Describing the Strategic Value Creation
Process in Corporate Venture Capital
The Importance of Building Interpersonal Relationships:
A Case Study of Husqvarna
Jönköping, 2020
Bachelor Thesis: Business Administration Number of Credits: 15 ECTS Programme of Study: International Management Authors: Rix, Nicolas 19970424-T091 Stamm, Felix 19960102-4772 Supervisor: Oskar Engii
Abstract
Background and Purpose: In the past years, Corporate Venture Capital (CVC) investments have
substantially gained relevance. Corporations engage in this practice to reap strategic benefits that are usually only associated with entrepreneurial ventures and thereby drive innovation. While the success of CVC investments is undisputed, scholars have failed to provide a full description of the process that leads to the creation of strategic value for corporations. Therefore, we want to investigate the strategic value creation process in CVC and build a comprehensive framework thereof. The research question is thus:
What is the process through which corporations create strategic value in CVC investments?
Methodology: In line with pragmatism, we chose the methods best suited to answer the research
question: Primary data will be obtained in face to face interviews with key individuals involved in the strategic value creation process in Husqvarna Group Ventures. Following methods from Morse (1994) and Alvesson & Kärreman (2011), we then analyse the data in a dialogue with our frame of reference. After the identification of a breakdown, an unexpected result that cannot be explained by current academia, we continue to build the framework applying two interpretive repertoires. To do so, we combine our findings with the fragmented existing literature to depict the strategic value creation process.
Findings: We find that scholars have overlooked the complexity of the knowledge transfer, which is an
integral part of strategic value creation. The CVC unit cannot directly access knowledge in their portfolio firms; instead, an active and involved effort needs to be made by the corporate to create learning opportunities, which can then be transformed into strategic value. The key to accessing knowledge can be found in what we call the knowledge sharing mechanism: An intricate interplay of relationships between the CVC unit and the portfolio firm. We find that corporates significantly commit to activities to build an environment that facilitates voluntary, reciprocal knowledge sharing.
Conclusion: Business units must establish and maintain interpersonal relationships with their
portfolio firms to meet corporate objectives of innovation and strategic value creation through CVC. The relationship acts a channel for the knowledge transfer, and by extension, as an enabler of strategic value creation. We fill a gap in the existing literature and provide an all-encompassing framework depicting the strategic value creation process of CVC investments with a focus on the relationships between the CVC unit and the portfolio firm. Researchers have neglected this aspect until now.
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Acknowledgements
So here we are, some 250 litres of beer, 100 litres of coffee, and thousands of hours of Spotify music later we have completed our Bachelor thesis. It's been a long process of reading, drafting, writing, erasing, and fixing – but in the end, we believe that something extraordinary has been achieved here. Having said that, this thesis would not have been the same without many other people, and we would like to express our gratitude and most profound appreciation to everyone who was of assistance over the past five months.
First and foremost, we would like to thank our tutor, Oskar Eng. Throughout the process, he provided extraordinarily helpful feedback and guided us through even the most challenging situations. His support and assistance extended far beyond the compulsory seminars, and we are deeply thankful for his input and his expertise on even the most abstract philosophical assumptions that found their way in this paper. What a legend!
Further, we would like to express sincere gratitude, and a big thank you to Mark Johnson, Vice President of Husqvarna Group Ventures. His time and dedication despite a slight change in the focus of this thesis provided us with the best data we could have imagined. A special thanks as well to Per Ericson, Head of Strategy and Senior Vice President of Husqvarna Group AB, who dedicated some of his valuable time to ensure we got the information required for this thesis.
We would like to thank our peers Mohammed Albarbari and Lukas Kipper who had to read our (at times lengthy) drafts, provided valuable feedback and input throughout the seminars, and challenged us in mock oppositions. Further, we would like to extend our thanks to everyone else providing feedback on the final version of this thesis, namely Sophia Bulmash, Sascha Bardua, Jessie Bader, Alba García, and Michel Liegmann.
Last but not least, we are deeply thankful for the emotional support we received from friends and family.
This cheat sheet provides the reader with an overview of some of the principles, models, and concepts used frequently throughout the thesis. By using this cheat sheet, the reader can avoid browsing through the thesis looking for a certain Appendix, explanation, or Figure. We therefore strongly encourage the reader to print this sheet as well as the page with the definitions to ensure a smooth and pleasant reading experience and full comprehension.
The process of strategic value creation Timeline with activities
Alvesson’s principles
(De-)fragmentation: Researchers need to unpack the empirical data as far as possible.
Defamiliarisation: Researchers need to open up the studied reality by avoiding the use of familiar concepts. Findings should be seen as something arbitrary and exotic.
Problematisation: The unpacking, deconstruction, and critique of concepts that come with cultural bias. Interpretations can be more salient when researchers do not rely on pre-established concepts.
Broad scholarship: The development of multiple interpretive repertoires by the researchers to ‘see’ data in different light. An interpretive repertoire here refers to a set of perspectives, concepts, and themes that a researcher masters.
Reflexive critique: The conscious effort by the researchers to consider alternative ways of working with the date, for example by using an alternative interpretive repertoire.
