literature review on venture capital

Venture Capital: A Catalyst for Innovation and Growth

This article studies the development of the venture capital (VC) industry in the United States and assesses how VC financing affects firm innovation and growth. The results highlight the essential role of VC financing for U.S. innovation and growth and suggest that VC development in other countries could promote their economic growth.

Jeremy Greenwood is a professor of economics at the University of Pennsylvania. Pengfei Han is an assistant professor of finance at Guanghua School of Management at Peking University. Juan M. Sánchez is a vice president and economist at the Federal Reserve Bank St. Louis. We thank Ana Maria Santacreu for helpful comments.

INTRODUCTION

Venture capital (VC) is a particular type of private equity that focuses on investing in young companies with high-growth potential. The companies and products and services VC helped develop are ubiquitous in our daily lives: the Apple iPhone, Google Search, Amazon, Facebook and Twitter, Starbucks, Uber, Tesla electric vehicles, Airbnb, Instacart, and the Moderna COVID-19 vaccine. Although these companies operate in drastically different industries and with dramatically different business models, they share one common and crucial footprint in their corporate histories: All of them received major financing and mentorship support from VC investors in the early stages of their development.

This article outlines the history of VC and characterizes some stylized facts about VC's impact on innovation and growth. In particular, this article empirically evaluates the relationship between VC, firm growth, and innovation.

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11 Corporate venture capital: A literature review and research agenda

From the book de gruyter handbook of entrepreneurial finance.

The study of corporate venture capital (CVC), which involves equity stakes from corporations in startup technology companies, spans more than fifty years and draws extensively from financial, organizational and entrepreneurship theory. While the CVC industry has grown substantially in the past two decades, the benefits for corporate sponsors and startups are still hotly debated in boardrooms. CVC structures and practices are rapidly evolving offering a rich tapestry for further study. CVC literature has progressed significantly, yet many topics remain unexplored with potential impact on CVC practices, finance, innovation and the corporation. This work is timely as technology increasingly impacts traditional industries rendering questions on the applicability of CVC across these sectors. This literature review surveys 238 CVC studies citing over 100 seminal CVC studies from the past two decades as well as their intellectual antecedents and theoretical perspectives that inform CVC research.

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Exploring the landscape of corporate venture capital: a systematic review of the entrepreneurial and finance literature

• Published: 15 March 2018
• Volume 68 , pages 279–319, ( 2018 )

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• Patrick Röhm   ORCID: orcid.org/0000-0003-4781-7053 1  

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The influence of corporate venture capital (CVC) investments within the venture capital industry, that is, equity stakes in high technology ventures, has stimulated the academic literature on this specific research area. Generally, CVC is strongly associated with the concept of corporate venturing and plays a vital role in the strategic renewal of established companies. Owing to the multifaceted nature of the CVC phenomenon, the existing literature is rather fragmented. Therefore, the purpose of this article is twofold: first, bibliographic coupling is introduced to the field of CVC to reveal the underlying structure of the current research front. Second, a content-related review is conducted to shed light on nascent research streams and shortcomings within the CVC literature that indicate promising avenues for future research. The systematic review of a comprehensive set of 65 articles reveals that the prevailing CVC literature is mainly driven by two dominant logics, management and finance, that tend to separate themselves from one another. Moreover, nascent research streams are identified that will broaden and enrich the academic discussion.

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The taxonomy is adopted from Keil ( 2000 ) and Sharma and Chrisman ( 1999 )

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During the data collection process, the following differences were identified: While the Strategic Management Journal is only available on Scopus for issues from 2011 onwards, Web of Science does not cover the following journals: Venture Capital: An International Journal of Entrepreneurial Finance , World Review of Entrepreneurship , Management and Sustainable Development and the Management Research Review .

Please note, counts are not mutually exclusive due to the fact that articles could apply several statistical methods simultaneously.

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Acknowledgements

I thank Andreas Kuckertz and Andreas Köhn, University of Hohenheim, for the assistance in the interrater reliability proceeding and valuable comments on prior versions of this paper.

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Röhm, P. Exploring the landscape of corporate venture capital: a systematic review of the entrepreneurial and finance literature. Manag Rev Q 68 , 279–319 (2018). https://doi.org/10.1007/s11301-018-0140-z

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Literature Review on Venture Capital

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Venture capital is key and paramount to business especially start up. But many businesses especially in emerging economies lack access to these services and resource.

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What Venture Capitalists Can Teach Companies About Decision-Making

A conversation with Stanford GSB professor Ilya Strebulaev on embracing disagreement.

