Corporate Venturing Shortcomings Lack of experience in the market entered Entered market already served by parent Lack of sustained top management support “Adverse selection” Costs and benefits accrue to different managers Conflict between strategic and financial objectives Inadequate risk/reward compensation Competition for scarce internal resources if venture successful Long decision-making chains

Advantages of Venture Capital Incentives - Gain-sharing arrangements between VC, limited partners, and entrepreneurs assures better alignment of incentives Staged investment at milestones, learn as you go, better focused for the business model, always the threat of discontinuance. Corporate ventures less strict in reacting to failed milestones. Also, cash given up-front in chunks and progress reviewed annually as part of regular budget cycle. Rigorous Surveillance - VCs frequent and intense monitoring of progress (19 times per year). More information and faster feedback. Reviews for corporate ventures more rigorous at higher levels as venture progresses in time and financial and human resources committed Unconstrained by existing corporate business models

Advantages of Corporate Ventures Longer funding horizon (more than six years) More money (scale) available for these ventures, e.g., IBM 360 Control over complementary assets (especially tacit ones–brand, reputation, knowledge-based) If the corporate venture was in a related line of business, the venture did better (matched VCs performance) Retain learning (through retained personnel), lesson learned (through post-mortems) and availability for future ventures. Need a culture that celebrates failures (3M). No failures means no risk taking

Location of NVG Between CV and VC NVG Learning Scale of Capital Time horizon New Business Models Monitor Financial Discipline Incentive intensity Complements LUCENT’S LOCATION Pseudo-equity used Staged funding Outside VC board Outside Board, CEO No specific fund length Shifting to bigger deals Re-acquisitions Limited career risk VCCV

Lucent’s New Ventures Group (NVG) Incentives – hybrid compensation system – Lucent employees had forego annual bonus and fringes in return for “phantom stock”. Outsiders had to learn to deal with overheads, corporate policies, annual operating plans Financial discipline - staged funding, allow VC investment, hire outside CEO, adaptable business model Monitoring – More external, e.g., like VC Business models can shift if necessary. Longer time horizons - no fixed life, no drive to liquidity Scale - fund bigger projects than typical VC Complementarities - Gather inside intelligence about industry trends, strategic direction consistent with Lucent Retention of learning - Personnel can rejoin the company if venture fails. Better recruitment because the competition for hiring is usually startup firms.