A new market in Germany: Corporate Venturing

Venture capital has become an important financial service for young, growing and innovative
companies throughout the world, although the market is substantially better developed in the
US and the UK compared to other European countries. Although the main share of venture
capital is still provided by wealthy individuals and families, established corporations
increasingly also act as investors in new ventures. In 2000, the total venture capital market in
the US had a volume of U$ 93.1 billion of which U$ 6.2 billion were invested by corporate
venture divisions. In 2001, the US venture market broke in, corporate investments were
down to 522.4 million
1
due to the general shake-down of the stock markets.

In Germany, the market for venture capital developed much later and the first corporate
venture capital engagement occurred in 1984 through a fund in which large corporations,
such as Siemens, Bayer and Daimler Benz participated. It took another 13 years until the first
captive corporate venturing firm was founded by Deutsche Telekom in 1997. In 2000, 18 of
the 30 largest German public companies (noted in the DAX) maintained a venturing division.
In 2000, the total volume invested by venture capital was 20 billion of which 6 billion were
raised in that year. Industrial corporations mobilized around 8.4 % of these new funds.

In Germany, not only corporate venturing is much less developed than in the US, also
studies on this market are still rare, the latest comprehensive one dating back to 1996.
2

Thus, there is definitely need for more recent information, some more general information
indicates that the market has developed rapidly since then. More detailed and recent
information on corporate venturing is not only interesting for academics, but also for industrial
companies involved or thinking about becoming involved in corporate venturing, financial
institutions and consulting firms. Techconsult, a firm specialized in technology consulting,
identified through a review of the literature, the following fields relevant to sketch the current
state of the market for corporate venturing:

Development
- What are the expected trends, will the market continue to grow?
- Which type of companies are involved in corporate venturing and which are
thinking about becoming involved?
Motivation
- What are the motives of corporate venturists - strategic versus financial
objectives?
Procedure
- Which selection criteria are used to identify ventures worth funding?
- Which role does knowledge management play in corporate venturing?
- How is the fulfilment of strategic targets assessed?
Experiences
- Which problems do corporate venturists experience?
Success factors
- Do corporate venturists focus on strategic or financial targets?
- How does control of the venture influence their success?

Case questions part A

1. What do you think about the fields of interests identified by Techconsult - are they
appropriate to sketch the German market for corporate venturing?
2. How would you design a study to get a more recent and detailed sketch of the
market?
- What would be your population?
- How would you sample respondents from the population?
- Which communication approach would you use?
- Draft questions to obtain the required information?
An example of a study

The board of Techconsult was very interested in the current state of the German market for
corporate venturing, as they strongly believed that strategic consulting of high technology
firms should at least include corporate venturing as a long term option to promote innovation
and R&D. People at Techconsult knew a lot about corporate venturing and recently they had
even hired people who had been involved in corporate venturing in the UK and US.
Knowledge, on what specifically was going on in Germany was however missing. Therefore,
the board decided to conduct a study to sketch the market. Nancy Nabozny and Klaus
Schneider were asked to organize such a study. Nabozny just recently joined the firm, before
that she was employed at a US university. There her job was to advice researchers with a
fresh idea that caught the interest of large corporations, how they should design their co-
operation. Schneider has been working with Techconsult for more than 5 years and was
currently a project leader and responsible for several consulting projects mainly in the
automotive sector.

Nabozny and Schneider thought that a survey among corporate venturing firms would be
appropriate to obtain the necessary information. As described above they identified through
discussions with experts the following fields of interest. Then, they had to put the survey into
practise and faced immediately a serious problem. Their research population were corporate
venturing firms, but there is no list or database, which nicely represents corporate venturing
firms and from which they could build a sample. They tried to search the Internet extensively
to find such firms in Germany and this search yielded about 60 firms, which were funded by
35 corporations. They were not satisfied at all with their Internet search and thought about
contacting all major corporations in Germany using existing firm databases. They send the
questionnaire to about 4200 decision makers in about 2700 corporations, but only 88
companies returned the questionnaire. As the management board was pressing to see the
results of the study, they decided to use the information of these 88 companies for their
analysis of the German corporate venturing market.

The table below shows the questions and closed answer categories of the questionnaire
used in this research.

No. Question Measurement scale
1 What is your general strategic orientation Nominal:
5: costleadership
4: differentation
3: niche strategy
2: growth strategy
1: others

2 How do you assess corporate venturing compared
to ...
A) M&As on the following aspects
B) Partnering on the following aspects
1: extension of product / service range
2: evaluation on capital market
3: achieving of general objectives
4: financial risks involved
5: flexibility
6: improving innovative capabilities
7: improving competitive position
8: improving quality
9: access to new markets
10: access to new technologies

Ordinal
1: corporate venturing
advantageous
2: no difference
3: corporate venturing less
advantageous
3 Balance strategic versus financial objectives Likert
1 = purely strategic
5 = purely financial
4 Importance of specific objectives
a) access to high potentials
b) development of competences
c) utilization of resources
d) utilization of innovative capabilities
e) improving quality
f) access to new markets
g) access to new technologies
h) identification of future markets
i) increasing sales
j) strengthen core business

