How do Corporate Venture Capitalists do Deals? An Exploration of Corporate Investment Practices

• DOI: http://doi.org/10.1002/sej.1178
• Date: 01 December 2014
• Author: Vangelis Souitaris,Stefania Zerbinati
• Published date: 01 December 2014

HOW DO CORPORATE VENTURE CAPITALISTS

DO DEALS? AN EXPLORATION OF

CORPORATE INVESTMENT PRACTICES

VANGELIS SOUITARIS1,2* and STEFANIA ZERBINATI1

1Cass Business School, City University London, London, United Kingdom

2LUISS University, Rome, Italy

How do corporate venture capitalists (CVCs) do deals? Conversations with CVCs suggest that

the putative view of venture capital investing is incomplete. We draw on 13 cases of CVC

programs to document eight ‘corporate investment practices’ that are unique to CVCs. These

practices reflect pressureon the CVC units for strategic fit and engagement with the corporation

and also an opportunity to utilize parental resources. We then show that CVCs vary their

emphasis on corporate investment practices, diverging into two distinct investment logics,

‘integrated’versus ‘arm’s-length.’ Focus of isomorphism on internal versus external stakehold-

ers explains the emergence of the two logics. Copyright © 2014 Strategic Management Society.

‘We have one limited partner in our fund and we’ve

got to make sure we keep them happy, and that is

very different to an independent VC.’(K1, Kappa).

INTRODUCTION

Corporate venture capital (CVC) is defined as minor-

ity equity investments by established corporations in

privately held entrepreneurial ventures (Dushnitsky,

2012). CVC represents an important and growing

source of capital for entrepreneurs. Whereas inde-

pendent venture capital (VC) funds declined during

the 2000 to 2010 decade (Ghalbouni and Rouzies,

2010), corporate venture capital has shown an

upswing. As CVC activity has grown since 2005,

so has academic interest in the phenomenon

(Dushnitsky 2012; Hill et al., 2009; Keil, Autio, and

George, 2008; Maula, 2007). This study documents

and explains aspects of the CVC investment process

that diverge from standard practices of independent

venture capitalists (VCs).

The venture capital literature identified a series of

stages within a VC deal, such as deal origination,

screening, and structuring (Wright and Robbie,

1998; Gompers and Lerner, 2004; Fried and Hisrich,

1994; Tyebjee and Bruno, 1984), and then described

and explained specific practices within each stage,

such as syndication and staging (e.g., Gompers and

Lerner, 2004). We argue that the current theory,

framed around independent VCs, is not well suited

to fully explain the investment practices of CVCs for

two reasons: first, CVC units typically have a single,

dominant, limited partner, who owns the unit and

provides all the funds (the parent corporation).

Instead, independent VCs typically raise a fund from

multiple, nondominant, limited partners. Second, the

limited partner of CVC units (a corporation) typi-

cally seeks both financial and strategic benefits.

In contrast, the limited partners of independent VCs

are investors typically interested only in financial

returns. More broadly, since corporate ventures

differ in their practices from independent ventures

(Narayanan, Yang, and Zahra, 2009; Shrader and

Simon, 1997), we expect CVC investment practices

Keywords: corporate venture capital; investment practices;

focus of isomorphism; institutional logics

*Correspondence to: VangelisSouitaris, Cass Business School,

City University London, 106 Bunhill Row,London EC1Y 8TZ,

U.K. E-mail: v.souitaris@city.ac.uk

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Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 8: 321–348 (2014)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1178

Copyright © 2014 Strategic Management Society

to differ from the documented practices of indepen-

dent VCs.

The recently emerged CVC literature has investi-

gated the applicability of broad structural features of

the ‘VC model’ (e.g., staging and compensation) to

CVCs (Dushnitsky and Shapira, 2010; Hill et al.,

2009; Maula, Autio, and Murray, 2005).Yet, we still

do not know if there are fine-grained practice differ-

ences between VCs and CVCs in the way they gen-

erate, screen, evaluate, approve, and monitor deals

(Hill et al., 2009).

