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The role of exploratory subunits in organizational ambidexterity: An inductive examination of corporate venture capital units

January 2010

January 2010

Authors:

Corey C. Phelps

University of Oklahoma

Sandip Basu

City University of New York - Bernard M. Baruch College

Suresh Kotha

Foster School of Business, University of Washington

This paper has been published under a different title. Here is the complete citation: Basu, S., Phelps, C., & Kotha, S. (2016). Search and integration in external venturing: An inductive examination of corporate venture capital units. Strategic Entrepreneurship Journal, 10: 129-152.

. Sample of CVC units

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SEARCH AND INTEGRATION IN EXTERNAL

VENTURING: AN INDUCTIVE EXAMINATION OF

CORPORATE VENTURE CAPITAL UNITS

SANDIP BASU 1*, COREY C. PHELPS 2

, and SURESH KOTHA3

1Loomba Department of Management, Zicklin School of Business, Baruch

College, City University of New York, New York, New York, U.S.A.

2Desautels Faculty of Management, McGill University, Montreal, Canada

3Foster School of Business, University of Washington, Seattle, Washington,

U.S.A.

Research summary: How do external venturing units effectively achieve external knowledge

search and integration of their initiatives with mainstream organizational units? We investigate

this largely unexplored question through an inductive study of 17 corporate venture capital

units. We document a set of ﬁve novel practices that inﬂuence the efﬁcacy of a unit’s external

search and internal integration and identify how these practices complement a broader set of

practices used by all units. We highlight the entrepreneurial nature of managing an external

venturing unit, often to overcome unfavorable corporate contexts, a perspective that prior

research has largely overlooked. Our ﬁndings provide unique insights into why some corporate

investors are better at learning from external start-ups than others.

Managerial summary: External venturing involves strategic partnerships by established ﬁrms

with entrepreneurial ventures. Top management usually tasks autonomous units with searching

for willing and potentially valuable partners. These units must integrate their activities with the

operations of parent ﬁrms to elicit cooperation from important business units. To understand

how external venturing units implement search and integration in combination, we study

corporate venture capital (CVC) units, which form external partnerships through minority

investments in start-ups. While all units adopted fundamental processes that are well estab-

lished in the venture capital community, certain processes that are idiosyncratic to corporate

investing helped units demonstrate superior performance in their strategic missions. These

processes often required CVC unit managers to be entrepreneurial and politically savvy in

Management Society.

INTRODUCTION

Although established ﬁrms need to adapt to chang-

ing competitive environments to survive and prosper

over time, they are often constrained in doing so by

their own processes, cultures, and capabilities

(Leonard-Barton, 1992). An important way incum-

bents can remain nimble while continuing to

compete in core businesses is through corporate

venturing—programmatic efforts to create new

entrepreneurial ventures within the ﬁrm (Block and

MacMillan, 1993). Venturing can be internal or

external, depending on whether the venture idea and

required resources originate inside or outside ﬁrm

boundaries (Sharma and Chrisman, 1999).

Keywords: external venturing; corporate venture capital;

search; integration; qualitative

*Correspondence to: Sanip Basu, Loomba Department of Man-

agement, Zicklin School of Business, Baruch College, City

University of NewYork, One Bernard Baruch Way, New York,

NY 10010, U.S.A. E-mail: sandip.basu@baruch.cuny.edu

Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 10: 129–152 (2016)

Published online 9 September 2015 in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1206

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In internal corporate venturing, new business

ideas are generated and nurtured within the ﬁrm,

often through autonomous efforts by lower-level

employees rather than explicit top-down direction

(Burgelman, 1985).1In contrast, external venturing

involves a deliberate search for new ideas and

knowledge outside ﬁrm boundaries (Keil, 2004; Keil

et al., 2008). Established ﬁrms typically pursue

external venturing by partnering with and learning

from young entrepreneurial ventures (Wadhwa and

Kotha, 2006), through dedicated units distinct from

the mainstream organization (Dushnitsky, 2012).

These external venturing units are tasked with the

responsibility of searching for new ventures that are

willing and potentially valuable partners (Keil,

2004). Thus, the effectiveness of an external ventur-

ing unit depends considerably on the efﬁcacy of its

external search processes (Dushnitsky and Lenox,

2005).

Research also suggests the extent to which exter-

nal venturing units are effectively integrated with

mainstream units complements their external search

efforts (Hill and Birkinshaw, 2014). External ventur-

ing units act as boundary spanners between external

partners and units within their parent ﬁrms (Keil,

Autio, and George, 2008) and thereby face unique

challenges in fostering knowledge sharing between

these parties (Puranam and Srikanth, 2007). To

perform their assigned role effectively, external ven-

turing units must overcome the apathy or outright

resistance of mainstream units toward sharing

resources with, or learning from, external venture

partners (Chesbrough and Rosenbloom, 2002).2

Effective integration of external venturing units

secures cooperation for themselves and external

partners from the mainstream organization,

enhancing these units’ performance (Gaba and

Bhattacharya, 2012).

In sum, research demonstrates that external ven-

turing can contribute to the renewal and resilience of

incumbent ﬁrms and is distinct from internal ventur-

ing in important ways. Scholars have pointed out that

while it is important for external venturing units to

engage in both search and integration, achieving

both simultaneously can be challenging. Focusing

on external search can result in relative isolation

from the mainstream organization (Chesbrough and

Rosenbloom, 2002; Sykes, 1990), while efforts at

enhancing integration can detract from the unit’s

primary search mission (Hill and Birkinshaw, 2014).

Despite these contributions to our understanding of

external venturing, this literature is limited in two

important respects. First, while prior research has

highlighted the importance and challenges of search

and integration during external venturing, there is

little examination of the speciﬁc practices3that allow

venturing units to overcome these challenges. Prior

research has typically highlighted effective search

processes without elaborating on how they may affect

integration or vice versa. Therefore, research has yet

to identify how search and integration processes can

work in tandem without impeding each other. For

example, Keil et al. (2008) identify particular prob-

lems external venturing units face in searching for

external ventures and in integrating with mainstream

units, but do not explore how particular venturing

practices address these problems. Souitaris,

Zerbinati, and Liu (2012) demonstrate trade-offs

between structures that increase venturing units’

legitimacy with external venturing audiences (facili-

tating search) and those that increase legitimacy with

internal mainstream unit audiences (facilitating inte-

gration). However, this study does not examine how

these inconsistencies can be resolved so that units can

be efﬁcacious in search and integration. Similarly,

Souitaris and Zerbinati (2014) identify and describe

eight practices that differentiate corporate venture

capitalists (a particular form of external corporate

venturing) from independent venture capitalists

(VCs) but do not investigate which of these practices

aid search or integration and how.

Second, research has primarily focused on top

management initiatives that foster search and inte-

gration (Dushnitsky and Shapira, 2010; O’Reilly and

Tushman, 2008). Scholars have highlighted how

senior managers who create specialized units also try

and ﬁnd ways to integrate these units with the main-

stream organization (Tushman and O’Reilly, 1996)4

1For example, ﬁrms often create autonomous units such as

incubators or skunk works to nurture internal ventures with

strategic potential but poor strategic ﬁt with mainstream busi-

nesses (Burgelman, 1985; Sykes, 1990).

2Mainstream units often lack incentives to work with new ideas

or knowledge generated by external venturing units, view such

units as a threat to their internal activities, and resist ideas that

are inconsistent with the organization’s dominant cognitive

frameworks and business logic.

3Throughout this article, we use the terms practices and pro-

cesses as synonyms.

4For example, an organization’s top management is responsible

for ‘strategic integration,’ which consists of ‘a common strate-

gic intent, an overarching set of values, and targeted structural

linking mechanisms to leverage shared assets . . . orchestrated

by a senior team with a common fate incentive system and team

processes capable of managing these inconsistent alignments in

a consistent fashion’ (O’Reilly and Tushman, 2008: 22–23).

S. Basu, C. C. Phelps, and S. Kotha

DOI: 10.1002/sej

130

Strat. Entrepreneurship J.,10: 129–152 (2016)

and establish performance metrics and incentives to

inﬂuence the search for external partners

(Dushnitsky and Shapira, 2010). By emphasizing top

management’s role in integration and search,

researchers have overlooked the potential for entre-

preneurial agency by unit-level managers, particu-

larly in the context of external venturing, to

overcome the constraints and challenges of their cor-

porate environment. While some recent studies

acknowledge the importance of integration initia-

tives external venturing units undertake to build rela-

tionships with the mainstream organization (e.g.,

Hill and Birkinshaw, 2014), research is yet to high-

light speciﬁc practices that unit-level managers can

adopt in this regard.

We address these limitations by studying how

external venturing units effectively achieve external

knowledge search and integration of their initiatives

with mainstream organizational units. We seek to

identify processes that help overcome the challenges

of implementing search and integration in combina-

tion. We examine an important type of external ven-

turing unit, responsible for corporate venture capital

(CVC) investments, to address our research ques-

tion. CVC units are dedicated, specialized units

of established ﬁrms that make minority equity

investments in privately held entrepreneurial ven-

tures (Dushnitsky and Lenox, 2005; Wadhwa and

Kotha, 2006). CVC investments allow corporate

investors to access and learn about potentially

valuable or disruptive knowledge their portfolio

companies are developing (Basu, Phelps, and

Kotha, 2011; Dushnitsky and Lenox, 2005).The

rapid global growth in the pursuit of CVC by incum-

bent ﬁrms over the past decade has been accompa-

nied by increasing academic research on the topic

(see Dushnitsky, 2012).

Given the lack of research into how and why

external venturing units achieve effective search and

integration, we conducted a qualitative, inductive

study of 17 corporate venture capital units. This

study extends substantive theory of CVC unit per-

formance by explaining how unit-level processes

differentially inﬂuence the efﬁcacy of its search and

integration. In particular, we document a set of ﬁve

practices that prior research has not adequately

examined, but which were found to have important

inﬂuences on either CVC unit search or integration.

Our results suggest that CVC units that minimize the

complexity of deal negotiations with ventures and

protect ventures’ strategic interests improve their

reputation among start-ups and VCs as attractive

investors. Units that evaluate and select ventures

based on an early stage of development increase the

search beneﬁts they offer their parent ﬁrms by

helping them probe potentially useful but uncertain

technologies, markets, or business models before

rivals. Moreover, CVC units that help develop

explicit collaborative blueprints between venture

partners and mainstream businesses create social

contracts between the parties, thereby increasing

venture integration. Finally, CVC units that avoid

competing with mainstream units and frame their

role as complementary reduce internal political

resistance to their activities, resulting in more effec-

tive unit integration.

