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Article | Harvard Business Review | October 2013

Corporate Venturing

by Josh Lerner

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Abstract

For decades, large companies have been wary of corporate venturing. But as R&D organizations face pressure to rein in costs and produce results, companies are investing in promising start-ups to gain knowledge and agility. The logic of corporate venturing is compelling: A well-run fund can help a firm respond quickly to changes in markets and gain a better view of threats. In some cases, it can stimulate demand for a company's own products. And its investments may earn attractive returns. During their first three years as public companies, firms backed by corporate venture funds show better stock price performance, on average, than companies backed by traditional VCs. Managing corporate venture funds is not easy. Some companies have seen their venture initiatives fail, and even firms with successful funds have struggled to make use of the knowledge gained from start-up investments. Six steps can help companies avoid the pitfalls. Align goals. Corporate venture funds are more successful if the business of the corporate parent and of the portfolio firm overlap. Streamline approvals. A complicated decision process can burden the fund with too many goals and lead to ineffective investing patterns. Provide powerful incentives. Companies that don't offer adequate compensation to their venture capitalists will face a steady stream of defections. Tolerate failure. A zero failure rate may indicate that the fund is playing it too safe. Stick to your commitments. If a company is seen as a fickle investor, professionals will be wary of joining its venture unit, entrepreneurs will be reluctant to accept its funds, and independent VCs will be hesitant to join in. Harvest valuable information. Companies need to invest as much in learning from their start-ups as they do in making and overseeing deals.

Keywords: Venture Capital; Knowledge Acquisition; Corporate Strategy; Research and Development; Business Startups; Innovation and Invention;

Format: Print Find at HarvardPurchase

Citation:

Lerner, Josh. "Corporate Venturing." Harvard Business Review 91, no. 10 (October 2013): 86–94.

About the Author

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Josh Lerner
Jacob H. Schiff Professor of Investment Banking
Unit Head, Entrepreneurial Management
Entrepreneurial Management
Finance

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More from the Author

  • Working Paper | HBS Working Paper Series | 2018

    Private Equity, Jobs, and Productivity: Reply to Ayash and Rastad

    Steven J. Davis, John Haltiwanger, Kyle Handley, Ron S. Jarmin, Josh Lerner and Javier Miranda

    Ayash and Rastad (2017) express several concerns about our 2014 analysis of private equity buyouts. We welcome their interest in our work but think their criticisms are off the mark. Some of their claims reflect a misunderstanding of the Census Bureau’s Longitudinal Business Database (LBD) and its underlying data inputs. Because the LBD has emerged as a major laboratory for empirical studies in economics and finance, we use this opportunity to reiterate and clarify some of its important features. In a similar spirit, we elaborate on steps taken to develop our large sample of private equity buyouts. We also address Ayash and Rastad’s remarks about the empirical design of our establishment-level analysis, our methods for distinguishing between leveraged buyouts (LBOs) and other private equity transactions, bankruptcy rates among firms acquired in LBOs, their assertion that we undercount large public-to-private LBOs, and other matters.

    Keywords: Private Equity; Leveraged Buyouts; Jobs and Positions; Performance Productivity;

    Citation:

    Davis, Steven J., John Haltiwanger, Kyle Handley, Ron S. Jarmin, Josh Lerner, and Javier Miranda. "Private Equity, Jobs, and Productivity: Reply to Ayash and Rastad." Harvard Business School Working Paper, No. 18-074, January 2018.  View Details
    CiteView DetailsSSRN Read Now Related
  • Article | Journal of Financial Economics | January 2018

    The Globalization of Angel Investments: Evidence Across Countries

    Josh Lerner, Antoinette Schoar, Stanislav Sokolinski and Karen Wilson

    This paper examines investments made by 13 angel groups across 21 countries. We compare applicants just above and below the funding cutoff and find that these angel investors have a positive impact on the growth, performance, and survival of firms as well as their follow-on fundraising. The positive impact of angel financing is independent of the level of venture activity and entrepreneur friendliness in the country. However, we find that the development stage and maturity of startups that apply for angel funding (and those that are ultimately funded) is inversely correlated with the entrepreneurship friendliness of the country, which may reflect self-censoring by very early stage firms that do not expect to receive funding in these environments.

    Keywords: Entrepreneurship; Globalization; Investment; Business Startups;

    Citation:

    Lerner, Josh, Antoinette Schoar, Stanislav Sokolinski, and Karen Wilson. "The Globalization of Angel Investments: Evidence Across Countries." Journal of Financial Economics 127, no. 1 (January 2018): 1–20.  View Details
    CiteView DetailsFind at Harvard Related
  • Teaching Note | HBS Case Collection | December 2017

    KKR, Ringier Digital, and the Acquisition of Scout24 Switzerland

    Josh Lerner

    Teaching Note for HBS No. 816-059.

    Citation:

    Lerner, Josh. "KKR, Ringier Digital, and the Acquisition of Scout24 Switzerland." Harvard Business School Teaching Note 818-085, December 2017.  View Details
    CiteView DetailsPurchase Related
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