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1. DEFINITIONS ... 1
2. INTRODUCTION ... 2
3. PROBLEM & PROBLEM DISCUSSION ... 2
4. PURPOSE ... 3
5. LITERATURE REVIEW: CORPORATE VENTURE CAPITAL ... 3
5.1 METHOD OF REVIEW ... 4
5.2 WHAT IS CORPORATE VENTURE CAPITAL? ... 4
5.3 MAIN OBJECTIVE OF CORPORATE VENTURE CAPITAL INVESTMENTS ... 5
5.4 THE CREATION OF STRATEGIC VALUE ... 5
5.4.1STRATEGIC VALUE CREATION THROUGH KNOWLEDGE TRANSFER ... 5
5.4.2STRATEGIC VALUE CREATION BY OTHER MEANS ... 7
5.5 TYPES OF CORPORATE VENTURE CAPITAL INVESTMENTS ... 7
5.6 SERVICES PROVIDED BY CVCS BEYOND FINANCIAL CAPITAL ... 8
5.7 STRUCTURE AND STAFFING IN CORPORATE VENTURE CAPITAL ... 9
5.8 FOUR CLASSIFICATIONS OF CVC UNITS ... 9
6. METHODOLOGY AND METHODS ... 10
6.1 RESEARCH PHILOSOPHY AND UNDERLYING ASSUMPTIONS ... 11
6.1.1THE PARADIGM ... 11
6.1.2ADDITIONAL PHILOSOPHICAL IDEAS AND GUIDING PRINCIPLES ... 12
6.2 RESEARCH DESIGN ... 14
6.3 DATA COLLECTION PROCESS ... 16
6.4 DATA ANALYSIS ... 18
6.5 ETHICAL CONSIDERATIONS ... 19
7. RESULTS & EMPIRICAL FINDINGS ... 20
7.1 ABOUT HUSQVARNA ... 20
7.2 ABOUT HUSQVARNA GROUP VENTURES ... 20
7.3 MANAGEMENT PRACTICES ... 21
7.4 DEAL-SOURCING AND SCREENING CRITERIA ... 22
7.5 SERVICES PROVIDED TO PORTFOLIO COMPANIES ... 23
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8. IDENTIFYING A BREAKDOWN ... 25
9. LITERATURE REVIEW: RELATIONSHIPS ... 26
9.1 METHOD OF REVIEW ... 26
9.2 RELATIONSHIPS IN THE BUSINESS CONTEXT ... 26
9.3 PREREQUISITES FOR RELATIONSHIP BUILDING ... 27
9.4 BENEFITS OF RELATIONSHIPS IN A BUSINESS CONTEXT ... 28
9.5 RELATIONSHIPS IN THE CONTEXT OF CORPORATE VENTURE CAPITAL ... 29
10. ANALYSIS & INTERPRETATION ... 29
10.1 PART 1: ACTIVITIES UNDERTAKEN BY CVCS ... 30
10.1.1INTRODUCTION ... 30
10.1.2PROBLEM IDENTIFICATION ... 31
10.1.3EVALUATION OF SOLUTIONS ... 31
10.1.4DEAL SOURCING ... 31
10.1.5SCREENING ... 32
10.1.6NEGOTIATIONS &INVESTMENT ... 33
10.1.7POSTING BOARD MEMBER ... 33
10.1.8BUILDING AN ENVIRONMENT THAT FACILITATES KNOWLEDGE SHARING ... 34
10.1.8.1 Monitoring ... 35
10.1.8.2 Providing Smart Capital ... 35
10.1.8.3 Professional Interactions... 35
10.1.8.4 Network Building... 36
10.1.9KNOWLEDGE SHARING... 36
10.1.10FUNNELLING OF KNOWLEDGE TO THE RELEVANT SBUS ... 37
10.2 PART 2: THE STRATEGIC VALUE CREATION PROCESS ... 38
10.2.1INTRODUCTION ... 38
10.2.2PROBLEM IDENTIFICATION ... 38
10.2.3DEAL SOURCING ... 39
10.2.4SCREENING AND SELECTION ... 39
10.2.5INVESTMENT ... 40
10.2.6RELATIONSHIP ESTABLISHMENT ... 40
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10.2.7.1 Relationship Development & Building a Knowledge Sharing Environment ... 41
10.2.7.2 Business Development & Knowledge Creation ... 42
10.2.7.3 Knowledge Sharing ... 43
10.2.8REPATRIATION OF KNOWLEDGE ... 44
11. CONCLUSIONS FROM ANALYSIS & INTERPRETATION ... 44
12. DISCUSSION ... 45
12.1 ADDITIONAL FINDINGS ... 45
12.1.1FOURTH TYPE OF KNOWLEDGE ... 45
12.1.2NOVEL SUCCESS FACTORS ... 46
12.1.3SWIMMING WITH THE SHARKS? ... 47
12.2 PRACTICAL IMPLICATIONS ... 47
12.3 LIMITATIONS AND RESEARCH SUGGESTIONS ... 47
13. REFERENCES ... 49
14. APPENDIX ... 59
14.1 APPENDIX 1: THREE KEY PARTIES IN CVC ... 59
14.2 APPENDIX 2: CHESBROUGH’S CVC INVESTMENT TYPES ... 60
14.3 APPENDIX 3: CVC-BACKED START-UPS MORE INNOVATIVE THAN IVC-BACKED START-UPS ... 62
14.4 APPENDIX 4: CVC UNIT CLASSIFICATION DEPENDING ON SERVICES OFFERED AND LIST OF SERVICES .... 63
14.5 APPENDIX 5: LIST OF COMPANIES CONTACTED FOR INTERVIEWS ... 66
14.6 APPENDIX 6: INTERVIEW QUESTIONS ... 67
14.6.1HUSQVARNA VENTURES (HVV) IN GENERAL ... 67
14.6.2MANAGEMENT PRACTICES TO CREATE STRATEGIC VALUE FOR HUSQVARNA ... 68
14.7 APPENDIX 7: MORSE’S TOOL TO ANALYSE QUALITATIVE DATA ... 70
14.8 APPENDIX 8: A GENERAL OVERVIEW OF HUSQVARNA ... 71
14.9 APPENDIX 9: TYPES OF CVC INVESTMENTS AS DEFINED BY HVGV ... 72
14.10 APPENDIX 10: HVGV’S SCREENING CRITERIA... 73
14.11 APPENDIX 11: ACTIVITIES TIMELINE ... 74
14.12 APPENDIX 12: THE STRATEGIC VALUE CREATION PROCESS ... 75
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1. Definitions
CVC unit: The corporate venture capital arm of a corporation.
Corporate: The parent firm of the CVC unit; the corporation that engages in CVC investments.
Portfolio firm: The firm that has received funding from the corporate and is in the CVC unit’s portfolio. Strategic value: Strategic value is “the degree to which a particular action or planned action is
important or useful in relation to something that it wants to achieve.” (Cambridge dictionary, 2020a). However, for this thesis, we would like to narrow this definition further and define strategic value as the learning opportunities for corporations that arise from CVC investments and the knowledge that can be obtained from a portfolio firm.
Relationships: Relationships are defined as “a bond of commitment and expectations that two people
have toward one another” (Huang & Knight, 2017). We do not use the term relationship to explain a causal connection between two phenomena.
Knowledge transfer: While knowledge transfer can be defined as an internal process (see, e.g. Argote
& Ingram, 2000; Szulansky, 2000; Kalling, 2003), we will use the term to refer to the knowledge that is transferred from a portfolio firm to the investing company. Therefore, we will use a variation of the definition from the MacMillan dictionary: “The process of communicating knowledge that has been developed in one […] organization to other […] organizations.” (Macmillan Dictionary, 2020).
Process: Throughout this thesis, we will refer to the knowledge transfer as a process, that is “a series
of actions that [one] takes in order to achieve a result” (Cambridge dictionary, 2020b). We chose to use this term to clarify that the knowledge transfer is not happening at once but over time and requires action by the corporation.
Breakdown: Breakdowns are empirical findings that are not accounted for by or even contradict
previous research (Alvesson & Kärreman, 2011). In other words, any finding that surprises the researchers and requires them to challenge their assumptions and current literature.
Interpretive Repertoire: Interpretive repertoires “label the set of perspectives, concepts and themes
that a researcher masters [and include] the paradigmatic, theoretical, and methodological qualifications and restrictions that guide and constrain research work [as well as ] theories, basic assumptions, commitments, metaphors, vocabularies, and knowledge” (Alvesson & Sköldberg, 2009). Researchers with different repertoires might interpret data differently and draw conclusions based on their knowledge.
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2. Introduction
There are many ways for corporations to achieve growth through innovation. Traditionally, in-house R&D and to a lesser degree, joint ventures are associated with most innovations of the 20th century
(March, 1991; Lee, Kim & Jang, 2015). However, keeping up with start-ups and their innovative ideas can be a challenge for established, large enterprises. Young firms might grow to be serious competitors, and without innovating, incumbent firms will struggle to survive. To maintain a firm's position as an industry leader, enterprises must remain innovative (March, 1991). One alternative to R&D, the first pillar of innovation (Keil, 2002) that proliferated in the second half of the 20th century is
growth through mergers and acquisitions (M&A). There are numerous reasons for M&A (see e.g. Harding & Rovitt, 2004); one of them is to gain access to new technologies or products making M&A the second pillar of innovation (Keil, 2002).