Drawing from our data, we provide in-depth

explanations for how these processes enhance

aspects of search or integration and how they are

complementary to each other as well as with other

fundamental practices. Therefore, our study high-

lights how CVC units can overcome the trade-offs of

effective search and integration and accomplish both

effectively. It also suggests the beneﬁts of an orga-

nizational conﬁguration approach (Miller, 1996), in

which variations in bundles of practices are respon-

sible for favorable organizational outcomes rather

than individual practices alone. Through our focus

on micro-level practices adopted by unit managers,

we highlight how these managers are required to be

entrepreneurial and politically savvy to respond to

corporate contexts that are sometimes unfavorable.

These insights are often counter to conventional

wisdom and have been largely overlooked by prior

research.

THEORETICAL BACKGROUND

Prior research on CVC has been conducted at three

levels of analysis (Narayanan, Yang, and Zahra,

2009). First, considerable research has focused on

established ﬁrms’ motivations to engage in CVC

activity and the resultant outcomes to these ﬁrms

from such efforts (Basu et al., 2011; Dushnitsky and

Lenox, 2005; Gaba and Meyer, 2008). Second,

researchers have examined ventures’ motivations for

pursuing CVC relationships, how they manage the

relationships with their investors, and how such

ties affect venture performance (Dushnitsky and

Shaver, 2009; Katila, Rosenberger, and Eisenhardt,

2008; Maula, Autio, and Murray, 2009). Finally,

research has focused on CVC unit structures and

practices that enable them to function more effec-

Search and Integration in External Venturing

DOI: 10.1002/sej

131

Strat. Entrepreneurship J.,10: 129–152 (2016)

tively (Hill et al., 2009; Souitaris et al., 2012; Yang,

Narayanan, and Zahra, 2009). We elaborate on the

last research stream given its relevance to our

research question.

Search and integration in CVC units

Recent studies have examined CVC units’ search

activities, that is, the formal role with which these

units are tasked (Dushnitsky and Lenox, 2005). An

important aspect of search is the generation of

investment opportunities. Some studies highlight the

beneﬁts of ‘syndication’ or co-investing with other

investors such as independent VCs (Hill et al., 2009;

Yang et al., 2009). Syndication partnerships are ben-

eﬁcial in increasing the ‘deal ﬂow’ of potential

investment opportunities (Wright and Lockett, 2003)

and, particularly for corporate investors, can help in

learning good investment practices from experienced

investors (Maula, Keil, and Zahra, 2013). While it is

difﬁcult for CVC units to form these relationships

initially, they can gain legitimacy within the VC

community by mimicking its decision-making and

compensation practices (Souitaris et al., 2012). CVC

units can also access greater investment opportuni-

ties by enhancing their reputations as valuable part-

ners that nurture portfolio companies with critical

resources (Wadhwa and Basu, 2013).

CVC units’ search activities also involve selection

of ventures for investment from available opportuni-

ties. Some studies highlight the importance of select-

ing appropriate sectors in which to invest, proposing

that relatedness to the investor’s expertise (Keil

et al., 2008) and the technological opportunities that

sectors offer (Dushnitsky and Lenox, 2005) should

be considered. Moreover, research examines how

learning from existing CVC relationships should

also inform subsequent selection criteria. Keil et al.

(2008) characterized CVC relationships as a form of

‘disembodied experimentation,’ wherein multiple

trials with new technologies and business models

take place outside the boundaries of the corporate

investor, providing information about their potential

economic value.

Other studies have focused on the integration

approaches that enable CVC units to fulﬁll their role

as knowledge brokers between parent ﬁrms and port-

folio ventures. They suggest that effective CVC units

should monitor their investments through board

memberships or observation rights (Wadhwa and

Kotha, 2006). Further, CVC units can facilitate inte-

gration with mainstream units by emphasizing

knowledge sharing at the organizational level and by

building relationships with those units’ managers

based on trust and commitment (Weber and Weber,

2011). CVC units may also sacriﬁce the pursuit of

legitimacy with VC ﬁrms to increase their legitimacy

with internal mainstream units for more effective

integration (Souitaris et al., 2012).

In sum, research has typically examined how

CVC units pursue either search or integration activi-

ties and has highlighted the challenges of pursuing

both aspects simultaneously (Souitaris et al., 2012;

Weber and Weber, 2011). However, we know little

about how CVC units effectively manage search and

integration simultaneously, which is crucial to their

own survival and their parent ﬁrms’ renewal (Hill

and Birkinshaw, 2014; Keil et al., 2008).

METHODS

We employed a qualitative, inductive research

approach, which is appropriate for ‘how’ and ‘why’

questions (Eisenhardt and Graebner, 2007) such as

those motivating our research. We sought to elabo-

rate on ‘substantive’ theory—theory pertaining to a

speciﬁc context and phenomenon (Burgelman,

2011)—of how and why CVC units achieve effect-

ive search and integration. Theory elaboration is

implemented when preexisting conceptual ideas

or a preliminary model drive a study’s design, and

results are contrasted with past ﬁndings through

description, interpretation, and explanation (Lee,

1999).

Design and sample

Design

We used a multiple case design following ‘replica-

tion’ logic where cases are analogous to experi-

ments. Each case serves to conﬁrm or disconﬁrm the

inferences drawn from others (Yin, 1994). This

approach enables a broader exploration of the

research question and a better grounding for theo-

retical insights using empirical evidence (Eisenhardt

and Graebner, 2007). Although our research ques-

tion primarily addresses the level of the CVC unit,

we employed an embedded design involving mul-

tiple levels of analysis including the CVC unit and

the parent corporation, which increases the likeli-

hood of inducing richer and more reliable theoretical

insights (Yin, 1994). Multiple-case, embedded

S. Basu, C. C. Phelps, and S. Kotha

DOI: 10.1002/sej

132

Strat. Entrepreneurship J.,10: 129–152 (2016)

designs have been adopted in prior research on CVC

to study related research questions (Keil et al., 2008;

Weber and Weber, 2011).

Sample

We sought to observe the CVC units of U.S.-based

ﬁrms5that exhibited maximum variation in certain

observable characteristics (Miles and Huberman,

1994). Based on our reading of the CVC literature,

we selected CVC units that varied by four observ-

able characteristics: parent ﬁrm primary industry,

parent ﬁrm size, CVC unit size, and age. This

approach helped examine any variances in CVC unit

practices in different contexts. To increase the like-

lihood of ﬁnding contrasting patterns and polar dif-

ferences in performance (Yin, 1994), we sought

cases that involved active CVC investors and

recently disbanded units. We used Thomson Finan-

cial’s VentureXpert database to identify active or

recently inactive corporate investors that exhibited

variation across these dimensions. Next, we con-

tacted a senior manager at each CVC unit and invited

him/her to be interviewed. If our initial contact

declined, we contacted others in the same unit. If

none of the managers responded positively, we

expanded our list to other CVC units. Finally, we

assembled a set of 17 cases (i.e., units)—13 active

and four recently disbanded. To ensure the sample

was consistent with our research question, we asked

speciﬁc questions to corroborate media reports that

all units had a primarily strategic mission involving

access to external knowledge. Our CVC units

pursued three types of strategic objectives: horizon

scanning, gap ﬁlling, and ecosystem building, each

of which have been identiﬁed and described in prior

literature (Chesbrough, 2002; Kann, 2000).6

Descriptive information about our sample of CVC

units, their parent ﬁrms, and interview subjects is

provided in Table 1. We disguised unit names to

protect their identities.

Data collection and sources

Interviews

We conducted interviews in multiple waves from

2006 to 2012. As Table 1 shows, our primary respon-

dents were senior managers of active CVC units and

former senior managers of disbanded units. They

represent ‘key informants’ who are highly knowl-

edgeable about the phenomenon being studied

(Kumar, Stern, and Anderson, 1993). To assess the

perspectives of different internal stakeholders about

a particular CVC program, we also interviewed

senior managers from business units and corporate

functions (e.g., R&D) at the parent organizations of

many of the CVC units. These managers typically

had long tenures and technological backgrounds at

their respective ﬁrms. Therefore, our choice of

respondents helped minimize recall problems that

could potentially inﬂuence the results (Huber and

Power, 1985).

Consistent with the theory-elaboration objective,

we adopted a focused approach in which ﬁndings

from prior research guided the data collection and

analytical procedures (Eisenhardt, 1989). In particu-

lar, because our motivation is to extend theory con-

cerning the role of search and integration in external

corporate venturing, our data collection efforts were

focused on, but not limited to, these speciﬁc aspects

of units’ activities. We developed a semi-structured

protocol, with some variation among active and dis-

banded unit managers and parent organization man-

agers. Open-ended questions in the protocol

concerned the following areas of CVC unit opera-

tions: (1) motivation and structure of the CVC

program; (2) determinants of investment volume and

deal ﬂow; (3) unit hiring and compensation prac-

tices; (4) evaluation and selection of portfolio com-

panies; (5) monitoring of investment relationships;

and (6) evaluation of individual investment and

program success. Interviews followed the ‘court-

room’ procedure (Eisenhardt, 1989), focusing on

facts, concrete examples, and quantitative data,

which are less subject to cognitive biases and

impression management than opinions or interpreta-

tions (Huber and Power, 1985).7Each interview

lasted one hour on average and was typically

recorded and transcribed. We did a total of 28 inter-

views with a combined transcript length of 530

pages. Of these, 17 were with current and former

5U.S.-based units carry out the vast majority of CVC invest-

ments (Dushnitsky, 2012). Sampling only these units also holds

the inﬂuence of formal and informal national institutions con-

stant.

6Most units had more than one type of objective. Twelve units

pursued horizon scanning, i.e., investing in ventures that were

developing technologies and business models that could poten-

tially disrupt their parents’ products or technologies. Nine units

pursued gap ﬁlling, i.e., investing in ventures with knowledge

their parents did not possess but needed in order to develop new

products and processes. Three units pursued ecosystem build-

ing, i.e., investing in ventures with complementary products

that may enhance the demand for the parents’ products.

7To encourage candor and accurate information, all subjects

were assured conﬁdentiality and the opportunity to review and

revise the transcripts (Huber and Power, 1985).