Likert
1 = not at all important
5 = very important
5 Do you have realized (planned) certain activities in
corporate venturing?
a) execution of internal business plan
b) established a centre for potential corporate
venturing
c) cared for entrepreneurial activities of employees
d) initiated an incubator service
e) provided rules for capital funding

1 = no
2 = planned
3 = yes
6 How important are those measure for success?
a) execution of internal business plan
b) established a centre for potential corporate
venturing
c) cared for entrepreneurial activities of employees
d) initiated an incubator service
e) provided rules for capital funding

1 = low
5 = high
7 Which measures for external corporate ventures do
you already have initiated?
a) participation in a venture capital fund
b) direct participation in a new venture
c) cooperation with venture capital firms or business
angles
d) established a venture capital subsidiary

1 = no
2 = planned
3 = yes
8 How important are those measure for success?
a) participation in a venture capital fund
b) direct participation in a new venture
c) cooperation with venture capital firms or business
angles
d) established a venture capital subsidiary

1 = low
5 = high
9 How important is corporate venture for you in
general?
a) today
b) in the medium term
c) in the long term

1 = low
5 = high
10 How many corporate ventures will you fund
a) today (near future)
b) medium term
c) long term
1 = no
2 = 1-5
3 = 6-10
4 = 11 - 30
5 = more than 30
11 How large will be the share of expenditures for
corporate venturing?
a) today
b) medium term
c) long term

1 = less than 0.5 %
2 = about 1 %
3 = 1-2 %
4 = 2-5 %
5 = more than 5%
12 a) are the following groups involved in INITIATING
corporate ventures
b) are the following groups involved in SELECTING
corporate ventures
c) are the following groups involved in EXECUTING
corporate ventures
1: management board
2: business units
3: corporate venturing department
4: strategy department
5: specific project groups
6: corporate venturing subsidiary

0 = no
1 = yes
13 Do you use the following criteria in the process of
selecting corporate ventures?
a) personality / experience of venture team
b) market characteristics
c) product characteristics
d) technological characteristics
e) possibility to obtain patents
f) strategic fit
g) expected synergies
h) time horizon for venture
i) financial key indicators
j) risk of the investment
k) size / volume of the investment

1 = never
5 = always
14 How do you support venture firms?
a) financial funds
b) personnel
c) infra structure (offices etc.)
d) know-how
e) business contacts
f) production facilities
g) R&D facilities

1 = no
3 = often
15 Through with measures do you control the venture?
a) participate as external directors
b) participate as member of management board
c) financial controlling
d) regular meetings
e) informal contacts

1 = never
3 = often
16 How well do those measure work?
a) participate as external directors
b) participate as member of management board
c) financial controlling
d) regular meetings
e) informal contacts


1 = low
5 = high
17 How is the success of the venture measured?
a) financial goals
b) strategic goals

1 = not
2 = qualitative
3 = quantitative
18 Since when do you use corporate venturing

Number of years
19 How satisfied are you with the achieved goals in
your corporate venturing activities?
a) regarding financial goals
b) regarding strategic goals

0 = not all
5 = very satisfied
20 Please estimate roughly how often each of the
following exit options is used?
a) IPO
b) trade sales
c) management buy out
d) refinancing by banks / venture capital firms
e) dissolution
f) integrate cv in firm

Percentage
21 What are the main reasons for terminating the
relation between venture and the corporation?
a) mile stones not achieved
b) unsatisfied return on investment
c) missing strategic fit
d) good exit opportunity
e) original goals achieved
f) technological barriers

1 = never
3 = often
22 How would you assess the importance of the
following problems?
a) important resources to coach the venture are
missing
b) differences in corporate cultures
c) missing venture capital know-how
d) missing commitment of management
e) missing corporate venturing strategy
f) no systematic screening of venture opportunities
g) conflict of interest between venture and
corporation
h) bad communication between venture and
corporation
i) achievement of strategic goals cannot be
measured

1 = low
5 = high
23 Do venture and corporation operate in the same
sector?

0 = yes
1 = no
24 What is the size of the corporation in terms of Euro
revenues?
1 = less than 100 millions
2 = 100 to 500 millions
3 = 0,5 to 2 billions
4 = 2 to 5 billions
5 = 5 to 10 billions
6 = more than 10 billions



Case questions part B

1. What do you think about the low response, which consequences does it have?
2. What do you think about the questionnaire and the chosen answer categories?
3. Using the information of the 88 companies (see data file), how would you describe
the German market for corporate venturing?


1
G. Paisner Steep fall in corporate venturing London Financial News, February, 4th, 2002.
2
K. Schween Corporate Venture Capital: Risikokapitalfinanzierung deutscher Industrieunternehmen
[Corporate Venture Capital: Risk capital financing of German industrial corporations]. Wiesbaden:
Gabler 1996.