After the dot-com bubble burst about five years ago, corporate-sponsored venture capital funds jumped off that bandwagon in droves. Investing in startup technology companies -- thought to be a quick way to beef up the corporate bottom line and look technologically hip while doing so -- suddenly didn't seem like such a smart idea.
Managements as diverse as those at Boeing and Dell junked the concept. The reasons varied, says Mark G. Heesen, president of the Arlington, Va.-based National Venture Capital Association (NVCA). At Boeing, the unit fell victim to a wider corporate restructuring. At Dell, managers just didn't see enough of a positive impact on its bottom line. Such retrenchments caused hardly a blip on the corporate Richter scale. Unlike freestanding venture funds, some of which now manage billions of dollars in assets, corporate funds typically are small. "When a key person leaves, these funds often fall apart," Heesen says.
So why bother? Because venture capital is an essential tool available to a corporation to increase its innovativeness, says Wharton management professor Gary Dushnitsky. In his dissertation work, as well as three co-authored papers with Michael J. Lenox of the Fuqua School of Business at Duke University, Dushnitsky argues that corporate officials -- who once saw a quick windfall in financing outside technologies -- got it wrong then, and may be wrong now to recoil from making such investments.
In 2000, when corporate venture capital investing was at its peak, over 300 large corporations poured more than $16 billion of venture money into small startup companies. That number had dropped to slightly over $1 billion as of 2003, according to the NVCA.
"Because venture capital has fallen a little out of favor in the last five years, people might be a little skeptical about it," Dushnitsky said in an interview.
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