Technology, media and eBusiness (eCommerce, eBusinessAutomation and control telecommunications Internet & Content, eFinance

Life sciences telecommunications, CRM technologyMedical engineering Bertelsmann: management, media & and other growth marketsPower & energy Wireless & broadband entertainment, others). bmp

markets (RBSC) also invested in lifeOn-demand & interactiveentertainment services

sciences.

Community building (such asP2P)Digital asset managementapplications

Value proposition(apart

Brand name, Siemens’ J.P. Morgan Chase: Access to industry and Share ideas on technology

from money) Access to worldwide Support of management technology-related know and business concepts in themarketing and distribution in improving technologies, how area of e-financechannels building up management Development of concepts Share experiences in

(continued)

Corporate

Venture

Capita

l:WhoAddsValue?

31

Table 1 (continued)



(Siemens AG)






resources and expandingglobally

Access to network ofconnections to leading

managing a high-growthcompany

R&D support Huge customer base industrial companiesNetwork of leading worldwidetechnology companies Brand nameBertelsmann:Content

Licensing or OEM licenses Media services such asprinting, storage media,manufacturing, distribution,financial and marketingservicesBertelsmann customer baseBroad network of marketknowledge and technologicalassistance

Outcome (1999 –Q1 2003)

More than 70 direct and J. P. Morgan Chase: All activities withdrawn due Started some investment in

more than 25 fund-in-fund Hundreds of investments to lack of success; only eInsurance business,investments Roland Berger Strategy eAuction (like ebay) andMajor restructuring in Consultants still holding its technology for the webOctober 2001 10% stake in bmp (which (100world).

had to massively restructureits portfolio)

Consors Capital made someIPOs (like the Investmentbank from Schwab Epochpartners). Very bad markettiming (no IPO in Germanysince 2001)

(continued)

32

D.Z.Knyphausen

-Aufseß

Table 1 (continued)



(Siemens AG)






At the end of 2002announcement of Increased

Massive write-offs since July2001

Activities totally stopped dueto the market

investment activity in medicalsolutions in the U.S and inthe U.K.

Lab Morgan reduced to avery small unit and with anew focus

conditions (investmentbusiness) and sold to the newshareholder BNP

Bertelsmann: Paribas.Only 6 investments ofBertelsmann CapitalVentures; Bertelsmann Valleyconsolidated withBertelsmann CapitalVentures after very limitedsuccess; final consolidation inAugust 2002

Corporate

Venture

Capita

l:WhoAddsValue?

33

promoted its transformation to an ‘e-company’, apart from the company’s high-priority ‘TOP’ programme which was focused on fostering innovation and customerorientation of all employees (see Kunerth, 1994). On the other hand, in the financialservices industry, ‘Charles Schwab’s market cap is bigger than Merrill Lynch’s!’ and‘we’re going to get amazoned!’ are two statements that point out the upcoming spiritof that time.7 Many large firms in the financial services industry—such as J. P.Morgan Chase—decided to open the window of technological opportunitiesprovided by the Internet and to prevent employees from joining young start-upcompanies. In a similar vein, Bertelsmann—a company that always claimed to beentrepreneurially driven and still under the strong influence of its founder ReinhardMohn—has fostered an intrapreneurship initiative within the company that isconnected to its central spin-off programme. After a traineeship of about 15 months,four to ten ‘high potentials’ from different countries were intended to receiveentrepreneurial responsibility for a business, thus getting ‘the chance to work on upto four independent and success-oriented entrepreneurial projects at severalinternational locations’ (Bertelsmann website, accessed May 2000). Later, thisconcept was included in a management philosophy that also encourages spin-offs.Former CEO Thomas Middelhoff’s appeal expressed it succinctly:

See yourself and your unit as a start-up within the company. Beat yourcompetitors. Develop ground-taking media technology, even if at first theycannot be integrated into the typical business plan. And have the courage tospin-off with your new technology and make an IPO for Bertelsmann.8

Whereas management consulting traditionally propagate a business model thathighlights the need for independence from clients and, therefore, fixed consulting fees(excluding entrepreneurial risks), Bain & Co. is an example of a consulting companythat also heavily bet on an entrepreneurial spirit. Bain’s Website (accessed December2001) articulated this spirit in the following manner:

Bain offices brim with the same electricity found at start-ups. We pioneered thepractice of taking equity in lieu of fees, which means that Bain’s outcomes arelinked to our clients’ successes. In recent years, we’ve increasingly been takingequity to work for start-ups in new-economy and traditional environments.Many would-be entrepreneurs discover their venture ideas and find their futurebusiness partners while working among Bain’s capable and energetic mix ofpeople. We support those who go on to start new companies. We aim to developlifelong relationships with our alumni, which has the additional benefit ofkeeping our current staff.