Search and Integration in External Venturing

DOI: 10.1002/sej

133

Strat. Entrepreneurship J.,10: 129–152 (2016)

Table 1. Sample of CVC units

CVC unit name

(coded)

Parent ﬁrm’s

industry

Objectives+Parent’s revenues

in 2006 ($ million)

Year of unit

establishment

Cumulative

investment volume

($ million)

Number of unit

employees (approx.)

Informants Unit status

in 2006

Impressive

Ventures

Semiconductors 1/2/3 35,382 1990 3,000 >100 Vice president of investment group,

principal architect at parent, principal

engineer at parent

Active

Qualiﬁed

Ventures

Semiconductors 1/3 7,526 1999 (3 ad hoc investments

earlier)

200 (Commitment of

500 million)

Initially 6 (size is larger

now)

Head of investment group in North

America, senior director of business

development at parent, chief

technology ofﬁcer at parent

Active

Momentous

Ventures

Telecommunications

equipment

1/2 42,879 1999 (earlier wave in the

1980s)

500 15 Corporate vice president and director of

equity investing

Active

Masterful

Ventures

Software 2/3 44,282 Mid-1980s (since parent’s

early days)

800 12 (in entire corporate

development group)

Managing director of corporate

development, Principal manager at

parent

Active

Joyous Ventures Pharmaceuticals 2 53,324 1973 500 28 Director of portfolio investments and

analysis

Active

Glorious

Ventures

Medical devices 1 Acquired

(3,550 in 2005)

Just before IPO in 1994 200 5–7 (size has been as

large as 30)

Vice president of business development,

vice president of technology at

competing ﬁrm

Active

Ultimate

Ventures

Logistics 1/2 47,547 1997 36 (Approval required

for every 25 million)

2 (have been 5 earlier) Fund manager Active

Auspicious

Ventures

Instruments 1 4,973 2001 (ad hoc since 2000) 100 3 (30–40 in entire

business creation

group)

Investment manager Active

Productive

Ventures

Pharmaceuticals 2 48,371 2004 (earlier wave too) 100 (Commitment of

200 million in 5

years)

4 Senior manager in strategic investments

group

Active

Knockout

Ventures

Photographic

equipment

1 13,274 2001 (indirect investments

for 25 years)

100 9 Director and vice president of external

alliances

Active

Dynamic

Ventures

Chemicals 2 28,982 2003 (ad hoc since 1970s) 30 5 Venture development manager, vice

president of R&D at competing ﬁrm

Active

Accomplished

Ventures

Biotechnology 2 14,268 2004 (indirect investments

earlier)

60 (Capitalization of

100 million)

3 Managing director of investment group Active

Leading

Ventures

Pharmaceuticals 1 15,691 2001 (limited partner 10

years ago)

86 (Capitalization of

175 million)

6 Executive director of new ventures,

senior vice president of research at

parent

Active

Booming

Ventures

Aerospace 1 61,530 1999 Capitalization of 250

million

6–7 Managing director of investment group,

director of corporate innovation at

parent, vice president of technology

of portfolio company.

Terminated

in 2005

Advanced

Ventures

Management

services

1 18,228 1999 (ad hoc deals since

1995)

250 25 General partner of investment group,

president of external collaborating

organization

Terminated

in 2002

Bountiful

Ventures

Engineering and

construction

1/2 20,500 1998 Capitalization of 200

million

20 CEO, chairman of investment group Terminated

in 2002

Innovative

Ventures

Information

technology

1 91,424 1999 200 6 Vice president of growth initiatives Evolved into

indirect

investing

+1=Horizon scanning; 2 =Gap ﬁlling; 3 =Ecosystem building

S. Basu, C. C. Phelps, and S. Kotha

DOI: 10.1002/sej

134

Strat. Entrepreneurship J.,10: 129–152 (2016)

CVC unit managers and 11 were from other perspec-

tives (mostly parent ﬁrm managers, but also a few

portfolio company managers, co-investors, and com-

peting ﬁrm managers).

Archival data

We supplemented interview data and follow-up

e-mails with archival information about each CVC

unit and corresponding parent ﬁrm. This information

was collected from a variety of sources such as

parent ﬁrm 10K statements, company Web sites,

Factiva, Lexis-Nexis, and VentureXpert databases. It

included data on unit investment volumes and pat-

terns, choices of sectors, motivations, rounds of

investments, and syndication activities. The supple-

mentary data enriched informant statements, helped

clarify ambiguous statements, and conﬁrmed inter-

view data where applicable. Such diverse sources

helped triangulate our primary data (Jick, 1979) and

examine them from multiple vantage points (Yin,

1994).

Data coding and analysis

Following prior research (Eisenhardt and Graebner,

2007; Miles and Huberman, 1994), we used a three-

step analytical procedure, as described next:

Step 1: Within-case analysis to identify search and

integration processes

We treated all data about a sample CVC unit as

constituting a single case (Miles and Huberman,

1994). We followed the practice of ‘constant com-

parison’ (Strauss and Corbin, 1998) through cycles

of comparing basic coding of raw data with induced

higher level abstractions. First, we carefully read the

interview transcripts and associated archival materi-

als in order to ‘open code’ an informant’s responses

using his/her own language (retaining words,

phrases, terms, or labels offered by the informant).

We tagged each passage that conveyed a particular

point, thought, or idea with one or more codes that

reﬂected what the informant was describing. Next,

we reduced the dimensionality of these open codes

by constructing ﬁrst-order processes (Strauss and

Corbin, 1998). Finally, ﬁrst-order processes were

grouped into broad activity themes that involved a

critical aspect of search or integration. The mapping

and clustering of codes and processes involved

numerous iterations until we reached ‘theoretical

saturation’ (Miles and Huberman, 1994) where no

new theoretical categories emerged from the last few

cases studied.

Step 2: Evaluating performance outcomes for

each case

Research suggests that high performing CVC units

positively affect diverse stakeholders and maintain

favorable relationships with these stakeholders

(Bassen et al., 2006; Hill and Birkinshaw, 2014).

Thus, we sought to capture the nature of our units’

relationships with three important sets of stakehold-

ers: the parent ﬁrm’s top management, business unit

personnel, and investing partners, each of whom is

vital to the units’ continuance (Hill and Birkinshaw,

2014). Observations by unit managers (and parent

ﬁrm managers wherever applicable) on relationships

with these critical stakeholders were used to evaluate

each unit’s performance in fulﬁlling its strategic

mission.

We identiﬁed four strong performers based on

respondents’ observations of favorable relationships

with all three stakeholders: Impressive, Qualiﬁed,

Momentous, and Leading Ventures. We also identi-

ﬁed three weak performers where respondents

reported unfavorable relationships with each of these

stakeholders: Booming, Advanced, and Knockout

Ventures. The remaining units, which had mixed

assessments, were treated as average performers.

In 2006 (when we conducted our initial inter-

views), the four strong performers had been active

for ﬁve to 16 years, and their cumulative investments

ranged from $80 million to $3 billion. In contrast,

two of our weak performers, Booming and

Advanced, had been disbanded recently. The third

unit, Knockout, was still active and had accumulated

investments of around $100 million, but annual

investment volumes were volatile and the unit was

often on the verge of termination.8

The strong and weak performers are highlighted

in Table 2, along with representative quotes regard-

ing their relationships with the three types of impor-

tant stakeholders.

We also attempted to conﬁrm our categorizations

of strong, average, and weak performers using archi-

val data to evaluate the extent to which the CVC

8The unit was terminated in 2012 as we were working on

subsequent revisions, which increased our conﬁdence in the

predictive reliability of our evaluative approach. The respon-

dents from the other two disbanded units reported mixed out-

comes and suggested that closure might have occurred for

reasons other than performance.

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Table 2. Strong and weak performing units

Unit Observed

performance

Representative quotes

Top management relationship Business unit relationship External partner relationship

Impressive Strong Positive Positive Positive

‘[Our management] was very clear about maintaining

our investment pace and quite public in their view

that the right time to invest is during down cycles.

We were concerned about where innovation was

going to come from, which is ultimately what drives

our industry, and we were not going to let up.’

‘We’re viewed as kind of an honest information broker source for the

company. People want to talk to us all of the time to get a sense of

what’s going on out there in the marketplace which they might be

missing.’

‘Our most important source of quality deals is our

entrepreneurial network. This consists of proven

entrepreneurs that we’ve worked and invested with in

the past.’

Qualiﬁed Strong Positive Positive Positive

‘Now it’s a situation where not only is there a

strategic need to sustain this activity, but people are

actually very happy about the results of this. And

because of that, [we] want to continue this activity.’

‘The business units were part of helping us bolster our case that a

company was strategic to [the parent’s] needs. And then they would also

help us on the partnership side, whether it was a codevelopment type

partnership or a channel partnership.’

‘In the wireless communication value chain, we were a

very neutral party. So, for example, partnering with us

would not preclude partnering with [the parent’s

rivals]. So we played on that neutrality. We were the

Switzerland of the value chain.’

Momentous Strong Positive Positive Positive

‘I have endorsement at the very top of the

corporation. We have a CEO who is well aware of

the urgency and the speed and innovation that can

be realized via these outside investments; and so a

great appreciation for what it is that we do and a

great interest in it.’

‘I would say [the business units] are very deeply involved. When there is a

speciﬁc product linkage, I want to make sure they have near day-to-day

visibility. My team spends most of its time outside the walls of the garden

area but ultimately that traction [has] to take place inside and that

really is dependent upon a strong relationship with the business units.’

‘I sit on the ventures’ boards as a [parent] investor so I

have to navigate both sides of everything. But it really

has been designed to be a win-win; so that the

companies I invest in win as well as [the parent]. I

think we’ve done a pretty good job of that.’

Leading Strong Positive Positive Positive

‘The vice presidents of chemistry and biology,

discovery, etcetera, in [the parent company] are

keenly interested in the explore side of our

investments. They see the venture capital group as

being a great way for them to explore new areas of

research in a very leveraged way.’

‘We found this little company and brought it to [our researchers’]

attention, and so you know, we were very much the extra set of eyes and

ears for them. On the other hand, this company that we’re looking at

right now was brought to our attention by some of our early-stage

discovery chemists who said ‘you know, there’s this really bright guy in

Australia, and he desperately needs funding.’ ’

‘We have always demanded that if there is an asset within

a portfolio company that’s open for being licensed, that

somebody pick up the phone and call someone at [the

parent]. When I say ‘demanded,’ it’s probably a strong

term because we’ve never had anyone in our portfolio

companies who’s anything other than delighted [to do

so].’