In more recent years, corporate venture capital (CVC) investments have grown in importance. The U.S. Department of Commerce indicates that firms look increasingly to CVC as an alternative approach to strategic growth (Tong & Li, 2011; MacMillan et al., 2008; Chesbrough & Tucci, 2002). Here, corporations purchase a minority equity stake in new ventures they hold similarly to independent venture capital funds (IVC) (Drover, Busenitz, Matusik, Townsend, Anglin & Dushnitsky, 2017; Gaba & Meyer, 2008). Compared to IVC funds, however, CVC units are less interested in financial returns, but they invest with the intent to create strategic value to enhance innovation. This value typically comes from the transfer of knowledge from the portfolio firm to the CVC unit. The increasing importance of strategic growth makes CVC investments the third pillar of innovation (Tong & Li, 2011; MacMillan, Roberts, Livada & Wang, 2008).
3. Problem & Problem Discussion
Although CVC investments have been growing consistently over the past years, little is known about the process of strategic value creation in those investments. So far, academics have focussed on the role of CVC units for corporate innovation (Dushnitsky & Lenox, 2005a; Dushnitsky & Lenox, 2005b), success factors (Napp & Minshall, 2011), and pitfalls (Dushnitsky & Lenox, 2006; Birkinshaw, van Basten Batenburg, & Murray, 2002). Further, knowledge transfer has been identified as a crucial part in the strategic value creation for corporates (Benson & Ziedonis, 2009; Lee et al., 2015; Kann, 2002; Dushnitsky & Lenox, 2005b). However, Lee et al. (2015) argue that a comprehensive understanding of
3 that knowledge transfer, antecedents, and success factors is missing. Researchers that have acknowledged the role of knowledge transfer have not paid attention to the complexity of this process. Altogether, the literature on the strategic value creation process is fragmented (Röhm, 2018).
4. Purpose
The purpose of this thesis is to fill this gap in the existing literature by developing a comprehensive framework that depicts the strategic value creation process in CVC. Our work aims at laying out the current state of research and identifying the missing aspects of strategic value creation to then link these elements together to describe the bigger picture of the strategic value creation process. The research question we are attempting to answer is, therefore:
What is the process through which corporations create strategic value in CVC investments?
As the transfer of relevant knowledge from portfolio firms to the corporate is vital for this strategic value creation, enablers of knowledge transfer will be at the core of this model. A visualisation will complement the text-based analysis to make the process description more tangible. To the best of our knowledge, no such framework exists in the academic literature, and we are the first attempting to close this gap.
5. Literature Review: Corporate Venture Capital
The following section will review the relevant academic literature on CVC that will provide us with a frame of reference for the remainder of this paper. The research outlined here provides the information necessary to comprehend this thesis and will be used in the findings and analysis sections to ground interpretations in previous research. Further, we use some insights from the literature review to design our research.
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5.1 Method of Review
To find the relevant literature to provide us with a frame of reference, we applied a systematic approach as outlined by Easterby-Smith, Thorpe, and Jackson (2015). This approach is transparent and objective, ensuring accuracy and minimising the risk of any form of bias or missing relevant literature. We used the search engines 'Primo' run by the ExLibris Group, and 'Web of Science' run by Thomson Reuter. Throughout the process, we limited results to publications in English and from reputable sources. Initial searches were conducted with the search term “Corporate venture* capital” in the title or abstract and, after filtering, 87 results remained. The number of articles was further narrowed down by evaluating their relevance for this thesis by reading the abstract and considering the number of citations.
Following the initial step of a rather broad search we narrowed the search terms down to get closer to our research question by looking for “corporate venture capital AND value creation” in the title or any field (Primo) and topic, title, or abstract (WoS). We found an additional nine articles closely related to our research question, allowing us to use a 'funnel' design in the literature review, narrowing the topic down from a broader overview of CVCs to strategic value creation in a CVC setting.
Additionally, we followed up on interesting leads identified in the literature reviews through snowball research and finally filled gaps by conducting complementary searches such as “corporate venture capital AND strategic value OR governance OR knowledge transfer”. The total number of relevant articles on which this literature review is based is 54, as well as two books.
5.2 What is Corporate Venture Capital?
Corporate venture capital units are the business units of enterprises which, similar to IVC investment firms, engage in minority equity stake investments into young, mostly small, entrepreneurial, privately-held ventures that originate outside the corporation, often on a global scale (Drover et al., 2017; Wadhwa, Phelps & Kotha, 2016; Gompers & Lerner, 1998; Tong & Li, 2011; Park & Steensma, 2012; Dushnitsky & Lenox, 2005a; Gaba & Meyer, 2008). The main contrast to regular IVC firms is the purpose of the investment: IVC funds, business angels, and other investors are solely interested in financial returns. CVC investors, on the other hand, are not looking for financial returns primarily, they are more interested in strategic returns, often in the form of strategic or technological learning (Dushnitsky & Lenox, 2005a; Van de Vrande, Lemmens & Van Haverbeke, 2006). Therefore, CVC units invest in start-ups that are “younger, riskier, and less profitable” than those receiving IVC investments (Chemmanur,
5 Loutskina & Tian, 2014). Since strategic learning requires time, a CVC investment horizon is often longer than that of an IVC (Chemmanur et al., 2014).
Compared to the nowadays ubiquitous M&A deals, the difference is the stake which is being acquired by the corporation – CVC investments are not an acquisition, but solely a minority stake in a new venture (Tong & Li, 2011).
This type of investment and business activity is a relatively new phenomenon and grew rapidly in the past 20 years (Park & Steensma, 2012; Gaba & Meyer, 2008). Research shows that firms engaging heavily in CVC investments increase their innovation rate significantly (Dushnitsky & Lenox, 2005a; Dushnitsky & Lenox, 2005b; Smith & Shah, 2013). Consequently, CVC investments have developed to be one of three pillars of innovation, along with internal R&D and acquisitions (Tong & Li, 2011; Roberts, 2006; Keil, 2002).
5.3 Main Objective of Corporate Venture Capital Investments
By holding a stake in start-ups, corporates can pursue various financial and strategic goals, the latter typically being prioritised (Chesbrough, 2002). Important strategic goals consist of insights into knowledge and technologies (Benson & Ziedonis, 2009; Lee et al., 2015; Kann, 2000) and other learning opportunities for the corporation (Sahaym, Steensma & Barden, 2010). These learning opportunities stem from the possibility to extract knowledge from the portfolio firm (Dushnitsky & Shaver, 2009). Even if the portfolio firm fails, valuable knowledge can be obtained (Hoetker & Agarwal, 2007; McGrath, 1999; Yang, Narayanan & De Carolis, 2014). This knowledge implies significant latent strategic value and growth opportunities for the corporate (Dushnitsky & Lenox, 2006; Maula, 2001; Ernst, Witt & Brachtendorf, 2005).
