Corporate Venturing Shortcomings. Lack of experience in the market entered Entered market already served by parent Lack of sustained top management support “Adverse selection” Costs and benefits accrue to different managers Conflict between strategic and financial objectives
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Incentives - Gain-sharing arrangements between VC, limited partners, and entrepreneurs assures better alignment of incentives
Staged investment at milestones, learn as you go, better focused for the business model, always the threat of discontinuance. Corporate ventures less strict in reacting to failed milestones. Also, cash given up-front in chunks and progress reviewed annually as part of regular budget cycle.
Rigorous Surveillance - VCs frequent and intense monitoring of progress (19 times per year). More information and faster feedback. Reviews for corporate ventures more rigorous at higher levels as venture progresses in time and financial and human resources committed
Unconstrained by existing corporate business models
Outside VC board
Outside Board, CEO
No specific fund length
Shifting to bigger deals
Limited career risk
New Business Models
Scale of Capital
Incentives – hybrid compensation system – Lucent employees had forego annual bonus and fringes in return for “phantom stock”. Outsiders had to learn to deal with overheads, corporate policies, annual operating plans
Financial discipline - staged funding, allow VC investment, hire outside CEO, adaptable business model
Monitoring – More external, e.g., like VC
Business models can shift if necessary.
Longer time horizons - no fixed life, no drive to liquidity
Scale - fund bigger projects than typical VC
Complementarities - Gather inside intelligence about industry trends, strategic direction consistent with Lucent
Retention of learning - Personnel can rejoin the company if venture fails. Better recruitment because the competition for hiring is usually startup firms.