Booming Weak Negative Negative Negative

‘Behind the scenes, people were going to the

chairman and the CTO and whispering in their ears

because everybody had their different agendas.

When those guys disappeared because of other

problems, there was nobody to manage the family

disputes, and that’s when things really got ugly.’

‘Most of the product divisions resented us and were jealous. They actually

viewed us as a tax. We were spending treasury money, which is money

they generated, and we wouldn’t be in the top 10 things they would

spend money on if they had a vote.’

‘Because we were big, [the VCs] never trusted us. So if it

went well, they’d say,‘Well, that worked out better than

we thought it would.’ And if it didn’t work out they’d

say,‘See, we thought it wouldn’t.’ ’

Advanced Weak Negative Negative Negative

‘If you talk to a [parent] partner, most of them would

probably say,‘I don’t think we did all that well [in

CVC investing].’ I was asked that question six

months ago by our CEO.

‘A couple guys at headquarters start telling the practice,‘Okay, here’s the

solution [from a portfolio company] we’re going to use.’ And our

practice is a bunch of free, independent guys who are going to say,

‘Bullshit. Nobody tells me what to do. I’m going to pick the best solution

that I deem ﬁt for this client.’ So we always had this battle going on for

about four or ﬁve years on that front.’

‘Often times our portfolio companies were disappointed

that even though they cracked the venture organization,

it was very difﬁcult to crack the consulting

organization.’

Knockout Weak Negative Negative Negative

‘We’ve never had stronger support [than the present]

because we almost died many times, believe me.’

‘[Tension with R&D groups] is really, really a hot button around here. It’s

almost that the longer I drag my project out in the resources labs, the

higher probability I have of guaranteed employment. Why in the world

would I ever go outside? That along with the arrogance of a researcher

who will never admit that you could get it outside better. So we struggle

with that a lot.’

‘We’re experts in our industry, but we not going to bring

an expert necessarily from some other industry to help

the company, per se. Sometimes other people are

concerned that if you have a potential customer as an

investor, then other customers who are competitive with

the investor might not come their way.’

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units were able to transfer knowledge to and from

portfolio ﬁrms.9Building on prior research (e.g.,

Gomes-Casseres, Hagedoorn, and Jaffe, 2006), we

used patent cross-citations to measure interﬁrm

knowledge transfer. We collected bibliometric data

on all U.S. patents issued from 2001 to 2006 (the ﬁve

years prior to when we conducted our ﬁrst round of

interviews) to parent ﬁrms and their portfolio com-

panies. Inbound knowledge transfer from a portfolio

company was assumed when the focal corporate

investor’s patents cited the portfolio company’s

patents (at least once) after the investor’s initial

investment. Outbound knowledge transfer to a port-

folio company was assumed when the portfolio com-

pany’s patents cited the patents owned by the

corporate investor (at least once). Parent companies

of the strongly performing units generated inbound

learning from 17 percent of their portfolio ﬁrms,

while 27 percent of portfolio ﬁrms garnered out-

bound learning from these parents, which were sig-

niﬁcantly higher than corresponding ﬁgures for the

average and weak performers. In contrast, weakly

performing units’ parents generated inbound learn-

ing from 7 percent of their portfolio ﬁrms, while 11

percent of the portfolio ﬁrms garnered outbound

learning from the parents. Both values were signiﬁ-

cantly lower than those for the strong and average

performers.

Step 3: Cross-case analyses using

predictor-outcome matrices

Finally, we created ‘case-ordered predictor-outcome

matrices’ (Miles and Huberman, 1994) to discern

similarities and differences in adoption of processes

among strong and weak performers. Afocused com-

parison of only the polar cases enabled clearer con-

trasts to emerge and stronger inferences to be made

(Yin, 1994). This exercise allowed us to identify key

search and integration processes that appear to

enhance unit performance (cf. Weber and Weber,

2011, for a similar approach). We also examined how

average performers adopted these processes in com-

bination. Throughout our analyses, we developed

causal explanations for the observed relationships by

theorizing about underlying mechanisms, consider-

ing existing evidence, and checking respondents’

explanations for any linkages (Miles and Huberman,

1994).

FINDINGS: IMPORTANT

UNIT PROCESSES

As discussed earlier, we ﬁrst conducted within-case

analyses to identify all search and integration pro-

cesses adopted by units. This approach helped us

uncover processes related to generating and select-

ing venture investment opportunities (aspects of a

unit’s search mission) and integrating speciﬁc ven-

tures as well as overall unit activities with the main-

stream. We summarize the primary links between

these practices and the different dimensions of

search and integration in Figure 1. We subsequently

discuss how some practices have secondary links

with other aspects of search and integration.

After identifying the strong, weak, and average

performers as reported earlier, we conducted cross-

case analyses to identify patterns in the adoption of

each search and integration process. The results of

these analyses are presented as a case-ordered matrix

in Table 3, depicting the use of all observed search

and integration practices by each sample unit,

arrayed by unit performance.

Based on differences in adoption among sample

units, we identiﬁed three types of unit-level pro-

cesses that are also depicted in Figure 1. Four of the

search processes and two integration processes were

adopted by all units and were, therefore, termed as

universal processes. Most CVC managers probably

understand the beneﬁts of these processes, resulting

in their widespread adoption. Consequently, these

processes appear to be necessary but not sufﬁcient to

ensure that a unit stands out as a strong performer.

Our ﬁndings also highlighted a few contingent pro-

cesses, of which one was in search and two in inte-

gration. For these processes, the links to unit

performance appear to be ambiguous since some

strong units did not adopt these processes and some

weak units did. While these processes perhaps help

unit performance in certain situations, they may

impede performance in others.

While we brieﬂy describe all identiﬁed universal

and contingent processes in this section for the sake

of completeness, we focus particularly on a third

type of unit-level process, which all the strong per-

formers but none of the weak performers had

9Both inbound and outbound knowledge transfers are central to

the performance of a CVC unit (Basu et al., 2011). While

inward learning is necessary to realize investor strategic objec-

tives (Wadhwa and Kotha, 2006), outbound knowledge transfer

indicates an investor’s ability to nurture portfolio ﬁrms and,

thereby, realize long-term collaborative goals (Keil et al.,

2008).

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adopted.10 Therefore, processes of this type, which

we term differentiating, appear to be strongly related

to CVC unit performance. We identiﬁed three differ-

entiating search and two differentiating integr-

ation processes. The qualitative evidence for the dif-

ferences in adoption of these processes between

strong and weak performers is provided in Tables 4

and 5.

Search processes

The formal role of a CVC unit is to search for new

investment opportunities (Dushnitsky and Lenox,

2005). Effectively doing so ensures that valuable

knowledge from portfolio ﬁrms is available to main-

stream units and complements their internal compe-

tencies (Chesbrough, 2002). As vital aspects of the

search function (Siggelkow and Levinthal, 2003), we

found that CVC units adopted processes that helped

in both generating adequate venture investment

opportunities and selecting ventures for investment.

All three types of processes—universal, contingent,

and differentiating—were among the search pro-

cesses observed.

Opportunity generation

We observed two universal processes, adopted by all

units, for generating new investment opportunities.

The ﬁrst such fundamental approach was syndica-

tion with traditional VCs, that is, investing in part-

nership with such investors. This practice enabled

units to gain visibility and legitimacy within the

investor community and consequently increase deal

ﬂow. As the manager of Productive Ventures

asserted:

‘We also happen to be a pretty nice syndication

partner because we invest relatively small amounts.

10 We found evidence that either a weakly performing unit had

not adopted a particular process or no evidence to show it had

adopted the process, whereas we found strong evidence for the

adoption of each process by all strongly performing units.

Opportunity

generation

CVC Unit

Reduction of

deal

complexity

Protection of

venture

interests

Lead investor

role

Evaluation of

venture

potential

Focus on

thematic areas

Commitment

to early-stage

ideas

Advisory role

to parent

management

Development

collaborative

blueprints

Mainstream

assistance in

selection

Avoidance of

competitive

postures

Unit-generic

integration

Going alone

Pricing the deal

Putting together the

syndicate

Closing the deal faster

Reducing terms and

conditions

Providing technological

assistance

Providing sales/

marketing assistance

Safeguarding ventures’

Avoiding competing

investments

Coinvesting with VCs

and private investors

Evaluating usefulness

of technology

Evaluating capabilities

of team

Evaluating

complementarities

Using strategic

planning

Investing in young

start-ups

Making follow-on

investments

Creating business

agreement during

investment

Nominating relevant

personnel as board

observers

Seeking board

membership or

observation

rights

Advising parent

management on

technological and

market trends

Rotating personnel

from mainstream

divisions

Promoting mainstream

personnel

Emphasizing low

size and power

Not investing in

substitutes for

internal technologies

Getting strategic

value vetted

Following-up on

leads

Opportunity

generation

Opportunity

selection

CVC unit

Syndication

with VCs

Nurturing

orientation

Formal

governance

mechanisms

Mainstream

assistance in

selection

Recruitment

of internal

personnel

Venture-

specific

integration

CVC unit

integration

Underlying codes First-order processes Broad ac s

docgniylrednUsess

ecorpredro-tsriFsemehtytiv

Diﬀerenang process Universal process Conngent process

Figure 1. Framework of CVC unit search and integration processes

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Table 3. Case-ordered matrix of search and integration processes

Search Integration

Opportunity generation Opportunity selection Venture-speciﬁc integration Unit-generic integration

CVC unit name Syndication

with VCs

Lead

investor

role

Nurturing

orientation

Reduction

of deal

complexity

Protection

of venture

interests

Evaluation

of venture

potential

Focus on

thematic

areas

Commitment to

early-stage

ideas

Formal

governance

mechanisms

Mainstream

assistance in

selection

Collaborative

blueprints

Advisory

role to

management

Avoidance of

competitive

postures

Recruitment

of internal

personnel

Strong

performers

Impressive * * * * * * * * * * * * *

Qualiﬁed * * * * * * * * * * * * *

Momentous * * * * * * * * * * * * *

Leading * * * * * * * * * * * * * *

Average

performers

Masterful * * * * * * * * * *

Auspicious * * * * * * * * * * *

Glorious * * * * * * * * * * * * *

Ultimate * * * * * * * * * * *

Joyous * * * * * * * * *

Productive * * * * * *

Dynamic * * * * * * * * * * * *

Accomplished * * * * * * * * * * * *

Bountiful * * * * * * * * * * *

Innovative * * * * * * *

Weak

performers

Booming * * * * * * * *

Advanced * * * * * * * * *

Knockout * * * * * * * *

Total adoptions 17 11 17 9 9 17 17 9 17 11 7 17 10 12

* Adopted by unit

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Table 4. Differentiating search processes

Aspect of

Process Adoption by strong performers Adoption by weak performers

Opportunity

generation

Reduction

of deal

complexity

Impressive, Qualiﬁed, Momentous, Leading—Yes Booming, Advanced, Knockout—No

Impressive: ‘We typically heard [from ventures] that our deal process is too complex, we have a

lot of terms and conditions. I think we’re addressing and getting a lot better at [these areas].’