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Venture capital firms notoriously embrace risk and take big swings, hoping that one startup will become a monster hit that pays for many other failed investments. This VC approach scares established companies, but it shouldn’t. Stanford Graduate School of Business professor Ilya Strebulaev says that VC firms have proven best practices that all leaders should apply in their own companies. He explains exactly how VC’s operationalize risk, embrace disagreement over consensus, and stay agile in their decision-making—all valuable lessons that apply outside of Silicon Valley. With author Alex Dang, Strebulaev cowrote the new book  The Venture Mindset: How to Make Smarter Bets and Achieve Extraordinary Growth  and the HBR article “ Make Decisions with a VC Mindset .”

CURT NICKISCH: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Curt Nickisch.

Startups have a strong brand. They’re famous for their resourcefulness, their willingness to fail for thriving and uncertainty, for their ability to see an opportunity where no one else does. But these qualities get repeated so often. They kind of become startup cliches. It’s easy to forget the underlying wisdom there, and the power is in the details. Take venture capital. What specifically makes venture capitalists different in their ability to seek value, and what practical lessons can any organization learn from that?

Today’s guest is someone who has spent decades researching the most successful venture capital firms, and he’s walked away with findings into what really makes them tick. Ilya Strebulaev is a professor at the Stanford Graduate School of Business with technology executive and consultant Alex Dang, he wrote the new book, the Venture Mindset, as well as the HBR article, Make Decisions with a VC Mindset. Ilya, excited to talk to you.

ILYA STREBULAEV: Thank you, Curt. It’s great to be here with you.

CURT NICKISCH: You have made your career as a researcher and professor out of venture capital, something that you would think would be really well understood and covered. I’m curious why you latched onto that industry for your work.

ILYA STREBULAEV: People always think that in Silicon Valley you know a lot about venture capital. And yet when I came to Stanford about 20 years ago, nobody studied venture capital. What I realized very early on is that the way venture capitalists make decisions is very different from the way we teach our students. It is also very different from how executives typically make decisions in large corporations, in large organizations. But there is something else. In my research I showed that the venture capital industry in the United States is causally responsible for a very non-trivial fraction of all the new large companies that appeared in this country in the last 50 years. The VC industry that is relatively small is responsible for a very large fraction of companies that became very successful. Think Apple, Google, Moderna, Netflix, Airbnb, Salesforce, Tesla, Uber, Zoom, and of course now OpenAI.

What this really means is that in the era of discontinuity and disruption, at the time when there are rapid advances in technology, large corporations face competitive pressure, not just from their traditional competitors, but also from newcomers that typically are venture-backed. And I think to respond effectively, these large companies would want to acquire, would want to adopt what I call the VC, the venture mindset.

CURT NICKISCH: So let’s dig into the VC mindset and what sets these decision makers apart. One thing that probably anybody would tell you if you ask them on the street is that this willingness to fail, comfort with failure is sort of at the heart of that mindset. Does your research bear that out?

ILYA STREBULAEV: It does. Of course, willingness to fail is one of the many principles that we identified that constitute the venture mindset. In fact, the way I think about failure is in terms of baseball. For venture capitalists, home runs matter, and strikeouts don’t. What you’ll see is that out of 20 typical early-stage venture capital investments, most may fail. A few will maybe return the money back, and maybe will earn a little bit. And it’s only one out of 20 that becomes a home run. In one of my venture capital classes at Stanford, we had one quite famous venture capitalist. And he was talking about one of his venture funds that he started back in 1999. And many, many years later, that fund was still going. All of his companies but one failed from that fund. And when students asked that venture capitalist, “So that fund was unsuccessful, right?” And his reply was, “Not at all, because there is still one company that actually is doing very, very well.” And so that company might become a home run. It’s easy to say, “Let’s embrace failure.” It’s much more difficult to implement it in a practical way.

So we can think about specific, what we called playbook mechanisms, of how you can implement every single principle of the VC mindset, including how you can implement your approach to failure, so that indeed you concentrate on home runs, and you decide to let go of your strikeouts.

CURT NICKISCH: Before we get into that playbook, let’s just talk about this game strategy first. And that is that you’re swinging for the fences, to use the baseball analogy of hitting a home run. That’s an economic model that works, but is it wrong for companies to say, “Let’s try 10 things, and it’s okay if only five of them are moderately successful.” But they’re not. None of them are big hits.