5.4 The Creation of Strategic Value
5.4.1 Strategic Value Creation Through Knowledge Transfer
To create strategic value, CVC units have to engage in value-creating activities. These are defined as “creating value along the value chain using available resources and capabilities” (Achtenhagen, Melin, & Naldi, 2013; Amit & Zott, 2001; Clauss, 2017; Dopfer, Fallahi, Kirchberger & Gassmann, 2017 as seen in Gutmann, Schmeiss & Stubner, 2019). This can be done through the exploitation of the portfolio firms' technologies, ideas, and innovations, which can be sold as new products via licensing agreements or even registered as patents (Chemmanur et al., 2014). However, the key to strategic
6 value creation is the knowledge transfer from the portfolio firm and the entailed learning opportunities for the corporate and its strategic business units (SBUs) (Tong & Li, 2011; MacMillan et al., 2008). Apart from technology and innovation, Yang et al. (2014) identify three types of knowledge that the CVC unit can obtain:
1. The knowledge beyond technology, such as information about markets, competitors, and industries
2. The experience gained from selecting, valuating, and nurturing the start-up 3. The integration and synergy creation skills
For purposeful and value-creating knowledge transfers, a particular “technological fit” needs to be present (Chemmanur et al., 2014). The efficiency of this knowledge transfer depends strongly on the potential for complementarities the corporate has with the start-ups (Ernst et al., 2005; Maula, Autio & Murray, 2009). Yang et al. (2014) argue that the knowledge exchange between the corporate and the portfolio firms depends on synergies and Napp & Minshall (2011) find that the most substantial potential for synergies can be found between the portfolio firm and the relevant SBU of the corporate, rather than the CVC unit or the entire corporation.
Therefore, most CVC units with primarily strategic goals look for investment opportunities in the same or related industries as their parent corporation since this will mutually help to nurture innovation and, thus, create value for the start-up and corporate. (Hellmann, 2002; Keil, Maula, Schildt & Zahra, 2008). Further, this industry complementarity has been identified as a crucial factor for organisational learning to be strategically relevant (Cohen & Levinthal, 1990; Ernst et al., 2005).
The knowledge transfer and learning takes place through the direct participation of CVCs in their portfolio companies. Thus, frequent visits by managers of the corporate and securing board seats in the portfolio firms are standard procedures (Yang et al., 2014; Bottazzi, DaRin & Hellmann, 2004; Maula & Murray, 2001). A board seat allows a
corporate employee to monitor activities in the portfolio firm. This can provide insights into the firm’s knowledge and technologies which are reported to the corporate (Sykes, 1990). Arrow (1974) and Daft and Lengel (1986) observed in case studies that some firms “institute specific organisational routines to encourage and funnel learning through increased interaction and
Figure 1 - Ernst et al. (2005): The Three Key Actors’ Roles in CVC
7 information flows” (Dushnitsky & Lenox, 2006). The interactions of CVC unit, portfolio form, and corporate are visualised in Figure 1, which can also be found in Appendix 1.
5.4.2 Strategic Value Creation by Other Means
Besides strategic learning and knowledge transfers, there are other strategic value-creating means (Chesbrough, 2002). Engaging in CVC allows corporates to scan the environment for new technologies and opens a window to “exploratory innovation” (Dushnitsky & Lenox, 2006). Some companies use their CVC unit exclusively as a “scouting tool to explore [… rather than to] exploit opportunities” (Napp & Minshall, 2011). Similarly, CVC activity offers prompt “attention to emerging technological discontinuities” (Maula, Keil & Zahra, 2013).
Some corporates employ the CVC unit solely as a matchmaker. Here, the CVC unit establishes relationships between portfolio companies and the corporate’s SBUs. From there on, all interactions happen directly between the two. Therefore, the “effectiveness of the matchmaking process” and the unit’s overall ability to create strong relationships externally, with their portfolio, and their parent firm’s SBUs have been identified as essential factors influencing value creation (Napp & Minshall, 2011; Hill & Birkinshaw, 2014). Consequently, strategic value creation in this setting is maximised if the CVC perfectly matches the SBU with the portfolio firm (Keil, Autio & George, 2008).
5.5 Types of Corporate Venture Capital Investments
By taking these different means to create strategic value and grouping them based on underlying objectives, Chesbrough (2002) identifies four types of CVC investments, which depend on the investment objective and the link to the operational capability (see Figure 2 or Appendix 2):
1. Driving investments are defined by strong strategic intentions and links between the operations of the corporate and the portfolio firm. The CVC unit works closely with other corporate SBUs to share knowledge, connect portfolio companies, and qualify investment
Figure 2 - Chesbrough (2002) - Four Types of CVC Investment
8 opportunities. However, due to the close cooperation with existing operations, this investment type is not suited to develop new capabilities and develop new business models.
2. Enabling investments occur for strategic reasons still, but the portfolio firm's operations are not coupled tightly with corporate operations. A company can take advantage of this notion by using its investments to stimulate the development of the ecosystem in which it operates - that is, the suppliers, customers, and third-party developers that make goods and services that stimulate demand for the company's offerings. The challenge here is to capture the stimulated market growth, rather than allowing competitors to reap the benefits of one's investment. 3. Emergent investments target start-ups that have tight links to the corporates operational
capabilities but offer little to enhance its current strategies. These investments provide future strategic options. This is especially interesting for opportunity exploration, as the insights gained into new products and markets are much richer compared to traditional market research.
4. Passive investments are not connected to the corporation’s operations and are purely for financial returns.
5.6 Services Provided by CVCs Beyond Financial Capital
CVC units can assist the portfolio firm’s development through “superior industry and technology expertise” (Chemmanur et al., 2014). These factors lead to CVC-backed start-ups being more effective in innovation than IVC-backed firms, measured in the number of patents registered (Chemmanur et al., 2014; see Appendix 3). This difference in innovation output can be explained by ‘smart capital’, which comprises all the value-adding services the CVC unit offers and “all non-financial benefits the portfolio companies receive from the corporate venture capital investor as a result of the investment relationship” (Maula, 2001). Gutmann et al. (2019) find that the value “based on the resources and capabilities of the parent organization is one of the key advantages a CVC unit can offer”. These inputs include corporate resources such as existing networks, distribution channels, test sites, labs (e.g. Maula & Murray, 2001; Dushnitsky, 2012) and the advantage of image resulting from affiliation with the corporate (Lantz, Sahut & Teulon, 2011). Similarly, Ernst et al. (2005) identify the “access to the mother [firm]’s technological competence and market knowledge” as a competitive advantage CVC-backed start-ups have over IVC backed firms.
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5.7 Structure and Staffing in Corporate Venture Capital
There is little consensus in academia regarding the structure of CVC units, and there appear to be drastic differences between firms, industries, and countries. Drover et al. (2017) conclude that CVC units vary in objectives, structure, staffing, and salary. While some are highly autonomous, structured like VC funds, and possess a dedicated pool of capital; a close integration into the corporation seems to be more common (Hill, Maula, Birkinshaw & Murray, 2009). Since most CVC units pursue strategic goals rather than financial returns, their managers are often long-time employees who know the corporation, its goals, and its values (Souitaris & Zerbinati, 2014; Souitaris, Zerbinati & Liu, 2012; Napp & Minshall, 2011). Roberts (2006) states that in some industries, these units are considered crucial to a firm’s growth strategy so that managing directors and top managers are directly involved in CVC management.