Booming: ‘To avoid losing the ability to control or inﬂuence as ownership

dilutes, I’d negotiate things like warrants and things, so if the thing was going

well we could take more in.’

Qualiﬁed: ‘We never tried to insert contractual clauses for privileged access. And actually that

was deliberate because I had done enough research through various means to know how that

kind of an approach is perceived by the investment community and by the companies

themselves.’

Advanced: ‘So if we had an opportunity that the practice said,‘Wow, this is

really cool,’ I said,‘Well, I’ll tell you what, there’s a way of making even

more money on this: we’ll have to do a warrant structure so we can extend

the value of the cash investment.’ ’

Momentous: ‘Contractual terms like the right to ﬁrst refusal is rare [for the unit] because they

create a ﬁnancial impediment to the company and, quite frankly, most companies won’t sign

them.’

Knockout: ‘We put in the right to participate should there be a change of

control, such as an acquisition kind of thing. At times, we can’t always get a

board seat or observer seat, so we have done side letters where we’ll ask for

the board information separate.’

Leading: ‘We try not to insert any sort of preferential contractual language in the term sheet

because we think that has a tendency to reduce the value of an asset from an economics

standpoint.’

Protection of

venture

interests

Impressive, Qualiﬁed, Momentous, Leading—Yes Booming—No, Advanced, Knockout—Not indicated

Impressive: ‘We try not to have [the portfolio companies] be directly competitive. If an existing

portfolio company strongly objects, we’ll go meet with them to try and ﬁgure out if we can do

this in a way that isn’t a problem or not do the deal.’

Qualiﬁed: ‘We would not invest in competitors of our portfolio company. We were very loyal to

the company that we invested in. So that created a reputation of these companies wanting to

have us on as an investor versus looking at us as a sort of necessary evil.’

Booming: ‘Clearly, it was a control issue [for the ventures]. Would our

bureaucracy and our management support these things, or at the same time,

would they stay away? And, of course, legal would come in and say,‘Well, no,

we can’t stay out of their hair because we have a legal responsibility.’ ’

Momentous: ‘We don’t want to invest in things that we have conﬂict with. We tell people, ‘ if you

don’t have the intellectual property on something yet, [we] don’t want to see it.’ ’

Leading: ‘We will quite consciously segregate people who are involved in our activities. With

respect to intellectual property, we really never let [parent] people look at the patent

applications or anything like that, we use outside patent counsel for that.’

Opportunity

selection

Commitment

to early-stage

ideas

Impressive, Qualiﬁed, Momentous, Leading—Yes Booming—Partial, Advanced—No, Knockout—Not indicated

Impressive: ‘For a reasonably healthy portion of our deals, we can look at something and say,’

that thing really looks like it has serious long-term potential.’ And we’re relatively patient

money as long as the company is progressing and moving and doing the things that make

sense. We can stick with it.’

Booming: ‘We never went beyond an A round. Once you get to an A round, other

investors are coming in and your ownership is diluting. You’re losing the

ability to control or inﬂuence.’

Qualiﬁed: ‘We would often focus on Series A rounds since we would look at companies with core

and disruptive technologies. We would be able to better assess using our internal technical

resources and the technical merit these investments had. By Series B, I would expect the

company to have a prototype and a well thought out business or go-to-market plan.’

Advanced: ‘So we felt that we could get in earlier relationships with these

companies as an investor, as opposed to a strategic partner, simply because as

an A or B round investor, they don’t have a marketable product. The [parent]

consulting business is not going to recommend to our clients nonmarket

proven solutions. So that was the dilemma and that’s the approach we took.’

Momentous: ‘Of the [selection criteria] that matter, No. 1 is the technology. Will it ﬁt somewhere

or intersect with [the parent] some day? That’s what kept us out of dot-com investing, and

we’re thankful. In many instances, we ask ourselves what we could do for [the parent] three to

four years out.’

Leading: ‘Strategically our interest is in seeing enough early-stage innovation get funding. So

we’re trying to make closer alliances with the few very early-stage investors that remain in the

life sciences, and we’re trying to establish some capability for ourselves there.’

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Table 5. Differentiating integration processes

Aspect of

integration

Process Adoption by strong performers Adoption by weak performers

Venture-speciﬁc

integration

Development of

collaborative

blueprint

Impressive, Qualiﬁed, Momentous, Leading—Yes Booming—Not indicated, Advanced, Knockout—No

Impressive: ‘It’s relatively common for our deals to have a business agreement component

involving the business units. We generally do it up front because we know we’re doing it.

Because, quite frankly, your negotiating position once the deal is done is signiﬁcantly less than

that when you’re into it.’

Qualiﬁed: ‘One of the things that the venture group did was develop fairly deep relationships

with the companies that we invested in. The business development aspect of it was important

for us regardless of whether we made the investment or not. And so, going in, we would be

very focused on the relationship, the alliance aspect of it.’

Advanced: ‘Now, when it got into doing alliances and

things like that, we were very careful to draw a line.

Having run the alliance function, I was not going to

dictate that ‘because we did an investment we’ll have

an alliance.’ ’

Momentous: ‘In many instances, the prospective holder of the commercial agreement will be the

relevant observer . . . because traction [has] to take place inside and that really is dependent

upon a strong relationship with the business units.’

Knockout: ‘We’re always involved in monitoring the

commercial situation because we are responsible for

[the ﬁrm’s] reputation in the space. We often will act

kind of as an in-between, and it’s certainly in our best

interest to make sure that that commercial deal is

pulled off.’

Leading: ‘For example, in the investments that we made in health care IT, nearly every one of

those companies had a pretty substantial agreement with [the parent] immediately . . . for our

investments in research tools, which was very hot a few years ago but turned into a ﬁnancial

dog, two of the three companies have signiﬁcant commercial agreements subsequent to our

venture capital investment.’

Unit-generi

integration

Avoidance of

competing

postures

Impressive, Qualiﬁed, Momentous, Leading—Yes Booming, Knockout—No, Advanced—Not indicated

Impressive: ‘We have a small group of people from [the unit] who are assigned to the central

research labs. Business units typically have a two to four year horizon on product planning

and investing in stuff, and these guys have three to seven years.’

Qualiﬁed: ‘If the opportunity was competitive or something that [the ﬁrm] would want to get into

directly in the future, then it would be really hard to make investments outside that had a

similar agenda. We didn’t need a business unit check off to make an investment, but if the

business unit said no, then it became a politically uphill battle.’

Booming: ‘Here they viewed it as either their money or

their technology or their people. And we’d end up

talking to the executive vice president about things

that he or she knew nothing about. Middle

management would jump in there and wouldn’t let go

of things.’

Momentous: ‘[Our position] is that you can’t do everything yourself in a big corporation fast

enough to satisfy all your customers. But even more importantly, we tell the units you don’t

have to do everything yourself. So the things that we leverage outside are those that people

might be able to get to more quickly or that they’re not looking at.’

Knockout: ‘The struggle with people embracing this

activity is because they’re afraid that if I go outside,

then I’m outsourcing my job.’

Leading: ‘Because [the parent] has such a strong balance sheet, the capex constraints on these

guys are relatively minimal. Opex constraints on them are very real, but my opex is about $1.7

million; I mean, it’s a rounding error. It’s taken ﬁve and a half years, but that argument has,

thankfully, just gone away.’

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We do add credibility due to our brand. Our venture

friends tend to pick up the phone and show us a lot of

stuff.’

Another universal process adopted by all units

was to pursue a nurturing orientation toward their

portfolio ﬁrms by transferring vital resources from

their parent companies. Units using this approach

built a reputation as a valuable partner, which again

helped attract a greater volume of investment oppor-

tunities. As the manager of Dynamic Ventures

remarked:

‘I need to know that a strong connection is made that

will continue. Then, the small company beneﬁts

because it knows somebody’s going to help them

exploit their technology while using [the investor’s]

customers or market access, whatever we agreed.’

One contingent process that some of our units

pursued was to take a lead investor role in several

investments. Different approaches to leading an

investment involved being the only investor in

a round, inviting other investors to form a syndi-

cate, and deciding the terms of the deal. A lead

investor role resulted in greater visibility in the

investment community and thereby more invitations

to participate in ﬁnancing other ventures.11 For

example, the manager of Qualiﬁed Ventures

remarked:

‘As we had more visibility into the market and better

understanding of the product or technology, we took

on more of a colead role. We brought [in] the VCs,

helped them understand the opportunity better from

a technical and market standpoint, and inﬂuenced

the terms of the investment.’

We now highlight two important differentiating

processes that appeared to strongly help opportunity

generation, but which prior research has not exam-

ined adequately. This ﬁrst was to pursue reductions

in deal complexity through efforts to simplify and

minimize the terms and conditions of the investment

contract. Units pursuing this process made invest-

ments more quickly, more transparently, and less

restrictively for the portfolio venture. As the

manager of Impressive Ventures noted, such efforts

were of high priority for his unit:

‘We typically heard [from ventures] that our deal

process is too complex; we have a lot of terms and

conditions. I think we’re addressing and getting a lot

better at [these areas].’

The manager of Momentous Ventures suggested

that restrictive contractual clauses made potential

portfolio companies reluctant to form relationships.

Therefore, the absence of such clauses resulted in a

unit becoming more desirable for ventures as a

partner. The manager said:

‘Contractual terms like the right to ﬁrst refusal are

rare [for the unit] because they create a ﬁnancial

impediment to the company and, quite frankly, most

companies won’t sign them.’

Table 3 indicates and Table 4 provides further evi-

dence that all strongly performing units recognized

the importance of this process. However, respon-

dents from the weakly performing units did not indi-

cate that reducing deal complexity was an area

of concern and further remarked that they often

tried to insert contractual rights into a contract (with

the often unintended effect of increasing its com-

plexity).