ILYA STREBULAEV: The way to think about this principle of home runs met and strikeouts don’t, is not to think about each individual project or each individual experiment, but think about a portfolio of bets that you have. I think when smart venture capitalists make decisions about how they’re going to allocate their budget, very often the most important decision is not about a specific startup, but the most important decision about the portfolio allocation. My first reaction is let’s think about your strategy. Maybe you don’t take enough risk. So recently I worked with one venture fund that’s quite successful, or used to be quite successful. And the fund increased, almost tripled in size, and almost tripled in terms of the number of partners. And the managing partner realized that well, we’re not as successful as we used to be. So they invited me, and I looked at their data. And I quickly realized that their portfolio allocation strategy changed. They no longer made a lot of risky bets.

Well, behind that was another principle of the venture mindset, which is agree to disagree. In that venture capital fund, they used to have three partners. Now they had eight or nine partners. And yet they continued exactly the same decision-making process they used to have 10, 15 years ago. And one of the important principles they had is that every single partner should be very enthusiastic about the deal. And with let’s say nine partners, it no longer works. That means that all nine partners must now consent to invest in the deal.

And one of the specific recommendations from me was, you have to change this consensus culture. You have to agree to disagree. By the way, there’s a specific playbook mechanism that I recommend, and not just for venture capitalists, but in fact for any organization. And it is called Anti-portfolio. And anti-portfolio means look at the projects that you decided not to implement, and have a look at what happened to those projects.

And if your anti-portfolio performs better than your portfolio, I think there’s a good reason to sit back and think what happened. And in a large organization, it’s very similar. You have a lot of internal projects that you then decide maybe not to pursue. Well, have a look what happened to similar projects or similar ideas elsewhere.

CURT NICKISCH: So let’s dig into one thing that you just talked about a bit, which was this agree to disagree, which goes against a lot of companies that are consensus driven. And it goes against just this idea, I guess, that if it’s a good idea, everybody should recognize it and come around to it. But if you really try to go with consensus, then you tend to not have very pathbreaking, groundbreaking investments or ventures that you’re developing inside your firm. Is that right?

ILYA STREBULAEV: That is right, Curt. I think consensus is very important in the era of stability so that when we all know the final goal, we all have more or less the same information, and none of us expect dramatic changes, then consensus is likely the right approach. But once we face what I call unknown unknowns, once in fact the end goal is unclear. For example, maybe we’re entering the new market. For example, we are trying to adopt a new technology, then consensus is dangerous.

CURT NICKISCH: I’m curious what specific things venture capital firms do then to get around this inertia, I guess, of consensus. What do they do to actually support that kind of disagreement and that kind of environment where disagreement can thrive and still let people proceed?

ILYA STREBULAEV: They use several very practical mechanisms. The first one is they assign a devil’s advocate. You kind of appoint one person or a small group of people to take the opposite view. In fact, in a group decision making, it’s very often difficult for people to say, “I disagree.” Especially if somebody else is very enthusiastic about the deal, or maybe if the boss is enthusiastic about the investment. So you appoint somebody, and let’s say I’m going to say, “Curt, tomorrow we’re going to discuss this specific project. And it is your responsibility to come up with all possible weaknesses, all possible reasons why we should not pursue this project.” For example, Andreessen Horowitz, a large venture capital firm, also known as A16z very often designates what they call a red team. So they have a blue team that argues for the deal, and they have a red team tasked with arguing against a deal. Now in large organizations, they decide to implement a devil’s advocate, make sure that you alternate who the devil is.

If you are going to be appointed as a devil again and again and again, then in fact your influence is going to be diminished over time. Another mechanism that venture capital firms use is what I call a consensus minus X rule. So let’s say going back to the example I gave earlier about a partnership of nine decision makers. Consensus minus X, let’s say consensus minus two means is that the investment will be approved even if only seven people are in favor. So you can set this number depending on the size of the investment.

CURT NICKISCH: And so you might even make it smaller than for smaller investments, so that even if one person was in favor of doing it, you could do a seed stage investment, for instance.

ILYA STREBULAEV: That is true. That is correct. And in fact, it’s not just about seed investment. Let me give you an example. Venrock, which is a very storied venture capital firm, the firm behind investments in Intel, Apple DoubleClick and many, many other companies. There are a number of partners, and they vigorously debate every deal. And then the partner who initially presented the idea, who is the pioneer of the idea, will have to make the final decision unilaterally. Think about this Curt. There are nine partners, and one partner will hear all the feedback. In fact, you’re facing now eight devils. And then you will have to make your own decision.