Regarding the composition and size of the optimal portfolio, Lantz et al. (2014) find that a large portfolio lowers the risks associated with innovation. There is no consensus among scholars how diverse the portfolio should be: a broader portfolio might offer more diversified knowledge (Matusik & Fitza, 2012). The relationship between portfolio diversification and knowledge transfer can be described by an inverted-U shaped curve (Yang et al., 2014), implying that very diverse portfolios lead to an overall smaller transfer of knowledge. Additionally, and contradicting Lantz et al. (2014), Lee et al. (2015) find that a large portfolio leads to a smaller per-firm transfer due to restraints within the CVC unit.
5.8 Four Classifications of CVC Units
Much research (Chesbrough, 2002; Sahaym et al., 2010; Dushnitsky & Shaver, 2009; Dushnitsky & Lenox, 2006; Maula 2001; Ernst et al., 2005) has been conducted regarding the creation and capture of strategic value for the corporation by exploiting resources and capabilities found in their portfolio firms. However, Gutman et al. (2019) state that the current academia does not provide much detail regarding how these capabilities and resources are translated into value-adding services for value creation and value capture. “The sparsity of research on this topic is at odds with current trends […given that the] share of CVC as a total of venture capital deals rose to 18 per cent in 2017” (CB Insights, 2018 as seen in Gutmann et al., 2019).
To close this gap, Gutmann et al. (2019) identify different value-creating and value-capturing services CVC units offer portfolio firms, and they identify four groups of CVC units based on the concentration
10 and focus of services offered (Figure 3; see Appendix 4 for a more detailed description of the model and the services).
1. The Harvester uses a focused configuration. It provides a high number and variety of services related to value capture but only a few services related to value creation. Its strategic motivation is to strengthen supply and distribution channels by increasing demand for products through CVC investments.
2. The Builder uses a comprehensive configuration. It offers services to support
the full range of value-creation and value-capture activities. Its strategic motivation is to build ecosystems and drive collaborative innovation within the industry.
3. The Enabler employs a focused configuration. It focuses its services on core value-creation activities. Its strategic motivation is to foster internal innovation and transformation by facilitating joint value creation between specific business units and portfolio ventures. 4. The Observer operates on a basic configuration. It focuses on providing a few essential services
across both value creation and value capture. Its strategic motivation is to gather strategic insights regarding novel technologies, markets, and business models.
6. Methodology and Methods
In the following section, we will begin by devoting some time to research philosophy and our paradigm before looking into how the research will be conducted, namely the research design, data collection, and analysis methods.
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6.1 Research Philosophy and Underlying Assumptions
Traditionally, empirical data has been viewed as a signpost that points in a specific direction and is “viewed as a guide to or as the ultimate validator for knowledge claims” (Alvesson & Kärreman, 2011). We believe, however, that this understanding somewhat builds on inaccurate assumptions: “That human interests and cultural, gendered and political ideals can put their imprint on methodological ideals as well as on research practices and results makes it very difficult to see science as a pure activity – neutral and objective in relation to the reproduction or challenging of social ideologies, institutions and interests” (Alvesson & Kärreman, 2011). Critical theorists have underlined a similar point of view, namely, social enquiry’s political-, interest-, and value-laden nature (Alvesson & Deetz, 2000; Delanty, 2005).
This problem is worsened by the understanding that social reality rarely speaks for itself. As Alvesson & Kärreman (2011) explain: “It always speaks through a language that is familiar to and favoured by the speaker; a matter further complicated by the fact that in social science it is not only the subject but also the researcher who will act as mediators of the social world”. In line with this belief, we agree with researchers like Denzon & Lincoln (2011), who state that “there is no clear window into the inner life of an individual. Any gaze is always filtered through the lenses of language, gender, social class, race, and ethnicity. There are no objective observations, only observations socially situated in the worlds of the observer and the observed”.
6.1.1 The Paradigm
These beliefs build the foundation of our research paradigm. In social sciences, a paradigm refers to “the philosophical assumptions or to the basic set of beliefs that guide the actions and define the worldview of the researcher” (Denzon & Lincoln, 2011; Kaushik & Walsh, 2019). Proctor (1998) argues that there must be consistency between the personal beliefs of the researchers, the aim of the research, the research question itself, and the methods chosen to investigate. Consequently, the researchers’ beliefs will lead them to follow a particular paradigm and its assumptions, videlicet the ontology, the epistemology, and the data collection methods (Žukauskas, Vveinhardt & Andriukaitienė, 2018). Ontology is the study of being, reality, and the world around us; researchers need to understand the real nature in society (Žukauskas et al., 2018). Epistemology is the branch of (research) philosophy that determines how data can be collected, and it is about the procurement of knowledge. It includes general parameters and assumptions about real-world nature (Žukauskas et al., 2018).
12 We do not see the world as absolute, but rather believe that reality is ambiguous and depends strongly on the researchers’ background and point of view. Consequently, we believe that all findings and interpretations will always carry the subjective view of the researchers and there is no absolute reality. In our thesis, we want to focus primarily on answering the research question. We, therefore, have to ask ourselves what methods would be most applicable to do so, rather than following a classical positivist or interpretivist paradigm that strictly limits the choice of methods. Consequently, we will follow the philosophical ideas of pragmatism and its implications. Pragmatism has its origin in the late 19th century in the United States, where it took off as a philosophical movement to question the
traditional assumptions about the nature of reality, knowledge, and inquiry (Kaushik & Walsh, 2019). As a research paradigm, it has traditionally been connected to multi-methods research (MMR) (Morgan, 2007; Morgan, 2014). However, we agree with Morgan (2014) that the close link between MMR and pragmatism should be questioned and needs to be re-evaluated since the answer to the research question should be prioritised. Pragmatism as a philosophy gives us freedom of choice regarding the methods (Žukauskas et al., 2018; Morgan, 2014), depending on how we see fit to answer the research question in the best way possible.
The implications of pragmatism are in line with our view of the world: the ontological assumptions include an indistinct reality, that is based only on the personal attributes of the researcher such as language, history, and culture. The epistemology of pragmatism implies that knowledge is derived from the personal experience of the researcher (Žukauskas et al., 2018).
6.1.2 Additional Philosophical Ideas and Guiding Principles
Empirical data has to be seen in the context of its constructed nature (Alvesson & Deetz, 2000; Astley, 1985; Shotter, 1993; Steier, 1991). To deal with the inseparability of researcher and data, we will follow guiding principles developed by Alvesson & Kärreman (2011) that support researchers in acknowledging the relevancy of data’s context. They suggest understanding empirical data “as a resource for developing theoretical ideas through the active mobilisation and problematisation of existing frameworks […] to enhance our ability to challenge, refute, refine and illustrate theory “. More precisely, the interaction with empirical data should happen in the form of encounters between theoretical assumptions and empirical impressions. These dialogues between literature and findings will be at the core of our analysis; they are meant to distance the researchers from the data and allow them to uncover breakdowns. Breakdowns are empirical findings that are not accounted for by or even
13 contradict previous research. These breakdowns allow for novel research insights, and we will elaborate on their use in 6.2.
This approach to research builds on serendipity, a term coined by Merton & Barber (2004) as “the art of being curious at the opportune but unexpected moment.” In this sense, “theory development is stimulated” through an active search for inconsistencies or contradictions with existing literature (Alvesson & Kärreman, 2011). These interpretations will then allow a new, abstract understanding of the ambiguous social reality.