The Bainlab initiative that started at individual offices in 1999 and was, on the onehand, supposed to leverage business ideas with growth potential and, on the otherhand, to strengthen Bain’s commitment to the new economy, can be seen as a directmanifestation of this approach:

We said: We are not dumb! Why do all these internet start-ups exist? We can dowhat they do, with our consulting expertise at hand. We are located in America,


we have access to all data sources, we know what is going on at the stockexchange in 6, 9 or 12 months, we know all the business models that work.(interview)

However, the lab idea simply fell asleep in 2001. Why was this so? Dr EkkehardFranzke who was responsible for Bainlab in Munich, Germany, explains:

Time slipped away, the markets were always faster. All the time therewere 6 to 10 companies who had the same ideas [. . .] We are very good inthinking through a business model. Where is the profit potential? Howmuch money can you make? How the incumbents would react? Who arethe right customers? What is the best market entry strategy? [. . .] But, allthis is built on existing ideas. I believe, consultants are, ultimately,‘structurers’ and analysers. That is something different than being anentrepreneur.

This quote shows that despite of all popular announcements of an entrepreneurialfirm culture, it still has to be questioned whether this culture is exactly that whichcomplements the needs of a start-up company and, therefore, such a firm can reallyadd value to a start-up company. Dr Burkhard Schwenker, a managing partner ofRBSC, comments:

For myself, I have answered this question: We are not able to do that . . .To point that out, I have always had the idea that there is a group offormer consultants with five or six years of experience. This group ofpeople now starts a business and is consulted by a team of youngconsultants who have more or less the same skills as the founder team.That leads to two risks: one, the consultant team will most likely be asfascinated by the business model as the founder team, meaning that thecritical distance gets lost. And two, the skills which are really needed—operative skills such as accounting or liquidity management—are just notthere. For this reason, I think that it makes sense that the managementconsultants focus on large clients while smaller consultants [includingventure capital companies] focus on smaller clients, including start-upcompanies.

In contrast, Consors is a company whose founders and leading managers havecertainly gained very personal entrepreneurial experiences. Matthias Tomann,CEO of 100world, a company in which Consors invested money, explicitelystated that he aimed to draw ‘on the personal expertise of leading Consorsmanagers as well as the transfer of knowledge that Consors had acquired in itsrapid growth’.9 Consequently, Karl M. Schmidt, founder of Consors andelected ‘Entrepreneur of the Year’ in 2000 by manager magazin, a Germanbusiness magazine, and Franz Baur, another board member of Consors, servedalso as board members of 100world, a situation that seemed to materializebecause of the ‘good chemistry stemming from shared founding experience’(Tomann).


Strategy Development and Implementation

In the context of a start-up company, strategy development has first andforemost to do with the definition of a viable business model (zu Knyphausen-Aufseß & Meinhardt, 2002). Since the incumbent companies were stronglyinterested in learning about new business models, it should not be assumed thatthese incumbent companies have much to offer in this respect. Certainly, allventure capital units served as kind of a ‘sparring partner’ in discussions whichaim to make the proposed business model more robust. Thus, it depends on theindividual expertise of the investment manager involved and her or hisexperience with other start-up companies of how much input can be delivered.But even this did not work out for the case of incubators which focus on veryearly (‘seed’) projects. In these projects, at least Bertelsmann reported that oftenthe so-called ‘entrepreneurs’ were so inexperienced that there was not much toargue about. In contrast, Jan Kantowsky, the head of Bertelsmann CapitalVentures, admitted that more experienced entrepreneurs would certainly not askfor an incubator environment; instead, they are searching for ‘the best attorneys,the best accountants and the best tax advisors—they need no incubator’(interview).

Not surprisingly, the management consultant companies that were interviewedwere much more self-confident with respect to their ability to develop a viablestrategy. As Dr Schwenker from RBSC pointed out: ‘Of course we were and we stillare able to write a business plan. That’s not the problem—when there is a good idea,a consultant team can certainly help to elaborate this idea’ (interview). Accenture’s‘Business Launch Centres’ were also aiming at the support of refining the businessmodel and stipulating technical architecture and offered a number of moreoperational services, such as the creation of websites and related settlementprocesses, securing the scalability of web offerings and supporting the robustness ofbusiness processes. All of this points to strategy implementation issues that seem to beso important for start-up firms. However, the operational support discussed here hasa strong technical component and does not necessarily cover other importantoperational issues that start-up firms have to deal with. In the interview quotationcited in the above section on ‘entrepreneurial spirit’, Dr Schwenker of RBSC is quiteclear in saying that consultants usually do not have the knowledge which a start-updesperately requires, especially in the early stage of its existence (such as accountingor liquidity management).