CURT NICKISCH: I’m going to mention just a couple of other things that I thought were noteworthy in your article about improving this decision-making process. Number one, a lot of VC partnerships try to keep the team small, right? You just improve communication, you improve the speed, and that adding a lot of people to the decision-making process doesn’t actually help you that much. They ask for feedback in advance, some of them, so that people can read up on the companies, see the decks ahead of time, and then weigh in with their thoughts before they discuss as a group. And they also allow junior members of the team to speak first, just so that when the boss speaks, it doesn’t bias people’s opinions or influence the real feedback that they wanted to give. Some of those maybe are good practices that people know about, but I guess it’s important to underline, right?

ILYA STREBULAEV: These practices might be well known. It doesn’t mean though that they’re frequently implemented in large organizations. You mentioned keep teams small. In all venture capital firms, teams are always kept very, very small. But in large companies, very often you go into a meeting room and there will be a lot of people. And sometimes you might ask, “What on earth are all these people doing here?”

In practical terms, think about the following rule that is implemented in Amazon. Now, Amazon is one of those venture-backed company that retained it’s a venture mindset. Amazon has a very simple rule, two pizza team, so that if you’re still getting hungry after you consume two pizzas, then the team is too large, it’s around eight or ten people. And I think that there is in fact a lot of research that supports this notion. In fact, there’s a lot of research suggesting that maybe the teams should be even smaller. But in a large organization, every single time your decision-making team is more than ten, you have to ask a question why? And most often that will not be an efficient decision. Now, you also mentioned asking for feedback in advance. And in most successful venture capital firms, I observed that.

And by the way, it is done for a number of reasons. One is because they would like to minimize the influence of authority. Because Curt, if you’re my boss, let’s say you are the senior managing partner of the venture capital firm, and I’m a junior. And I maybe know something very interesting about this startup or about the founder. I have some really value-add soft information. If you speak before me, then it’s very difficult for me to provide this information if it somehow disagrees with your assessment.

CURT NICKISCH: Yeah, it becomes you like you’re arguing with that person.

ILYA STREBULAEV: That’s right. In fact, where large organizations I think can and should use it is not just when they decide on investments or on projects, but also in the interview process in hiring decisions. Google, again, another venture-backed company that retained its venture mindset has a policy. There is an interview committee when you hire people. The policy is you ask members of those committees to record their comments on each candidate individually in advance of the meeting, so that when you meet, you can have a look at what every single committee member independently said. By the way, sometimes venture capital firms go even further. They request anonymity. And there is something else, which in my experience I find very counterintuitive for let’s say corporate leaders, is that if we have an expert in the room, the natural tendency is to ask the expert first.

I’m sure you’ve been Curt, in the meetings where people said, “Well, Curt is the expert, so let’s hear from him what he has to say on this topic.” Venture capitalists very often do exactly the opposite. They’ll say, “Curt is the expert on this specific technology or this specific space. You know what? He is going to speak last.” Because well, you are the subject matter expert Curt, which means that if you say something and I happen to disagree with you, it’ll be much more difficult for me to talk.

CURT NICKISCH: Yeah, so much of decision-making in organizations is often about repeating past performance, right? Finding previous patterns and trying to repeat them. It sounds like you’re saying the venture mindset is almost trying to divorce yourself from that, and be open to exceptions, and be open to what’s different and what’s new.

ILYA STREBULAEV: In the large organization that deals with innovative projects, you always have to think about designing an efficient portfolio allocation. And try to avoid making an individual micro decisions on every single investment. So in the corporate VC environment, I think the parent company executives should decide on the total budget. They should decide on the number of investments that can be made. They should overall impose criteria, what kind of startups you can invest in, what kind of startups you can’t invest in. That depends on the overall strategy of the firm. But my advice is try to avoid making individual decisions.

CURT NICKISCH: The other tip that you have in the article is just to set ambitious timelines. And one thing I hadn’t really understood is that a lot of venture capitalists know that these are highly uncertain deals. You really don’t know how these are going to turn out. In all likelihood, most of these are going to fail. So spending a lot of time thinking about it, trying to game it, and all these different scenarios, it doesn’t actually help you reduce the risk. You just have to make a decision and move on. And so that’s a big recommendation of yours is just to set ambitious timelines, make decisions quickly on these companies that come to you or these investment opportunities, and just move on and not overthink things.

ILYA STREBULAEV: Curt, it is my recommendation. But note that I’m not saying that because you have to make decisions quickly, your decisions are going to be inefficient. In fact, venture capitalists came up with ways to make fast decisions very efficiently. And the chapter is titled How to Say No 100 Times. We do say it 100 times, because my research shows that for every startup that venture capital firms invest in, on average they say no, so they turn down 100 opportunities. Just think about this, think about all those thousands of startup investments that they decide not to invest in. And they do it quite efficiently. So very quickly how they do it, is that the venture mindset thinks about the funnel of all the deals in two different ways.