An antecedent for these interpretations is “to counter assumptions about patterns with ideas about social reality being more fragmented – at least in relation to the type of patterns that are assumed” (Alvesson & Kärreman, 2011). To do so, they proposed five methodological principles that should be considered when working with empirical data. These underlying principles are not meant to reject the idea of empirical data. They will instead encourage “the challenging and rethinking of established theory and thus inspire novel lines of theory development” and the discovery of breakdowns (Alvesson & Kärreman, 2011) while staying in line with pragmatism’s primary objective: the researcher’s best attempt to answer the given research question. These five principles are:
1. (De-)fragmentation – “producing an interplay between pattern and fragmentation seeking,
without necessarily seeing the former as the end result (or at least not the only end result) of a good study.”
Before interacting with empirical data, researchers should pay attention to the possibility of fragmenting, or ‘unpacking’ the empirical data further. “The combination of a fairly sophisticated, but unfixed preunderstanding and empirical material constructed in non-trivial ways […] provides the basis for theoretically innovative work circling around (de)fragmentation” (Alvesson, 2002).
2. Defamiliarisation – “trying to refrain from using familiar concepts and frameworks and instead
opening up the studied reality as an unknown and unfamiliar place” (Alvesson & Kärreman, 2011).
By defamiliarising the social world and rejecting a self-evident view, research can observe social phenomena in more novel ways. As Alvesson & Kärreman (2011) explain: “Defamiliarization means that we see things not as natural or rational but as exotic and arbitrary, as an expression of action and thinking within frozen, conformist patterns (Alvesson & Deetz, 2000; Marcus & Fischer, 1986)”.
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3. Problematisation – “the unpacking, deconstruction, and critique of concepts and categories
that belong to the received cultural and scientific traditions and wisdoms, and that also form the major input for our thinking and construction processes” (Alvesson & Kärreman, 2011). By not relying on pre-established concepts and rethinking underlying ideas and assumptions, different interpretations can turn out to be more salient.
4. Broad scholarship – “to develop and maintain interpretive repertoires, and to emphasize that
while observations are theory-laden, there are always excesses at the margin that cannot fully be captured by an interpretive repertoire, and that different interpretive repertoires will cast empirical observations in different lights” (Alvesson & Kärreman, 2011).
Interpretive repertoires are labelled by Alvesson & Sköldberg (2009) as “label the set of perspectives, concepts and themes that a researcher masters as an interpretive repertoire”. They include “the paradigmatic, theoretical, and methodological qualifications and restrictions that guide and constrain research work”, as well as “theories, basic assumptions, commitments, metaphors, vocabularies, and knowledge”. Thereby, interpretive repertoires show the researchers’ preunderstanding of academic resources that can be used when working with empirical material. More importantly, it also shows the limits “for what researchers can do in terms of creating something out of certain empirical material, material that in itself has been produced based on the interpretive inclinations of researchers” (Alvesson & Kärreman, 2011).
5. Reflexive critique – “the conscious effort to open up and consider alternative ways of working
with these issues, e.g. through invoking alternative metaphors and vocabularies” (Alvesson & Kärreman, 2011).
Under the assumption that reality cannot be understood as absolute, researchers should be modest towards the idea that research can produce the best interpretation. Alvesson & Kärreman (2011) suggest “a greater willingness to allow diverse vocabularies, interpretations and voices to make themselves heard in research texts […] to be preferable”. This last assumption underlines our philosophical ideas of pragmatism and the inseparability of data and researcher (Calás & Smircich, 1992) and calls for reflexivity (Alvesson & Sköldberg, 2009; Hardy & Clegg, 1997).
6.2 Research Design
Proper research aims at identifying and resolving discrepancies between previous literature and the researchers’ empirical findings, or in other words, breakdowns. Alvesson & Kärreman (2011) suggest
15 two possible approaches to finding breakdowns: first, a ‘breakdown focused research’ is designed solely to identify and resolve a breakdown. While this method has potential for the development of more novel interpretations of empirical data and general innovative capabilities for research, the “maximalist version sketched out [here] is not a low-risk strategy. [It requires a combination of] inspiring empirical material, access to a rich framework and resources for reflexivity about how to use these, creative construction work and, in the available literature, empty space for a theoretical contribution” (Alvesson & Kärreman, 2011).
To avoid this riskier approach, we will utilise the alternative, more moderate means: a breakdown-sensitive approach. We will apply a keen interest in potential breakdowns in tandem with a more traditional method. In this regard, the previously introduced five assumptions are used as underlying guiding principles throughout the research. By Alvesson’s and Kärreman’s (2011) definition, we will, therefore, be “open to the possibilities of an unanticipated theme and be keen to follow such themes, even when this is not the initial or primary intent of the study. Possible outcomes could be the refinement of a theory or suggestions about new lines of inquiry”.
Regarding the methods, pragmatism grants us freedom of choice regarding the methods we use to collect data, and thus methods from any paradigm can be used, as “pragmatist researchers place the research question above such philosophical considerations” (Tashakkori and Teddlie, 1998). After considering different methods, we came to realise that the data best suitable to answer our research question is qualitative, and we, therefore, choose to use methods traditionally associated with an interpretive philosophy. Furthermore, the purpose of this thesis and the lack of a comprehensive framework require a descriptive study to fill the earlier identified research gap. Since we base our framework on observations of practices that we then seek the most plausible explanation for, the study is written with abductive reasoning (Douven, 2017).
We decided on a case study to ensure the data collected stems from its real-life context (Eisenhardt and Graebner, 2007; Yin, 2017). To verify and saturate our primary data, we will try to use triangulation whenever possible.
Before collecting data, we have to determine the study's population, sample frame, and the sample itself. The population in question here is anyone that is involved in the value creation process of CVC. This includes investment managers and SBU managers in corporations. After an initial screening process, we identified and contacted 16 potentially suitable cases (see Appendix 5). To answer our research question, we have to ensure that the potential cases focus primarily on strategic returns, and therefore chose cases that can be classified in the left column of Chesbrough's (2002) matrix (see
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Appendix 2; Cheat Sheet). Therefore, selecting enabling or driving investments was a critical criterion in the selection of cases. Ultimately, we identified the corporate venture capital unit of Husqvarna Group AB, Husqvarna Group Ventures (HVGV), to be a suitable case for this study.
We chose HVGV for various reasons: to start, there is the proximity to Jönköping University, not only geographically (Husqvarna's historic corporate headquarter, and largest production site is situated in Huskvarna, Jönköping Kommun), but also through numerous guest lectures and its presence in the city. Much more important though is the company's history of innovation, business model innovations, and its ability to remain an industry leader through continued innovative ideas. In light of CVC being the third pillar of innovation, an emphasis on innovation indicates the successful strategic value creation by the CVC unit.
Consequently, the sample frame was limited to anyone involved in the strategic value creation process that was an employee or in another way related to HVGV. Given the complexity of the research topic, we choose to conduct face-to-face interviews to obtain in-depth data while remaining flexible enough to accommodate our breakdown sensitive approach. All interviews will take place in the offices of HVGV in the financial district of Stockholm. We choose this location to ensure the familiarity and accustoming of the interviewees to avoid any negative external influences from nonfamiliar locations.