Consors was without doubt a valuable partner to discuss strategy issues, at leastfrom the perspective of a company such as 100world. As mentioned above, the inputof the management expertise of Karl M. Schmidt and Franz Baur as well as otheremployees of Consors was considered as very helpful, especially concerning thedevelopment of the software component strategy and the reorganization of teams in100world’s professional services. However, this success is reduced in two aspects.First, establishing interfaces at Consors for the co-operation, and in part because ofinternal competition, has led to the duplication of competences. Second, the goodchemistry between the key players and the lack of their own experience reduced theneed for strong reporting requirements that would have forced a stronger disciplineon 100world’s management.


Technological Capability

From all the companies in my sample, Siemens is clearly the one that is mostdedicated to technology. The company sees itself as a global electronics andengineering powerhouse: ‘For 155 years, the Siemens name has been synonymouswith cutting-edge technologies and continuous growth in profitability. Ourinnovations—generated in our own laboratories and in co-operation with customers,business partners and universities—are our greatest strength’ (Siemens website,March 2004). In 2002, the company employed more than 53 000 people in itsresearch and development units and spent $5.4 billion. In the same year, thecompany filed 4566 patent applications, holding a top position in Germany, Europeand even in the USA Therefore, it seems natural that the company also sees itsventure capital activities in this context. The most prominent vehicles here are theSiemens Technology Accelerator (STA), Munich, and the Siemens Technology-To-Business Center (TTB) in Berkeley, California, both of which are assigned toSiemens Corporate Technology. The first focuses on the support of corporate spin-offs, whereas the latter specializes in nurturing radical innovations in the corebusiness areas of its sponsors, Corporate Technology, Information and Commu-nications, and the Automation and Drives Group. These activities take place in veryearly development stages of start-up companies. In contrast, the corporate CVC unitspecializes on later-stage financing and is assigned to the corporate financedepartment; it still co-ordinates networks of technical assistance, but is even morefocused on establishing helpful business relations (see below).

J. P. Morgan Chase, Bertelsmann and the management consulting companies alsoclaimed to give technical assistance but this is, by the very nature of the firms, not basedon a proprietary research and development outcome. Accenture is certainly anexceptionbecause of its general technologyorientation and itsTechnologyLabs,whichis a research and development organization dedicated to the combination of deeptechnical and scientific expertise with business know-how. The output is visible. In2001, for example, the European Patent Office granted Accenture 15 software patents(18 in 2002)—although this is a low number compared to the patents Siemens weregranted in the same years alone in the field of software (150 in 2001 and 174 in 2002).10

In the German financial service industry at the end of the 1990s, Consors was apioneer in using advanced e-finance software and a new online business model—oneof these companies, J. P. Morgan Chase, was looking for finding the way to the so-called ‘banking of the future’. From this perspective, it is not surprising that Consorscould offer an attractive value-proposition to start-up firms like 100world, whichalso dedicated its resources to the development of new software solutions for thefinancial service industry. Hence, the provision of technological advice should alwaysbe seen as an interactive process in which both parties involved could improve theirknowledge base. This is also true for the incumbent firms that explicitly used theaccess to innovative start-up firms as a ‘window on technology’.

Social Capital

With respect to social capital, especially the large companies in our sample cancertainly add value. First, they offer a well-known brand name, a strong customer


base and a network of possible (external) collaboration partners. J. P. Morgan Chaseis a good example. As Denis O’Leary, the Executive Manager of LabMorgan,pointed out:11

[T]he two elements of risk in building a business are getting it built and gettingrevenue. . . . We have access to J.P. Morgan Chase’s customers – 32 millionconsumers in the US alone. We’ve probably got one of the biggest companyfranchises in the world, a $714 billion organization. We’ve got very strongbrands—Morgan, Chase, H&Q [Hambrecht & Quist, a San Franciscoinvestment bank], etc.—and we have huge process flows. So all we’ve got todo is point our engines at the platform, and we’ll light ‘em up.

