Tuesday, May 04, 2010

Google Ventures: Does Corporate VC Work?

In this post on the New York Times "Bits" blog, Claire Cain Miller writes about Google Ventures - the corporate venture capital fund established by Google in March 2009. According to the article, Google has increased the amount of investment activity lately and aims to invest approximately $100 million per year.

As I read the article, I began thinking about the literature on corporate venture capital. What did scholars find when they studied the effectiveness of corporate VC funds? The work of Gary Dushnitsky of Wharton and Michael Lenox of Duke seemed particularly interesting. These scholars argue that corporate VC funds pursue both financial returns and so-called "strategic benefits" i.e. they provide a "window on cutting-edge technologies" being developed by start-ups. Dushnitsky and Lenox have found that corporate VC funds can increase value for the corporate parent, but the results are specific to particular industries. They specifically find that corporate VC funds tend to do well in the devices, semiconductor, and computer industries - whereas the results do not appear positive in industries such as chemicals, metals, pharmaceuticals, and vehicles. Moreover, these scholars find that corporate VC funds create value when they explicitly seek strategic benefits, not simply financial returns.

Well, what about Google? From an industry perspective, it operates in a sector that has seen corporate VC funds achieve success according to the work of Dushnitsky and Lenox. However, this quote in the NY Times blog seems to suggest that Google has a strategic orientation in some cases, but not in all situations:

"Many corporations, including Cisco, Intel and Disney, have venture arms. Most have a strategic goal to fund projects that might someday be useful to the company. But Google executives emphasized that the fund is not an incubator for companies that Google wants to someday buy. It invests in Internet and advertising companies, but also in biotech and clean tech."

1 comment:

jim said...

A few feedback points:
1) Strategic value to a CVC has many forms besides just "trying on the shoes" before an acquisition. It can be about building out the ecosystem (many examples of this from Intel Capital), outsourcing some of your highest risk R&D (big pharma), or investing in areas which MAY become strategic in the future (Cisco, Intel and others).
2) The Dushnitsky and Lenox paper is now 6 years old and many of its key primary sources are from the 90s. Not sure this is the best base case reference for Google - a company which barely existed in the late 90s.
3) The best answer to the question of "strategic value vs financial return" for CVCs is - YES. If all they are pursuing is financial return, they will eventually get tripped on the poor stock price or management turnover of their parent. If all they are focusing on is strategic return, they will typically rationalize making poor investments (ending up costing their parent money) and/or become a "tool" for savvy internal managers to have the CVC guys fund their outsourced R&D or market development partnerships - all of which will eventually lead to bye bye CVC.