6.3 Data Collection Process
For our sample, we decided on two senior managers who play key roles in the strategic value creation process for the company. Mark Johnson, the president of Husqvarna's CVC unit, has previous experience in venture capital and has worked for and with innovative start-ups before. He joined Husqvarna in 2018 when HVGV was formed and has led the unit since its inception. Our second interviewee is Per Ericson, head of business development and senior vice president of Husqvarna Group. Ericson has held different positions within the Husqvarna Group since 2011 and has more than two decades of management experience in international enterprises.
The first interview session will take place on February 17th in Stockholm. After an informal introduction
and a presentation of both Husqvarna Group and HVGV, we will conduct a detailed interview with Johnson, followed by a shorter interview with Ericson. Additionally, a second follow-up interview with Johnson will be conducted on April 2nd. Both interviews will be recorded.
The interviews will be mostly semi-structured to encourage dialogue (Collis & Hussey, 2014), although we will transition to unstructured interviews on particular topics of relevance. This allows us to investigate these with less biasedness and open up conversations between us and the participants
17 (Collis & Hussey, 2014). We will alternate between the two types mid-interview depending on the situation. This way, we will be able to maximise data density and saturation.
Given the partly structured nature of our interviews, we have to prepare questions before the interviews. They include open questions to explore the topic of value creation in CVC broadly and to find possible relationships. Hypothetical questions are used to encourage broader thinking and summary questions are used to ensure the information has been communicated correctly. Lastly, probes are used to follow-up on interesting leads and ensure understanding of the information given. A list of the scripted questions asked can be found in Appendix 6. To allow the conversation to develop naturally, we will ask the questions in a logical, rather than a pre-arranged order. A summary of the research results will be sent to the interviewees, giving them the chance to clear up potential misunderstandings.
Clearly stating our research purpose, why we want to address the problem, and which information we need to do so will help the interviews to be expedient. Following the assumption that people can have different perceptions, both authors will be present in the interviews to allow for different interpretations and follow-up questions of the interviewees’ answers.
During the interviews, some issues might arise: in interviews with employees of a corporation answers given by the interviewee might not always represent personal beliefs, but instead policy statements. We have to be careful to spot such incidences and act accordingly. While there are various critical approaches to avoid these biases and flaws in the data collection process (see e.g. Flanagan, 1954; Lee, 1993), our underlying assumptions lead us to question the data and information already. Further, consonant with pragmatism, we are aware of those biases and factors that influence both the responses by the interviewee and our own subjective perception thereof. Hence, Alvesson’s and Kärreman’s (2011) principles will challenge us to be critical throughout the interview and look out for any flawed or biased response.
Following the first interview, snowball research will be conducted if any gaps or shortcomings in the frame of reference can be identified. This process ensures data saturation further and verifies statements through triangulation. Finally, we are aware that additional interpretative repertoires might be needed to stay in line with our principle of broad scholarship (see 6.1.2).
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6.4 Data Analysis
Throughout the analysis, we will be using a breakdown-sensitive approach to identify potential discrepancies between our data and existing literature. Thus, this analysis will be guided by the aforementioned principles developed and suggested by Alvesson & Kärreman (2011).
However, since “theory does not magically arise from data” (Morse, 1994), we also need a more traditional framework to analyse our findings. An appropriate method is the cognitive process analysis by Morse (1994). It includes four, sequentially occurring cognitive processes that can be applied to all qualitative data (see Appendix 7):
1. The comprehending stage includes understanding the setting, the context, the culture, and
the research topic. It is crucial to keep the information obtained through the literature review separate from one's findings to avoid spillovers and contamination of the findings. The stage can be seen as completed once “saturation” is reached – that is the researchers reach a point at which they can write a “complete, detailed, coherent, rich description” – for both literature and findings.
2. The second stage consists of synthesising, which can be defined as the “merging of several
stories, experiences, or cases to describe a typical, composite pattern of behaviour or response” (Morse, 1994). The key step here is sifting through the data, identifying the important parts and erasing the unimportant information. The relevant factors need to earn their place in the new theory, and it is not uncommon that non-traditional variables turn out to be the most relevant ones. The researchers then identify the typical, average response of interviewees. The synthesis will be done through an analysis of categories and commonalities. This approach facilitates cognitive processes and allows linking and grouping the relevant information.
3. Once the synthesis is completed, the researchers begin theorising; that is, putting qualitative
data in a context. Theory creation is a continuous process of trial and error and, in line with our pragmatist view of the world, will be our best guess rather than absolute. This stage involves developing multiple theories and model, refining them, and linking data in new ways to create a different model to find the theory that suits best. Theorising involves five steps: first, relevant links between the data and existing literature need to be identified, followed by an examination of similar concepts in similar settings. The third step involves the systematic “incremental development of substantive or formal theory from the data”, which is followed
19 by theoretical sampling, falsifications, and conjecture. Lastly, the completed theory should be cross-checked by the original informants to ensure validity and accuracy in a second interview. Traditionally, the cognitive process analysis includes a fourth step (see Appendix 7), the recontextualisation of new theory. We, however, believe that this approach is not congruent with our research philosophy: recontextualising implies viewing our data and findings outside the social context it was obtained from and therefore, we will not apply our results from the analysis to other settings or populations.
Additionally, to account for the earlier mentioned critiques of traditional analysis tools and the way data is being seen, we will use Alvesson’s and Kärreman’s (2011) more novel suggestions about data analysis and interaction with empirical materials with regards to breakdowns in the form of guiding principles throughout the analysis. That means that we will “open up for and encourage those ideas that will offer challenges to conventional thinking within an area, pointing out any shortcomings or paradoxes. This requires an intensive empirical material/theory interplay where theory is also used ‘negatively’” (Alvesson & Kärreman, 2011). If a breakdown is discovered, we will ensure that it is not a “personal reaction that is due to limited empirical experience and theoretical overview” (Alvesson & Kärreman, 2011), but a genuine case of disagreement with or lack of representation in the existing research.
It is then up to us to resolve that breakdown through the interpretation of the collected primary data. Since we follow the paradigm of pragmatism, the solution is not absolute but subjective – it is the best possible solution we could develop. Here, the theorisation should best be understood as disciplined imagination, as Mills (1959) and Weick (1989) propose. The empirical data will anchor “the process of theorization in specific claims about the object under study” (Alvesson & Kärreman, 2011) to contain far-fetched ideas and limitless interpretation within this frame of imagination and discipline. Therefore, we will mobilise the empirical material not under the expectation of working with actual evidence that allows us to produce theory that mirrors reality (Eisenhardt, 1989). Instead, the findings serve as a partner for a critical dialogue with our frame of reference throughout the analysis.
6.5 Ethical Considerations
Throughout the interview process, we will follow strict ethical guidelines and principles that follow EU and Swedish legislation and laws. Interviewees need to participate voluntarily; no financial offerings will be made from our side to increase response likelihood. We vow to avoid causing any form of
20 physical, psychological, or other harm to the participants; or engage in conduct that would widely be viewed as unethical.
Further, the confidentiality of our interviewees and all data obtained is being taken very seriously throughout the thesis-writing process; all interviewees have the freedom to remain anonymous, and we will request permission to record the interviews (Bell & Bryman, 2007). A final version of this thesis will be sent to Husqvarna to ensure no classified or sensitive information will be published, and the portrayal of the corporation, individuals, and practices is accurate (Cassell, 1982).