In August 2001, the establishment of a special partnership programme wasannounced by LabMorgan—LabMorgan NetworksTM. This is a platform thatconnects about 20 leading technology companies—including Accenture, Cisco,Compaq and IBM—to approximately 240 employees (IT and Internet experts,consultants, investment bankers) at LabMorgan and its portfolio companies, inorder to exchange ideas on the improvement of operations, reduce costs and improvemarket access. There were three main ideas: (1) promoting the co-operation onbuilding e-finance market places; (2) making available investment possibilities forpartner companies; and (3) creating a leverage for access to cheaper hardware andsoftware, expert know-how and market partners. An example comes from a quote byWebALG Inc.’s CTO, an online provider of services for the automobile industry:‘Being as small as we are, without a track record, it’s difficult to go to a bigtechnology provider and say, ‘‘Give us your best price’’. But if we can go to thatprovider and say we’re part of the LabMorgan network, the pricing is always betterthan we can do on our own’.12

Second, and equally obvious, is the fact that large companies also can offer astrong internal network, a network that has to be organized by the venture capitalunit. ‘We are’, as J. Kantowsky from Bertelsmann explained, ‘a kind of a knowledgebroker. We are, so to say, on the ‘system border’ and connect external innovatorswith internal businesses. If we are successful, we will have the intended transfereffects—innovations come into the company [Bertelsmann]—whereas the start-ups—that is my strong belief—will be more successful altogether’ (interview). The successheavily depends on the willingness of the corporate units to share resources (time,expertise) with the start-up. This is most likely to occur when there is a ‘win-win’situation both for the start-up and the unit involved. Rauser (2002) has pointed outthat even in the case of Siemens—a company that claims to provide a very valuablesocial network due to its technological capabilities—a number of obstacles can arisein this context. First, direct financial incentives can be helpful, but they can also failwhen the time horizon of the investment is too long and does not fit to the short-termprofit expectations corporate divisions usually have to face. Second, as always, the‘chemistry’ between the individual actors is of relevance, as well as the overallworkload these actors have to deal with. And lastly, the geographical distance canalso influence the collaboration of the supposed partners.

Management consulting companies might also appear to offer considerable socialcapital. When Accenture Technology Ventures was created in 1999, the value added


for the portfolio companies should have consisted of four parts: (1) access toindustry and technology related know-how of a total of 65 000 professionals in 48countries (on the basis of service agreements); (2) access to network of connections toleading industrial companies worldwide; (3) the opportunity to use the brand nameand distribution channels of Accenture; and (4) global access to markets. However,the reference to ‘service agreements’ indicates that Accenture was focusing stronglyon obtaining consulting fees (either directly or as shares of the portfolio companies—‘sweat money’). This also explains the establishment of 22 Business Launch Centersthat were supposed to offer consulting services before and, of course, beyond ‘exit’.The question is whether start-ups are willing to pay for those services—the fact thatthe Business Launch Centers have been abandoned soon after their establishmentmight indicate that this may not be the case. Similar was the experience of Bain &Co. who also claimed to ‘bring global reach, and . . . its extraordinary network ofinnovative, change-oriented CEOs’ to their start-up clients (website, accessedNovember 2001).

Consors, itself a start-up company, could not offer a comparable social network,although it was seen, at least by 100world, as an important customer for theirsoftware solutions. Furthermore, contacts to various partners were introduced,leading to new business opportunities. However, at the end, the exclusiveness of theco-operation also meant a growth restraint for 100world. Consors could simply notoffer enough business opportunities.

Outcome

In the venture capital downturn in the early 2000s, all of the CVC activities coveredby my case studies encountered trouble. Relatively speaking, Siemens was the onecase study firm that got-off largely scot-free. On 1 October 2001, different (but notall) units that existed on the divisional level were reorganized under the roof ofSiemens Venture Capital in order to be able to better act with ‘one voice’ in themarket and guarantee consistent investment selection standards. Since then, thecompany seems to continue its strong commitment to the CVC business. In fact, inDecember 2002 it announced that it would increase investment activity in the area ofMedical Solutions (one of Siemens’ key businesses) in Greater Boston, MA, USAand Cambridge, UK.