The second differentiating opportunity-

generation process was to ensure protection of

venture interests, such that units’ own or parent

activities did not negatively impact a portfolio ven-

ture’s prospects. This addressed entrepreneurs’

concerns regarding investor opportunistic behavior

and resulted in more entrepreneurial ﬁrms seek-

ing investment in the future. For example, the

manager of Momentous Ventures explained that he

tried to protect the portfolio companies’ intellectual

property before they received funding from his

unit:

‘We don’t want to invest in things that we have con-

ﬂict with. We tell people ‘if you don’t have the intel-

lectual property [protection] on something yet, [we]

don’t want to see it.’ ’

The Qualiﬁed Ventures manager described

another approach used to protect venture interests.

He consciously avoided investing in ventures that

directly competed with any of the unit’s existing

venture partners, signaling the unit’s commitment to

these partners.

11 However, some of our respondents remarked that taking a

lead investor role may be counterproductive if a corporate

investor lacks the expertise or credibility to put together an

investment deal, which might explain the mixed effects of this

process.

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‘We would not invest in competitors of our portfolio

company. We were very loyal to the company that we

invested in. So, that created a reputation of these

companies wanting to have us on as an investor

versus looking at us as a sort of necessary evil.’

As Tables 3 and 4 indicate, all strong performers

took deliberate steps to protect portfolio company

interests while the weak performers did not under-

take any such speciﬁc actions. Moreover, there were

instances at Booming Ventures when their main-

stream units violated a portfolio company’s inter-

ests. The average performers were split between

adopting these two differentiating opportunity-

generation processes. Four average performers

made efforts to reduce deal complexity and were

also conscious of protecting venture interests. The

joint adoption of these processes by some units sug-

gests complementarities such that adopting one

makes the other less costly or more valuable.

Our data suggests important reasons why reduc-

ing deal complexity and protecting venture interests

result in the generation of quality investment

opportunities. A common perception of entrepre-

neurs is that corporate investors are difﬁcult to

work with (Katila et al., 2008), which can dissuade

ventures from seeking CVC funding. Our respon-

dents often faced similar concerns such as, ‘corpo-

rations move too slowly,’ and their ‘deal process is

too complex.’ Potential portfolio companies were

worried that the investor could be ‘looking to

potentially buy them,’, ‘infringing on the probabil-

ity of raising more money,’ and ‘tainting in some

form [through investment].’ Simplifying the terms

and conditions in the investment contract helped

venture managers see that the investor had ‘an

ability to move quickly if necessary,’ was foregoing

‘any special rights,’ and keeping investments at

‘arm’s-length where the company does not experi-

ence a bear hug.’

Further, the threat of intellectual property misap-

propriation by corporate investors is a major concern

for entrepreneurial ventures, which can inhibit them

from accepting CVC investments (Dushnitsky and

Shaver, 2009). Many of our respondents similarly

noted that their portfolio companies did ‘sometimes

have problems with technological leakage’ and

believed that their knowledge would be used to ‘ﬁll

white spaces within the corporation.’ The onus was

usually on the CVC units to ‘go out of [their] way to

partner in a meaningful way’ and ‘clarify the intent

of the investment model.’

Opportunity selection

The opportunity-selection aspect of search involves

the development of criteria for evaluating ventures for

investment. Following standard VC practices, a uni-

versal process that all our units tried to implement

was a careful evaluation of venture potential prior to

making an investment. In particular, they exercised

due diligence in evaluating the quality of ventures’

technology and management, which are often impor-

tant predictors of subsequent performance. As our

respondent from Ultimate Ventures remarked:

‘We often evaluate a technology that’s still trying to

prove itself. Clearly their management’s experience

with that type of business opportunity is going to be

important to us.’

Another universal process was a focus on broad

thematic areas for investment by all units. Such the-

matic areas were often identiﬁed by considering the

complementarity or relatedness with the investors’

areas of expertise. Some units developed strategic

plans to formally identify the sectors they would be

focusing on in future. Our respondent from Joyous

Ventures observed:

‘We seek novel therapies, devices, or technology

platforms that are strategically aligned with [the

ﬁrm’s] areas of focus. We proactively seek invest-

ments in such speciﬁc areas.’

In contrast to these well-known universal pro-

cesses, a relatively novel differentiating selection

process involved the commitment to early-stage

ideas. Units adopting this process invested in ven-

tures that possessed potentially valuable knowledge

but which required signiﬁcant further development,

such as recently founded ventures and/or ventures

that had not yet launched a product,. Therefore, they

focused on the long-term potential of portfolio com-

panies as opposed to an immediate route to commer-

cialization. The manager of Leading Ventures noted:

‘Strategically our interest is in seeing enough early-

stage innovation get funding. So we’re trying to

make closer alliances with the few very early-stage

investors that remain in the life sciences, and we’re

trying to establish some capability for ourselves

there.’

This process also included commitment to a ven-

ture’s development as its early-stage ideas matured.

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One approach that units used to display commitment

was making follow-on investments in later funding

rounds. Follow-on investments also prevented dilu-

tion of ownership in a venture to the point where

access to its ideas became difﬁcult for the corporate

investor. The manager of Impressive Ventures noted

his unit’s committed approach:

‘For a reasonably healthy portion of our deals, we

can look at something and say ‘that thing really

looks like it has serious long-term potential.’ And

we’re relatively patient money as long as the

company is progressing and moving and doing the

things that make sense. We can stick with it.’

As Tables 3 and 4 indicate, our respondents from

strongly performing units mentioned a continuing

commitment to ventures’ development while their

early-stage ideas matured. In contrast, none of our

weak units reported an overriding emphasis on early-

stage ideas or a patient approach to nurturing ideas.

The former manager of Advanced Ventures

explained that if he did invest in early-stage ven-

tures, it was with the intent of increasing ﬁnancial

returns rather than gaining access to ventures’ ideas.

While the former manager of Booming Ventures did

invest in early-stage ventures, he did not usually

make follow-on investments, indicating a lack of

continued commitment. Of the 10 average perform-

ers, only ﬁve adopted this process, as indicated in

Table 3. Three of these ﬁve units also adopted both

the differentiating opportunity-generation pro-

cesses,12 suggesting some complementarity between

the earlier processes and this key opportunity-

selection process.

In contrast to prior research that argues for the

conditional beneﬁts of making early-stage ideas for

both corporate investors (Markham et al., 2005) and

ventures (Kann, 2000),13 our results also suggest that

corporate investors can always beneﬁt from invest-

ing in early-stage ideas once they have taken steps to

protect venture interests, as discussed earlier. In such

cases, CVC investments can be used beneﬁcially as

low-cost probes to evaluate uncertain but potentially

valuable initiatives before further commitment is

made. Drawing from multiple interviews, our

respondents mentioned that ‘we use the minority

equity model when we don’t think we know enough

about what the company has or what the technology

could do for us,’ or that ‘the companies that we

bring in for investment evaluation have a two- to

ﬁve-year horizon in terms of things that might

impact our business.’ The CVC investment model is

most appropriate when ‘the risk proﬁle of the asset is

such that an equity stake is the most applicable tool

for minimizing risk and maximizing future option

value.’

Moreover, continued commitment to early-stage

ideas in the form of participation in follow-on

rounds, or ‘staging’ investments, can help a unit

maintain access to collaborative opportunities with

portfolio companies. Many respondents echoed

similar reasons for staging their investments, such as

enabling ‘staying power through at least a couple of

subsequent value inﬂection points,’ ensuring that

their ownership and leverage ‘do not get diluted too

badly’ and signaling their commitment ‘as long as

the portfolio company still has strategic value.’

In sum, we observed that our units adopted ﬁve

opportunity-generation processes, of which two

were universal, one contingent, and two differentiat-

ing. We also observed the adoption of three

opportunity-selection processes, of which two were

universal and one differentiating. We now move to a

discussion of the integration processes depicted in

Figure 1.

Integration processes

Integration refers to the extent to which other orga-

nizational units will cooperate and coordinate activi-

ties with a CVC unit to help it achieve its

organizational mission (Lawrence and Lorsch,

1967). When integration is ineffective, mainstream

units may be disinterested in the knowledge gener-

ated by a CVC unit or perceive it as a threat (Weber

and Weber, 2011). The integration processes our

CVC units adopted helped link both speciﬁc ven-

tures and overall unit activities with mainstream

units of the parent ﬁrm. Again, these processes were

a mix of universal, contingent, and differentiating

processes.

Venture-speciﬁc integration

Some of the integration practices we observed

were intended to establish effective cooperation and

12 As will be discussed later, these units were deﬁcient in one or

more differentiating integration processes.

13 Despite its recognized beneﬁts, the actual adoption of this

process is rare since CVC managers tend to be relatively risk

averse, perhaps because compensation structures do not incen-

tivize taking risks (Dushnitsky and Shapira, 2010) or because of

limited experience with VC investment processes (Dokko and

Gaba, 2012).

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coordination between speciﬁc ventures and main-

stream units and functions. Of these, a universal

process was the establishment of formal governance

mechanisms such as board memberships and

observer roles to monitor venture activities and

ensure they are aligned with the strategic interests of

units’ parent ﬁrms. We found that all units had insti-

tuted such governance mechanisms, which they

complemented with informal visits and meetings.

For example, our respondent from Glorious Ventures

remarked:

‘I walk a bit of the gray area when I ﬁll a board role

for one of these companies. I’m there at the behest

and for the care and loyalty of their shareholders. By

the same token, I sit here as a [parent ﬁrm] investor,

so I have to navigate both sides of everything.

Acontingent process, which was adopted by units

with varying performance, was to seek mainstream

assistance in selection, either to validate the strategic

value of a potential partner or to obtain leads for

investment opportunities. Respondents from these

units indicated that these efforts made relevant busi-

ness units more responsive to portfolio companies’

activities.14 As our respondent from Masterful Ven-

tures noted:

‘Around 20 percent of our leads are generated from

our external partners in operations and around 20

percent are proposed by the business units. We also

use the expertise of the business units in doing tech-

nical evaluations [of potential portfolio companies],

though some of our team members also have techni-

cal backgrounds.’