7. Results & Empirical Findings
All findings stem from the interviews unless otherwise stated and are a summary of 5.5 hours of interviews. They will be grouped based on their overarching topic, rather than presented in the order in which we obtained the information during the interview for comprehension purposes.
7.1 About Husqvarna
Husqvarna Group AB is a globally operating manufacturer of outdoor and gardening products. The group consists of three separate brands and their associated divisions: the core brand Husqvarna, Gardena, and Husqvarna Construction. Throughout its 330-year history, the corporation has consistently been product-oriented and possesses an innovative corporate culture. The enterprise likes to call itself “one of the world’s oldest start-ups” (Husqvarna, 2020a) and to maintain this entrepreneurial and innovative spirit numerous innovation engines are utilised both internally and externally to drive innovation and stay at the forefront of technological developments. For further details about Husqvarna, see Appendix 8.
7.2 About Husqvarna Group Ventures
One of Husqvarna’s innovation tools is their CVC unit, Husqvarna Group Ventures. Established in 2018, the unit is specialised in early-stage investments of up to SEK 30m in exchange for minority equity stakes, ranging from 10% to 25% (HVGV, 2020). The unit is closely linked to the headquarter and tightly embedded in HV's operations. While HVGV’s objectives are manifold, the unit is a part of the overall corporate innovation approach, and its primary goal is to drive innovation. Additionally, HVGV
21 functions as a learning tool for potential new markets, to build partners, to support Husqvarna’s ecosystem in the industry, to de-risks future M&A by scouting IP, and to foster a close relationship with potentially relevant companies. Lastly, HVGV can tap into the fast-paced AI- and robotics industry in which Husqvarna is innovating to identify disruptive energy early (HVGV, 2020).
When asked to place HVGV in the classification matrix by Gutman et al. (2019; see Appendix 4; Cheat Sheet), our interviewee selected the roles of enabler and observer since financial returns are hardly relevant in their investments. Instead, Husqvarna follows strategic objectives in each investment. The capital required for investments stems directly from the CFO and the unit has command over up to SEK 100m that they can invest each year without formal approval by the board. This ensures the agility required to make quick decisions regarding investment opportunities (Johnson, 2020).
The unit is currently run by Mark Johnson, with assistance from various other high-ranked managers of the HV group, mainly from the development, strategy, and technology and innovation departments.
7.3 Management Practices
Overall, HVGV emphasizes high-quality investments over large numbers of portfolio firms. Before the decision to invest is made, the business development and innovation divisions are called on for additional feedback on the potential for strategic value. The final decision to invest has to be made by the investment committee, which is chaired by Husqvarna’s CEO and which includes their CFO, Mark Johnson from HVGV, the CTO and his assistant, and the head of business development (Johnson, 2020). In addition to regular meetings of the committee, the key individuals have bi-weekly meetings in which Johnson updates the senior management regarding progress, opportunities, and the overall situation of the CVC unit and its portfolio firms. This structure ensures approval for all investments and post-investment management actions from the highest-level key individuals of Husqvarna and allows quick decisions regarding investments to maintain flexibility (HVGV, 2020).
Upon the investment, HVGV posts a member on the board of the portfolio firm. Johnson (2020) identified this as a 'must-criterion'; a start-up that does not allow HVGV to send at least a board-observer does not qualify for an investment. However, we found the process of finding suitable board members to be rather challenging. The board membership can be seen as a mediator job with the objective to build meaningful relationships between the CVC unit and its portfolio firms. Board members at portfolio firms are required to represent the start-up while being an employee at the corporate, which can lead to a conflict of interest. The board members, therefore, have to be mature and senior enough to understand the responsibility and challenges that come with the position. They
22 need to have an interest in being an owner rather than an executive, and they need to possess the strategic height regarding business and finance knowledge (Johnson, 2020).
Throughout an ongoing investment, HVGV remains active in their portfolio firms and schedules bi-monthly meetings. Johnson (2020) described maintaining a good connection to the start-up as crucial: “It is essential for the investment team and the business teams to have active and close communications to facilitate the immersion of the CVC team in the company’s strategy, particularly to create informal exchanges. It must also be easy for business teams to meet deal flow start-ups to get inspiration and share their expertise.”
As stated in our research design, we had to ensure that HVGV engages primarily in driving and enabling investments that place high importance of strategic returns. In the interview, we found that HVGV adapted Chesbrough’s matrix to reflect this importance by altering the CVC investment objective to reflect only strategic goals as opposed to including financials ones, namely “technological investment” and “business model or market investment” (see Figure 4 or
Appendix 9; Cheat Sheet).
7.4 Deal-Sourcing and Screening Criteria
We found that there are certain prerequisites for CVC investments. To justify the higher cost of CVC compared to other innovation methods, Johnson (2020) underlines the importance of identifying a specific problem that cannot be solved through in-house R&D. Start-ups are faster and more agile in developing and innovating as they do not have large corporate machinery behind them and no risk of gambling a well-established brand name. The in-house R&D is more closed off and, therefore, less exposed to innovation trends compared to start-ups. Corporates leverage CVC as a means to open up innovation efforts and access advantages typically reserved for start-ups (Johnson, 2020).
23 In this light, before an investment can take place, the corporate needs to identify start-ups that show potential for strategic returns. This process is referred to as “deal sourcing” and includes multiple means to be exposed to start-ups (Johnson, 2020; Ericson, 2020; HVGV, 2020).
An option are accelerators which the Husqvarna Group operates as part of their overall innovation strategy. Additionally, the market knowledge of employees in their respective fields can be utilised (Ericson, 2020). External possibilities to meet new ventures are start-up fairs such as ‘Slush’ in Helsinki and conferences. We found that a reputation affects the scouting success of CVCs as interactions with entrepreneurs become more rewarding the better the reputation. In some cases, a positive reputation can lead to potential portfolio firms initiating the CVC process by actively approaching the corporate for investments. Furthermore, the network of other investors in a start-up can lead to helpful suggestions, references, and recommendations regarding potentially interesting firms.
Once potential start-ups have been identified, HVGV has a list of screening criteria that start-ups need to fulfil to qualify for an investment, a complete list thereof can be found in Appendix 10. The most relevant ones for this thesis are: a subjective evaluation of the team behind the start-up and their competence; a strategic fit between start-up and corporate; and the novelty of the start-up
7.5 Services Provided to Portfolio Companies
Apart from the financial resources that portfolio firms receive, there are numerous other advantages provided by CVC units. An investment by a large and well-established corporate usually leads to increased commercial credibility, something that in our case study manifested through more accessible “bank financing solutions” (Johnson, 2020). The portfolio firms further benefit from the “almost unmatched insight and knowledge about relevant markets” (Johnson, 2020) provided. Additionally, they can profit from an established network of suppliers, partner, and customers as well as access to new markets and their respective distribution channels. CVC units can also act as advisors and consultants to the portfolio firm. This role typically falls to the posted board member. They then work as advocates or as network brokers. In our case study, the CVC unit’s network and commercial credibility developed commercial and strategic partnerships on the side of the portfolio firm.
Despite all of these additional benefits over IVCs, in our case, the corporate’s investment terms are similar to IVC’s, and few additional commitments are required from the start-up.