Table 2. Possible contributions of CVCs to build up critical capabilities of start-ups

Technologycompanies

Non-technologycompanies

Managementconsultants Start-ups

Entrepreneurial orientation xx xx x xxxStrategic development andrealization

x x xx xx

Technological capabilities xxx x x xxSocial capital xxx xxx xx x

Notes: xxx= large contributions; xx=medium contributions; x= small contributions


J. P. Morgan Chase is also still involved in start-up investments via its privateequity partnership. However, since July 2001, the company has written offinvestments of more than US$1 billion, mainly in the communication and e-finance industries, the latter of which includes the investments of LabMorgan. Bythe end of August 2001, this unit had invested in more than 60 start-upcompanies. However, revenue expectations deteriorated during 2001 andpessimism took over. In 2002, these activities were reduced to a small unitwhose principal task is to help J.P. Morgan’s businesses to better serve clientsand improve the efficiency and quality of the firm’s endeavours. There are twoareas on which this centre of excellence focuses: ‘Six Sigma Solutions’ and‘Technology Solutions’. The idea in the former area has obviously been adoptedfrom companies such as Motorola and General Electric (see Pande et al., 2000).In the latter area, the team in charge works with J. P. Morgan Partners and theinvestment bank’s technology, media and telecommunication group in theevaluation of technology companies and new ideas.

The concept of Bertelsmann Valley has not been very successful. The idea ofbuilding a local unit where the invested companies are concentrated has beenabandoned. There were only four companies operating in the market, and twoconcepts being developed. It seems that ‘media-related’ business concepts are not asolid basis for an incubator concept. In January 2002, Bertelsmann Valley wasintegrated into Bertelsmann Capital Ventures, which became the sole venture capitalunit of the company (Gruner & Jahr Multimedia Ventures, which also belonged tothe Bertelsmann group, was dissolved in November 2001). The fact that this unit wasestablished in the mid-2001—after the bubble—seemed to indicate the company’scommitment to this kind of investment, but in March 2002, there were still only sixcompanies that Bertelsmann Capital Ventures had invested in, and in August 2002 itwas announced that the whole Bertelsmann Capital division to which the venturecapital unit was assigned would be dissolved.

The consulting companies did not perform better. Soon after their establishment,Accenture’s Business Launch Centers had been abandoned. Then, in March 2002Accenture announced that it would bow out of the VC business entirely and that itwould take a $212 million charge to sell off its minority ownership interests in orderto reduce volatility in the company’s future earnings. Bainlab simply becamedormant, and Evolution Global Partners could never materialize its initial concept.Finally, RBSC announced in September 2002 that it had completely written off theinvestment, but is still committed to the company. Consors has not only withdrawnfrom the CVC business but has ceased to be an autonomous company—it wasacquired by the French bank BNP Paribas, SA, in May 2002 and is now part of theirCortal Consors operations.

Discussion

Having presented this case study evidence, the objective is now to derive somepropositions that could be helpful for further empirical research. At the sametime, it is also worthwhile considering whether the extant literature reviewed insection 2 of this paper addresses all the issues which emerged in the casestudies.


Relative value-adding potentials of CVC providers. Are there firms that can addmore value than others and that will, therefore, have a competitive advantage in theCVC business? This question can most easily be answered with regard totechnological capabilities. Here, technology-based incumbents such as Siemens orIntel have relatively big advantages. They have significant resources invested inR&D, which gives them great expertise in the respective fields of technology, thusenabling them to evaluate new technological developments critically (Cohen &Levinthal, 1990). However, there is also a possibility that an establishedtechnological company may not always contribute to the further development of atechnology—if the technology has a competence destroying character (Anderson &Tushman, 1986; Christensen & Bower, 1996). In fact, the Siemens Technology-To-Business unit is a good example for such a situation since it was founded to nurtureradical innovations that may have their origin at Siemens but have to be embeddedin a new context in order to develop its full potential. The location in Berkeley,California, should thereby be helpful in establishing relations to world-classuniversities and technology innovators. All this mirrors what has been observed,for example, in the pharmaceutical/biotech industry (e.g. Powell, 1993). Establishedpharmaceutical companies have concentrated increasingly on offering complemen-tary resources (carrying out pre-clinical and clinical tests, production and salesdistribution capacities), while the actual technology development is effected outsidetheir company—within the start-ups—(Teece, 1986; Rothaermel, 2001). Addition-ally, the company can indirectly enhance developing technologies by supportinguniversity developments to which the biotech companies are linked.13 Apart fromfinancial resources, a company’s own basic research can once more be seen as a‘ticket of admission to an information network’ (Mowery & Rosenberg, 1989: 13).

Even start-ups that are CVC investors can be helpful for the development oftechnologies in (other) start-ups; the example of Consors/100world provides someevidence to support this. Compared to established technology companies, there isless danger that they are limited by an antiquated technology paradigm. On the otherhand, these companies, that are themselves in the early stages of development andprobably do not yet have a strong technology core (Donahoe et al., 2002), can onlycover small technological niches.

Non-technology companies and consulting firms usually will not have a specifictechnology base from which start-up firms can substantially learn. Accenture is anexception from this rule on account of its focus on IT consulting. The managementconsulting business at this company is yet small, compared to competitors such asMcKinsey, RBSC and Bain.