The first, at the top of the funnel, you have a lot of deals. And I think of this as 100 to 10, using the automobile terminology, you are going to use a fast lane, which means that you are trying to make a very fast decision here as efficiently as possible. And here is one specific trick that venture capitalists use that I found amazingly efficient, and in all my work with large organizations, I observed that they don’t use this trick typically, before I explain this to them. They ask a different type of question. The typical question that you would ask Curt is, “Okay, here’s an investment. Why we would like to proceed with this investment?” But in the fast lane, 100 to 10 lane, venture capitalists ask a different question. They ask, “Why we should not proceed with this investment?” And just by adding not, it completely changes the picture. So that as long as you find a red flag or a critical flaw, you decide not to proceed with this deal and just move on to another investment.

But once you go into what I call a slow lane or 10 to 1 lane, you switch. And venture capitalists very often subconsciously, they in fact, they don’t realize themselves. They switch from asking one question, why we should not invest, to asking another question, which is why we should invest. Or in fact, as one of my VC friends told me, “Why are we greedy to invest?” And then they proceed into relatively slow, still fast, but relatively slow due diligence. And I think that in large organizations you can really implement that approach, 100 to 10, 10 to 1, fast lane, slow lane. And so that the questions you are asking or ask your team to investigate are going to be different at the different levels of the deal or project funnel.

CURT NICKISCH: Ilya, I want to ask you something about taking on this VC mindset at companies, because it’s different for them, right? Venture capitalists in some ways have it easy, because they’re not employing those people that are doing this. When those companies fail, they’ve lost their money, but they don’t have to pay severance. Often at companies, when you’re deciding on an internal venture, there is opportunity costs. You’re taking some of your employees who aren’t going to be working on other things, and then performance engine, I guess, instead of innovation engine to keep running. Knowing that these decisions are a little more complex just because of the nature of their business. What do you tell them when they feel like it’s just harder, or I have these realities that I have to pay attention to, that just doesn’t seem to factor for a company that’s just investing in companies and doesn’t suffer the same externalities that a corporation does with its own employees?

ILYA STREBULAEV: That’s a great question, Curt. First of all, we talked today about several principles of the venture mindset and specific mechanisms, specific ways to implement it. For large organizations specifically, I think you have to take a parsimonious view. In our book, the Venture Mindset, we in fact discussed nine principles. And what I observed especially for large organizations, is that all those principles are interconnected. So that you might want to, as a Chief Executive Officer, let’s say, or a leader in a large company, you would like to get acquainted with all of them to start with. Because I think that will give you a much fuller picture with how to deal with all those complexities. Another point to keep in mind is that if you change the culture of your organization so that people are incentivized both financially and non-financially to pursue home runs in projects, in project teams, then it’ll be much easier to reallocate teams within your company, so that if a project fails as many projects in a large company should fail, it does mean that there will be layoffs. It does mean that there will be severance or separation from workers.

It means that your team members are going to be reallocated. And indeed, many large companies pursue this strategy quite successfully in various industries, not just in technological industries. So in a way, I think large organizations, and this might sound counterintuitive, but that is both my observations and outcome of my research. Large organizations in fact, could use the venture mindset more efficiently than venture capital firms. Exactly because, first, unlike venture capital firms, they have a lot of resources. They have the budget, they have the people. Also, unlike venture capital firms, in fact, they can control better what those internal startups, let’s say, those intrapreneurs are doing. So in fact, if you exercise just the right dose of control while at the same time allowing a lot of flexibility, in fact, I think the venture mindset in a large company can flourish much more than even in a venture capital firm.

CURT NICKISCH: Ilya, this has been really, really interesting with a lot of great takeaways for companies to copy something that’s successful in an industry that we can all learn a lot from. Thanks so much for taking the time to share your research and your insights with our audience.

ILYA STREBULAEV: Thank you, Curt.

CURT NICKISCH: That’s Ilya Strebulaev, a professor at the Stanford Graduate School of Business and Co-author of the new book, the Venture Mindset, and the HBR article, make Decisions With a VC Mindset.

And we have nearly 1000 episodes plus more podcasts to help you manage your team, your organization, and your career. Find them at HBR.org/podcasts, or search HBR in Apple Podcast, Spotify, or wherever you listen.

Thanks to our team, senior producer Mary Dooe, associate producer Hannah Bates, audio product manager Ian Fox, and senior production specialist Rob Eckhardt. Thank you for listening to the HBR IdeaCast . We have a special series episode for you on Thursday, and we’ll be back with a regular episode on Tuesday. I’m Curt Nickisch.

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