In addition to these universal and contingent pro-

cesses for venture-speciﬁc integration, an important

differentiating process that has not been documented

in prior research was the proactive development of

collaborative blueprints. Managers of units adopting

this practice outlined plans for collaboration

between relevant business units and individual port-

folio companies, highlighting areas of mutual inter-

est and the speciﬁc business unit personnel

responsible for furthering this collaboration. As the

manager of Qualiﬁed Ventures observed:

‘One of the things that the venture group did was

develop fairly deep relationships with the companies

that we invested in. The business development aspect

was important for us regardless of whether we made

the investment or not. And so, going in, we would be

very focused on the relationship, the alliance aspect

of it.’

As an important aspect of a collaboration blue-

print, units often requested that key business unit

personnel work closely with a venture. For example,

the manager of Momentous Ventures assigned such

individuals to board observer roles in his portfolio

ﬁrms.

‘In many instances the prospective holder of the

commercial agreement will be the relevant observer

. . . because traction [has] to take place inside and

that really is dependent upon a strong relationship

with the business units.’

Tables 3 and 5 indicate that all strong performers

emphasized such blueprints and made business unit

personnel responsible for implementation. None of

the weak performers developed collaborative plans

at the time of investment, but attempted to forge

informal post-investment communication between a

portfolio company and relevant business units. As

the quote from the manager of Knockout Ventures

suggests, these unit managers hoped that informal

communication would translate to subsequent col-

laborative activities, which did not often happen. Of

the average performers, only three units tried to

develop collaborative blueprints (see Table 3). None

of these three units adopted more than one differen-

tiating search process. Arelative weakness in search,

therefore, may have prevented them from extracting

the full beneﬁts of this venture-speciﬁc integration

process.

Our data from multiple interviews suggested why

such blueprints helped in venture-speciﬁc integra-

tion. Our respondents noted that the success of an

investment is often determined by ‘whether it ends

up being a joint collaboration eventually,’ when it is

‘necessary to ﬁnd opportunities for interactions

within the organization.’ ‘Getting the business to buy

in’ to a venture is usually ‘[a unit’s] ﬁrst work,’ as is

ﬁguring out ‘the right time for [the venture] to have

a conversation with key scientists in licensing and

research groups.’ Collaborative blueprints helped in

‘identifying maps of how [the parent and the

venture] are going to collaborate,’ generate ‘traction

that is dependent on a strong relationship with the

14 However, excessive mainstream involvement in venture

selection might have an adverse side effect of resulting in con-

ﬂicts with the interests of portfolio companies. Some of our

respondents pointed out that it was necessary to create a

‘ﬁrewall’ between their portfolio companies and parent ﬁrms,

which was not possible when such mainstream involvement

was sought. This is perhaps one of the reasons why adoption of

this process did not beneﬁt all units strongly.

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business units,’ and ensure ‘some element of coop-

eration is built into the relationship.’

Unit-generic integration

The remaining integration practices were intended to

establish effective cooperation and coordination

between the generic activities of a CVC unit, inde-

pendent of particular external ventures, and main-

stream units. Through these practices, CVC units

tried to reduce the resistance and hostility of power-

ful mainstream units that might perceive external

venturing as a threat to their activities (Chesbrough

and Rosenbloom, 2002). As an example of a univer-

sal process in this regard, all units adopted an advi-

sory role to parent management to highlight their

potential value to the mainstream organizations. Unit

managers tried to regularly inform parent ﬁrm’s top

management of technological and market trends that

they gleaned from their partnerships with external

ventures. As the manager of Ultimate Ventures

noted:

‘We give [the top management] updates several

times a year [on] some of the trends in the market-

place and our portfolio companies, as well as the

companies we didn’t invest in.’

Acontingent process pursued by some units was

the exclusive recruitment of internal personnel from

within the parent organization, either through trans-

fers or rotation of individuals working in business

units. In doing so, these units expected unit members

to use their social ties with mainstream personnel to

avoid any hostility from, and build bridges with,

mainstream divisions.15 For example, our respondent

from Glorious Ventures noted:

‘For the most part, we have found that having some-

body who has lived the business gives [the unit] more

power both in terms of credibility and the ability to

inﬂuence the businesses.’

One important and yet little-explored differentiat-

ing practice through which units mitigated main-

stream resistance was the deliberate avoidance of

competitive postures with mainstream activities.

These units consciously fought perceptions that their

activities were substitutes for mainstream initiatives

by constantly emphasizing that their primary role

was to complement and assist mainstream divisions.

Some units made considerable efforts to understand

current and future parent initiatives to avoid compet-

ing with these initiatives. The manager of Qualiﬁed

Ventures stated:

‘If the opportunity was competitive or something that

[the ﬁrm] would want to get into directly in the

future, then it would be really hard to make invest-

ments outside that had a similar agenda. We didn’t

need a business unit check off to make an investment,

but if the business unit said no, then it became a

politically uphill battle.’

Some units also downplayed any competitive

threat by understating their relative size in terms of

budgets and/or returns in comparison to mainstream

divisions. For instance, the manager of Leading Ven-

tures continuously emphasized that his CVC unit

would never match the scale and scope of main-

stream units and, therefore, should not be considered

a threat:

‘I literally sat down the ﬁve heads of all research

including their boss, and went through Accounting

101 for them. [I] explained the difference between

opex and capex and said ‘look guys, what I’m spend-

ing is capex.’ Because [the parent] has such a strong

balance sheet, the capex constraints on these guys

are relatively minimal. Opex constraints on them are

very real, but my opex is about $1.7 million; I mean,

it’s a rounding error. It’s taken ﬁve and a half years,

but that argument has thankfully just gone away.’

As seen in Table 5, all strong performers avoided

investing in areas that overlapped or competed with

mainstream unit activities. While all of the weak

performers were confronted with mainstream indif-

ference and hostility, they failed to formulate an

approach to counter such resistance. The managers

of some of the units seemed resigned to these nega-

tive attitudes, as the quote from the manager of

Knockout Ventures indicates. Moreover, as shown in

Table 3, six of the 10 average performers avoided

competitive postures with the mainstream units. Two

of the three units that developed collaborative blue-

prints were also able to avoid competitive postures,

suggesting some complementarity among venture-

speciﬁc and unit-generic integration processes.

Data from multiple interviews indicate why avoid-

ing competitive postures was an important practice

15 However, as prior research suggests (Dokko and Gaba, 2012)

and some of our respondents noted, the network contacts that

external recruits possess and their experience with beneﬁcial

VC practices might often be more valuable than the integration

advantages of having purely internal members. This is perhaps

why not all units adopting this process experienced strong per-

formance beneﬁts.

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in building acceptability for the CVC unit. A unit’s

activities of ‘bringing learning into the organization’

were ‘dependent on the goodwill of all the other

folks in [the parent]’ and ‘the real hurdle is always

more internal.’‘There had to be a linkage within the

organization . . . both in terms of credibility and

ability to inﬂuence the business.’ ‘Strategic align-

ment had to be managed prudently and proactively’

by ‘maintaining close relationships with the various

operating groups.’

CVC units avoided a competitive posture by

‘asking business units for those things that will be

impacting them in a two- to ﬁve-year time horizon.’

This prevented a ‘politically uphill battle if a busi-

ness unit said no [to their investments].’ Units

‘avoided the likelihood of conﬂict’ by not making

investments ‘in pathways where [the parent] cur-

rently has an active R&D program’ and ‘ﬂying a

little bit below the radar because of the group’s small

size and newness.’

In sum, our units adopted three processes relating

to venture-speciﬁc integration, of which one was

universal, one contingent, and one differentiating.

We also observed three processes relating to unit-

generic integration, of which one was universal, one

contingent, and one differentiating. We now discuss

how some of these processes may have multiple

inﬂuences on different aspects of search and/or

integration.

Interdependencies between processes

In the interest of parsimony, we categorized ﬁrst-

order processes based on their primary utility in

helping a particular aspect of search or integration.

However, as our interviews revealed, some processes

had weaker secondary effects (sometimes negative)

on other aspects of search and integration.16 We

discuss these relationships to better understand the

different ways in which a process can beneﬁt or

impede CVC unit performance.

Interdependencies within search or integration

From our interviews, it appeared that some

opportunity-generation processes had secondary

relationships with opportunity selection, since these

processes often resulted in the creation of relevant

selection criteria. For example, units usually selected

a venture for investment if the invitation was

extended by a prominent syndication partner. Units

that sought to protect venture interests typically

avoided selection of investments where the potential

for violation of venture interests existed (such as

with ventures that lacked adequate intellectual prop-

erty protection). Opportunity-selection processes

may, in turn, have had a favorable secondary impact

on opportunity generation. As a unit focused on the-

matic sectors and early-stage ideas, it gained a repu-

tation for being a valuable partner to relatively young

ventures in these sectors, resulting in increased

investment opportunities.

There were similar secondary relationships

between venture-speciﬁc and unit-generic integra-

tion processes. The legitimacy of the CVC unit

increased as more individual ventures were success-

fully integrated (through developing collaborative

blueprints and establishment of governance mecha-

nisms), causing the unit’s positive performance to be

more visible to mainstream units. Moreover, as unit

managers advised parent management on external

developments and their units’ complementary activi-

ties, interest was often generated in speciﬁc ventures

from which valuable knowledge could be accessed.

Interdependencies between search and integration

We also observed instances of positive and negative

interdependencies between search and integration

processes. First, while the process of nurturing

portfolio ventures was primarily related to opportu-

nity generation, we found it had a secondary link

with venture-speciﬁc integration. As CVC units

approached relevant business units for critical

resources to support portfolio ventures, this resulted

in a greater understanding and appreciation of ven-

tures’ activities within the mainstream organization.

Second, the unit-generic integration process of

avoiding competitive positions with the mainstream

appeared to be secondarily related to selection—

units adopting this process selected only those ven-

tures for investment that did not potentially compete

with mainstream units. This process also had a sec-

ondary effect on opportunity generation since the

CVC unit better protected a venture’s interests when

the venture did not compete with the mainstream.

Third, the venture-speciﬁc integration process of

developing collaborative blueprints had a secondary

effect on opportunity generation and selection.

Greater collaboration with ventures helped create

a favorable reputation for a unit as a reliable

investor and, thereby, resulted in greater investment

16 We thank an anonymous reviewer for pointing us in this

direction.