This discussion suggests:

P1: Compared to other ‘types’ of CVC investors, CVC activities of establishedtechnology companies will be better able to provide resources to enhancetechnological capabilities in investee companies, under the assumption that thefocal technology is not competence-destroying from the perspective of thesetechnology incumbents.

Let us now look at entrepreneurial orientation. The empirical evidence discussedabove suggests that CVC start-ups might have the biggest potential and consulting


firms might have the smallest potential. The example of Consors/100world indicatesthat both companies have a similar culture, which facilitates a good fit between thetop managers and productive co-operation. On the other hand, the big consultingfirms whose philosophy is to be independent in their consulting services are notwilling to take entrepreneurial risks. Compared to this traditional philosophy,Accenture, Roland Berger Strategy Consultants and, above all, Bain & Co. havetaken a further step with their idea of ‘sweat money’. At least for the last twocompanies, this measure was motivated by the necessity to prevent the exodus ofconsultants to start-ups. After the reversal of this process in 2001 (B2C—Back toConsulting!) the initial consultant paradigm will probably quickly replace the ‘sweat’equity model. At the end, consultants are, as one of our interviewees said, ‘more‘‘structurers’’ and analysers. That is something different than being an entrepreneur’(see above).

With regard to entrepreneurial orientation, banks and established companies aredifficult to assess. Concerning banks, at least US investment banks aim at ‘[investing]capital, in order to position and risk on their own account as well as on theircustomer’s account’.14 With respect to other companies, the example of Bertelsmannshows how much they strive to push entrepreneurial orientation. Siemens’ ‘top’-initiative has a similar spirit (Kunerth, 1994). On the other hand, the studies ofHannan & Freeman (1977, 1989); Christensen (1997); Klepper (2001) and othersadvise not to over-estimate this entrepreneurial orientation—there are enough(good) reasons for ‘structural inertia’.

This discussion leads to the following proposition:

P2: Compared to other ‘types’ of CVC investors, CVC activities of recentlysuccessful new ventures will be better able to provide resources to investees topromote entrepreneurial capability.

The capability of developing and implementing strategies should be a domain ofthe consulting companies (Greiner & Metzger, 1983). At least concerning strategydevelopment there is no doubt that these companies can develop intelligentbusiness plans and models for young firms.15 However, there are some doubts (seethe Roland Berger Strategy Consultants case, above) concerning strategyimplementation, as consulting firms usually gather their experience duringconsulting projects with established companies—if they do so at all.16 Comparedto consulting firms, the start-up companies that are engaged as CVC investors, inprinciple, are in a better position; however, they have gathered specific experienceduring their own founding process, which does not necessarily allow forgeneralization. Incumbent companies are not positioned prominently with respectto strategy development and strategy implementation. At least for part of theactivities—for LabMorgan, Bertelsmann Valley, Siemens VC, for example—it canbe stated that the goal appears to be getting to know new business models thatcontrast with the company’s own business experience. Concerning the implemen-tation of strategy the situation is similar to that of the consulting firms. Ingeneral, however, it has to be pointed out that CVC units may well gatherexperience of their own during their activities, provided that the track record isextensive enough. That this is not the case with the companies in the case studies


has been shown in section 4, with the exception of Siemens Venture Capital thatstarted operations in the early 1980s.

P3: Compared to other ‘types’ of CVC investors, CVC activities of consultingfirms will be better able to provide resources to improve strategy developmentand to a lesser extent strategy implementation in investee companies.

An important role in almost all CVC activities sketched in section 4 was played bythe provision of social capital—in terms of reputation, distribution channels,customer relations or technology experts. The established (technology or non-technology oriented) companies have a great amount of credibility as they maintainthis social capital mainly in-house. On the other hand, LabMorgan established anetwork of its own that is intended to guarantee social capital. The argument ofconsulting firms is that on account of their project work and alumni networks theyhave access to ‘almost all’ large companies; however, it remains questionablewhether this access can be materialized. Bain and Roland Berger StrategyConsultants collateralized their CVC activities through building alliances with(more or less) established VC companies. In the case of CVC investing start-ups, thecreation of social capital is not as developed as with other companies that have beenin the market for some time already.

P4: Compared to other ‘types’ of CVC investors, CVC activities of establishedcompanies from technology and non-technology sectors are better able toprovide resources to improve social capital in investee companies.

Table 2 summarizes this discussion.