Using a multiple case study design, we empiri-

cally derive and explain eight ‘corporate investment

practices’ that are unique to CVCs. Our intensive

data collection effort took place over a decade and

included two sets of data. We conducted six case

studies in 2002 and seven in 2011–12 to ensure that

our results were broadly replicable across two

temporal ‘waves’ of CVC. The dataset includes 45

interviews with 23 senior CVC executives, com-

plemented by archival data and independent expert

validation.

Our results point out that corporate investment

practices reflect parental pressure on CVC units to

secure strategic fit for their investments and to

engage with the other divisions of the corporation.

Corporate investment practices also reflect an oppor-

tunity to utilize valuable corporate resources and

capabilities. Moreover, we observed varying degrees

of emphasis on corporate investment practices

among CVCs, suggesting the emergence of two dis-

tinct investment logics: ‘integrated’ versus ‘arm’s-

length’ toward the corporate parent. Programs that

aligned with the norms of the parent (internal focus

of isomorphism) followed an integrated investment

logic. In contrast, programs that aligned with the

norms of the VC industry (external focus of isomor-

phism) followed an arm’s-length logic.

Our article makes three contributions. First, we

extend the venture capital literature by documenting

and explaining investment practices that are unique

to CVCs. Second, we contribute to the CVC litera-

ture by advancing a new typology of corporate inves-

tors (integrated versus arm’s-length toward the

parent). We elaborate on the concepts of CVC

autonomy and integration by specifying a bundle of

associated investment practices. For instance, ‘inte-

grated’ CVC programs utilize, to a higher extent,

investment practices, such as corporate referrals,

screening deals for strategic potential, and linking

the venture with the parent. Third, we contribute to

institutional theory by demonstrating an alternative

mechanism of how multiple logics emerge.1We

show that focus of isomorphism to different stake-

holders (Souitaris, Zerbinati, and Liu, 2012) can lead

to the emergence of multiple logics in a field and to

variation of practice.

THEORETICAL OVERVIEW

This is an inductive study to explore the investment

practices of CVCs. We developed a model using an

iterative process between data and pertinent litera-

ture. We begin with an overview of the literatures

that we consulted either before or during the course

of the study, which then informed our emerging find-

ings (Pratt, 2008; Suddaby, 2006).

Venture capital investing

The venture capital literature revealed a multistage

investment process: the stages include deal origina-

tion, screening, evaluation and due diligence, appro-

val and structuring, monitoring and value adding,

and investment realization (Wright and Robbie,

1998; Gompers and Lerner 2004; Fried and Hisrich,

1994; Tyebjee and Bruno, 1984).

Variousauthors documented specific VC practices

within each deal stage. For example, to generate

deals, VCs rely heavily on referrals from other VCs

and business associates (Fiet, 1995). Referrals are

used because they can reduce information asymme-

try and adverse selection; namely, the VC’s inability

to predict the manager’s performance prior to deal

completion (Amit, Glosten, and Muller, 1990). To

evaluate deals, VCs rely on criteria, such as market

potential, the quality of the team, and the probability

of a successful exit (Fried and Hisrich, 1994; Petty

and Gruber, 2011). More recently, much attention

has been devoted to agency theory arguments to

explain the practices of syndication, staging, and

performance-based compensation (Gompers and

Lerner, 2004).

This literature, which is biased toward indepen-

dent VCs, is relevant, but it does not fully consider

and explain the investment practices of CVCs. CVCs

are a distinct class of VCs because they typically

1We complement existing recognized mechanisms, such as

critical events (Nigam and Ocasio, 2010), structural changes

(Dunn and Jones, 2010), and institutional entrepreneurship

(Greenwood and Suddaby, 2006).

322 V. Souitaris and S. Zerbinati

Copyright © 2014 Strategic Management Society Strat. Entrepreneurship J.,8: 321–348 (2014)

DOI: 10.1002/sej