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opportunities. It also served as a selection mecha-

nism since units adopting the process formed rela-

tionships only with ventures that were agreeable to

such collaborative blueprints. Fourth, the venture-

speciﬁc integration process of soliciting mainstream

assistance also impacted opportunity selection by

establishing mainstream involvement as a critical

part of the selection process. However, as discussed

earlier, this process may negatively impact opportu-

nity generation since venture interests were harder to

protect when the mainstream was closely involved in

selection. Similarly, the unit-generic integration

process of recruiting internal employees may nega-

tively impact opportunity generation, as internal

employees lack external networks that help generate

investment opportunities.

In sum, the presence of interdependencies

between processes suggests that there are often mul-

tiple and indirect ways to implement the different

aspects of search and integration other than the

direct relationships we highlighted in our frame-

work. Moreover, while search and integration

sometimes impede each other and are, therefore, dif-

ﬁcult to implement concurrently, there are also

several conditions where they could complement

each other. As our ﬁndings highlight, this was par-

ticularly true of the differentiating processes we

identiﬁed.

DISCUSSION

To examine how external venturing units generate

valuable knowledge for their corporate parents, we

studied how CVC units engaged in search and inte-

gration activities and the efﬁcacy of their speciﬁc

practices. Previous research on external venturing

provides little insight into this important question

and has, thus, overlooked the potential entrepreneur-

ial role that unit managers may play in achieving

effective search and integration. We identiﬁed and

described a set of four universal practices that all

sample CVC units used to facilitate the two compo-

nents of their search mission—the generation and

selection of new venture investment opportunities—

and two universal practices used to achieve integra-

tion with mainstream units. We also identiﬁed three

widely adopted practices that did not have a discern-

ible relationship with unit performance, possibly

because their inﬂuence was contingent on unob-

served factors.

Differentiating processes

In addition to these well-known and widely adopted

practices, we uncovered a set of ﬁve novel practices

that varied in use across CVC units and were related

to observed differences in the efﬁcacy of unit search

and integration. Speciﬁcally, units that focused on

reducing deal complexity and protecting ventures’

interests improved their reputation as attractive

investors among start-ups and VCs, thereby increas-

ing the number and quality of partnering opportuni-

ties, a primary component of search. Units that

evaluated and selected ventures based on an early

stage of development increased the search beneﬁts

they offered their parent ﬁrms by helping them probe

potentially useful, but uncertain, technologies,

markets, or business models before rivals. In terms

of integration efﬁcacy, CVC units that helped

develop explicit collaborative blueprints between

speciﬁc venture partners and mainstream businesses

created social contracts between the parties, thereby

increasing venture-speciﬁc integration. Finally, CVC

units that sought to avoid a competitive posture rela-

tive to mainstream units and frame their role as

complementary reduced internal political resistance

to their activities, resulting in more effective unit

integration.

Contributions and implications

Our study makes important contributions to the

external corporate venturing literature. We extend

and elaborate substantive theory of CVC by docu-

menting the ﬁve differentiating unit practices we

found to be valuable in improving the efﬁcacy of

units’ search for external venture partners and inte-

gration with mainstream organizational units. Prior

research has examined some of the universal and

contingent practices we identiﬁed (Hill et al., 2009;

Maula et al., 2013; Wadhwa and Basu, 2013), but

has not highlighted the importance of our differenti-

ating processes in much detail. We contribute to the

external venturing literature by drawing from our

data to provide detailed explanations for how and

why these practices inﬂuence the efﬁcacy of CVC

unit search and integration. In doing so, we show

how CVC units attempt to manage the trade-offs

between achieving effective search and integration

and accomplish both. Although studies show CVC

investing can enhance a corporate investor’s

innovativeness by learning from its portfolio ﬁrms

(Maula et al., 2013; Wadhwa and Kotha 2006), the

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conditions under which this happens are poorly

understood (Dushnitsky, 2012). Our results suggest

that an important source of heterogeneity in the

effects of CVC investing on ﬁrm-level innovation is

the efﬁcacy of CVC units’ search and integration

mechanisms.

We further extend substantive theory of CVC by

identifying and explaining complementarities

among the observed CVC unit practices. Our analy-

sis suggested the ﬁve differentiating practices

complement each other and are, therefore, more

effective when adopted as a bundle rather than as

individual processes in isolation. Our analysis also

indicated that the differentiating practices comple-

ment universal processes by enhancing the beneﬁts

of these processes. For example, syndication and

nurturing portfolio companies (both universal pro-

cesses) are more effective in stimulating opportunity

generation when the investor’s reputation is

enhanced through protecting venture interests and

reducing deal complexity. Similarly, the universal

selection processes of venture evaluation and focus

on thematic areas are more effective when comple-

mented by a commitment to early-stage ideas. Board

membership or observation rights work better at

integrating particular ventures when collaborative

plans with a mainstream unit have been developed;

and an advisory role to parent management is more

beneﬁcial in integrating a CVC unit when competi-

tive postures are avoided. In sum, our analysis sug-

gests that an organizational conﬁguration approach,

in which variations in particular bundles of practices

explain organizational outcomes (Miller, 1996), con-

tributes to a better understanding of CVC unit per-

formance relative to examining individual practices

in isolation.

We also extend research on external corporate

venturing by moving beyond its focus on top man-

agement in creating the structural context that

enables and constrains program execution (e.g.,

Dushnitsky and Shapira, 2010). We instead focus

attention on the role of CVC unit managers as entre-

preneurial agents in pursuit of effective search and

integration. Our results show how effective unit

managers strive to increase the value of search ini-

tiatives for mainstream units by building bridges

between speciﬁc ventures and relevant mainstream

units and increasing the internal legitimacy and

acceptance of their units’ overall activities. Because

they lack authority over many needed resources,

CVC managers are involved in a variety of political

processes that anticipate resistance from mainstream

units and seek to mitigate it through social inﬂuence.

For example, our analysis suggests that CVC unit

managers who pursued the practice of collaborative

blueprinting facilitated a social exchange relation-

ship (Starr and MacMillan, 1990) between a particu-

lar mainstream unit and a particular venture by

creating a social obligation between them. The obli-

gation is created when a mainstream unit manager

agrees to pursue collaboration with a venture or

agrees to participate as a board member or observer

for the venture (Homans, 1958). Moreover, unit

managers who pursued the avoidance of competitive

postures focused much of their efforts on a political

process of meaning construction (Kaplan, 2008).

These managers acknowledged the potential for

mainstream units to frame CVC programs as a

threat, which would result in hostility and resistance

toward their activities. However, they worked to

replace the threat framing with an opportunity

framing by mobilizing mainstream personnel around

the complementary and value-enhancing nature of

the CVC program. Similar to the case of effective

venture integration, CVC unit managers that

achieved effective unit integration were politically

skilled organizational operatives.

Possible alternative explanations

We considered two characteristics of our sample

CVC units as possible alternative explanations for

the relationship between the ﬁve differentiating

practices and the efﬁcacy of CVC unit search and

integration. First, we considered if the different

objectives pursued by the units drove both the choice

of practices and unit performance. To recall, our

units had diverse and often multiple strategic objec-

tives involving horizon scanning, ecosystem build-

ing, and gap ﬁlling. Next, we considered if the parent

ﬁrm’s primary industry generated the choice of prac-

tices and unit performance. Both of these arguments

are inconsistent with the data (see Tables 1 and 3).

Units that pursued the same objectives varied with

respect to their adoption of differentiating practices

and their performance. Similarly, CVC units of

parent ﬁrms in the same primary industries varied

with respect to both practices and performance.

Therefore, we concluded that unit objectives and

parent ﬁrm industry could not fully explain the rela-

tionships between the differentiating practices and

unit performance.

We also considered the possibility that the causal

direction of our results is the opposite of what we

Search and Integration in External Venturing

DOI: 10.1002/sej

149

Strat. Entrepreneurship J.,10: 129–152 (2016)

inducted from our data17—i.e., do differences in

CVC unit performance (in terms of their search and

integration effectiveness) cause differences in their

use of the ﬁve differentiating practices? While lon-

gitudinal data on practice adoption and unit perfor-

mance and/or some source of exogenous variation in

practice choice would help us investigate this possi-

bility, we lack such data. However, we know from

our data that some of the high performing units

adopted some of the differentiating practices at the

time their units were established. Consequently,

these choices could not have been made in response

to feedback about unit performance. Similarly, we

know that one of our low performing units had never

used any of the ﬁve differentiating practices, which

suggests they did not abandon them in response to

poor performance. Therefore, we concluded that unit

performance did not cause the adoption of any dif-

ferentiating practice.

Limitations and future research

An interesting follow-up question to our study is

why more external venturing units did not adopt the

differentiating processes identiﬁed here. Unit man-

agers may not be aware of the nuanced interactions

possible among these processes. Understanding such

barriers to adoption would be a valuable endeavor

for future research. While identifying differentiating

processes by contrasting strong and weak perform-

ing units, we found interesting differences in the

adoption of these processes by average performing

units. Given the scope of this study, we did not

explore the reasons for, or implications of, these

differences. Neither did we fully examine the condi-

tions under which the identiﬁed contingent processes

positively impact unit performance. We believe

these are also interesting opportunities for future

researchers.

Our ﬁndings suggest that through effective inte-

gration, CVC units can often transform unfavorable

corporate environments to become more receptive to

their activities. Future research could dynamically

examine if changes in corporate context alter the

relative importance of the differentiating processes

we identiﬁed. Finally, future research could examine

whether our ﬁndings are relevant to other types of

organizational units, such as internal venturing

groups, to build more general theory on how autono-

mous units can help parent ﬁrms become ‘ambidex-

trous’ in balancing exploration and exploitation

(Tushman and O’Reilly, 1996).

CONCLUSION

How can external corporate venturing units effec-

tively search for valuable external venture partners,

leverage the resources of internal mainstream units

in the process, and facilitate learning between these

two audiences, thereby contributing to corporate

renewal and resilience? We investigated this impor-

tant, yet largely unexplored, question through an

inductive study of 17 corporate venture capital units.

We documented a set of ﬁve practices that inﬂuence

the efﬁcacy of a unit’s external search and internal

integration. We also identiﬁed complementarities

between these ﬁve practices and other, more

common, practices used by all sample CVC units.

This study contributes to external venturing research

by showing how unit managers can achieve both

effective search and integration via entrepreneurial

and politically savvy practices, and it provides

insight into why some corporate investors are better

at learning from external start-ups than others.

ACKNOWLEDGEMENTS

We acknowledge generous ﬁnancial support for this

research from the Ewing Marion Kauffman Foundation

through a dissertation fellowship awarded to the ﬁrst

author. We thank all our respondents for their valuable

time and forthright insights.

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