Additional issues emerging from the case studies. There are at least two issues thatcame up in the case studies but are not well addressed in the literature. One isthat corporate investors may have problems in mobilizing their social network,which is such an important part of the value added they offer to their investees.In other words, it may well be that certain CVC-providing companies ‘have’ theseresources, but are not able to deliver them. The question, then, is whether thenetwork partners have enough willingness and incentives to collaborate with thestart-up firms in a helpful way. In the case of Siemens, there are attempts toallow the divisions to co-invest in the ventures; however, the long-termperspective of such an investment usually does not fit well to the short-termprofit expectations the divisions have to face. Bertelsmann, on the other hand,seemed to consider investments only when its divisions had a ‘strategic’ interest inthis project. Since I have not dealt with these upcoming issues in section 2, a fewtheoretical remarks are necessary.

In the context of corporate venture capital, incentive problems have mostly beendiscussed from a principal/agent perspective (Sykes, 1992; Kann, 2001). Forexample, if one takes the parent company as the principal and the CVC unit asagent, the question is how to get the CVC unit to act on behalf of the company andits owners. An obvious recommendation would be to add a ‘risk’ (i.e. a variablecomponent) to the remuneration of the CVC managers, as independent VC


companies usually do (cf. Gompers & Lerner, 1999). However, the more CVC-activities are handled ‘in-house’ and not by an independent unit (such as BVCapital), the less they might follow this recommendation (Block & Ornati, 1987). Astudy of Frederick W. Cook & Co. shows that only one- third of the CVC-activitiesincorporate the usual carried interest incentives at VCs and even fewer companiesdemand or at least allow for a co-investment from their investment managers(www.fwcook.com/corp_vc.html). A Towers Perrin study (2000) confirms this forGerman CVC activities. Because of this, Edelson (2001) has predicted that especiallysuccessful CVC managers will join independent VC companies and therefore leaveCVC activities with no future (Hardymon et al., 1983). Gompers & Lerner (1999:118 – 119) set this problem of an appropriate incentive system against the additionalvalue creation opportunities and argue that CVC activities can survive if there isenough ‘strategic fit’ to the core business of the company (see section 2).

The principal/agent theory is not really suited for closely examining the incentiveproblems that impede the co-operation between CVC unit and other units of thecompany. The assumed asymmetry in the relationship between principal and agentsimply does not apply here. However, this does not prevent one from consideringwhether the business units generating value added should participate in the successof the venture. As already shown, Siemens has several approaches to such a concepteven though they might not be thorough enough. Conversely, one can assume thatremoving the investment managers from the usual remuneration system (in line withthe arguments provided by the p/a literature cited above) undermines the teamcharacter that distinguishes multi-divisional enterprises from financial holdings (Hill,1994). From a motivational point of view (cf. Osterloh & Frey, 2000), there is therisk that the introduction of such extrinsic incentives may lead to the replacement ofthe intrinsic motivation for co-operation within teams. Like transaction cost theory(cf. Ghoshal & Moran, 1996), the principal/agent theory assumes that the actorsbehave opportunistically and cannot be motivated to act co-operatively withoutextrinsic incentives. Possibly, this is the main challenge that has to be met in order torender CVC activities successful: to create a context where the relevant actorsdevelop trust and are led to a behaviour that benefits the whole company (Ghoshal &Bartlett, 1997).

Proposition 5a can be stated as follows:

P5a: Successful CVC investors have an incentive system that integrates theinterests of the CVC units and the business units whose support is needed.

Who is best able to adequately integrate these different interests in a way thatenhances the overall performance of investment projects? I would assume that this isthe case in firms that have quite homogenous incentive structures and corporatecultures. I would further assume that the homogeneity is higher in consulting firmsand start-up investors, whereas in large incumbent firms, be they technology-drivenor not, there is either not such a homogeneity or there are homogenous incentivesystems but these systems do not support the collaboration in CVC investmentprojects. However, my interview with two investment managers from J. P. MorganChase provided some indications that investments banks may be similarly ‘moneydriven’ as, for example, management consulting firms and may thus also have a quite


homogenous incentive ‘culture’. Thus, my last and most speculative proposition canbe stated as follows:

P5b: In terms of the integrative characteristics of incentive systems, financialservice organizations, consulting firms and start-up investors are relativelybetter positioned than other large incumbent CVC investors.

There is another interesting issue that emerged in the case studies: the issue that thecapabilities that are possessed by the corporate investors are not simply ‘transferred’but are, at least in some areas such as technology, processed in a complex interactivesetting process in which both parties have the opportunity—and the need—to learnfrom each other. This mutual learning process can be somewhat problematic andasymmetric, as has been observed, for example, by Barney & Alvarez when they notethat ‘[a]lthough it is usually easy for a large firm to learn about the entrepreneurialfirm’s technology, it is often very difficult for the entrepreneurial firm to learn aboutand imitate the large firm’s organizational resources and capabilities’ (2001: 141). Afurther analysis of this issue is, however, difficult in the present context since the unitof analysis in such an interactive learning process has to exceed the sole focus on theCVC investor, which has been argued for earlier in this paper. Therefore, I leave theissue for further research projects.

Conclusions

In this paper, I have discussed the value adding potential of different ‘types’ of CVCproviders to investee start-up firms. After a brief review of the extant research, Ipresented a number of case studies that illustrate the typology I have suggested in arather pragmatic way. The theoretical discussion then aimed at deriving a set ofpropositions that may lead empirical research in the future. Overall, it has beenshown that there are indications that CVC-providing firms are not as homogenous asassumed by the existing literature on this topic. The contribution of this studytherefore lies in providing a better understanding of the value-added that may comealong with corporate venture capital, under the provision that the perspective of thestart-up firms comes more into play in order to define the real needs these companieshave in developing their business. It also emerged that the process of mobilizing andtransferring resources and capabilities may be worthy of more detailed study. Thus,there is a lot of possible future work for researchers in this interesting field.

Notes

1. According to data from the PricewaterhouseCoopers/Thomson Venture Economics/National Venture

Capital Association Money TreeTM Survey, CVC investments peaked in 2000 at US $16 908.2 million

(16% of all VC investments) and declined thereafter to US $1136.3 million (6.2%) in 2003.

2. Zu Knyphausen-Aufseß & Dowling (2003) attempt to compare the performance of CVC activities

with the performance of independent VC activities on the one hand and the performance of ‘blue chip’

investments on the other. The different methodological problems of performance parameters become

evident, which have as yet only been discussed rudimentarily in entrepreneurial finance literature (cf.

Cochrane, 2004).

3. Statement by a top manager from one of the companies in a personal e-mail to the author.


4. Information on Accenture was also taken from Form S-1 Registration Statement to Accenture Ltd

(www.freeedgar.com/EdgarConstruct/Data/950130/01-502267/ds1a.htm) as well as a portrait of

Accenture Technology Ventures in the German Business Magazine 10/01, pp. 14 – 15. Finally, with

respect to Siemens, I could also draw on a dissertation that was written by Ingo Rauser (2002) and a

paper by Rauser & zu Knyphausen-Aufseß (2002).

5. Bain Capital—a spin-off founded in 1984—specializes in private equity investments with great success.

However, it is no longer connected to the consulting firm Bain & Co.; in particular, there is no

exchange of information.

6. In parallel, in October 2000 Accenture introduced GameChange, a global network of seed round

venture capital and business-creation centres that will focus on high- growth, enterprise-centric market

segments, together with Softbank Venture Capital. Together, the firms have committed $100 million

to building GameChange’s global network (see press release: http://www.accenture.com/xd/

xd.asp?it= enweb&xd=_dyn\dynamicpressrelease_120.xml).

7. Wall Street & Technology, 17 August 2001.

8. Speech held on 9 March 2000 at Massachussetts Institute of Technology.

9. Quote taken from a lecture given by Matthias Tomann on 19 September 2001.

10. Data from http://swpat.ffii.org/patente/txt/ep/2001.de.html and http://swpat.ffii.org/patente/txt/ep/

2002.de.html, respectively. It has to be taken account that filing and granting of software patents are a

much more controversial issue than in the USA.

11. Interview in Silicon Alley Reporter, 5(46).

12. American Banker, 16 August 2001.

13. One example is the co-operation between Hoechst AG and Massachusetts General Hospital, which is

connected to Harvard Medical School, early in 1981.

14. From an interview in Frankfurter Allgemeine Zeitung of 20 December 2001 (p. 31) with Marc Heller,

co-manager of global investment banking at Goldman Sachs.

15. For more critical judgments and studies cf. the reports in Clark et al. (2001).

16. The Boston Consulting Group is well known for deliberately restricting itself to the ‘strategic’ level

and is not to be included in the implementation (cf. Nees & Greiner, 1985). On the other hand,

traditionally Accenture is strongly engaged in the implementation (especially with IT-strategies). Bain

is also trying to separate from its competitors by ‘rejecting the ‘old’ advice model to focus on strategy

and implementation’ (www.bain.com/bainweb/join/culture/overview.asp).

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Corporate Venture Capital: Who Adds Value?