Non-strategic spin-offs: The use of corporate venturing in developing and supporting nascent ventures

Book chapter, 2006

The paper analyzes how and why a parent firm continues to nurture non-strategic spin-off ventures. The question is addressed in a case study of a corporate venturing unit of a large technology-based firm in Sweden. Interviews were carried out with executives in the parent firm, the corporate venturing unit and in spin-off ventures. A striking feature of this corporate venturing organization is the continuing investment in spin-off ventures, which the parent organization explicitly regards as non-core. We investigate the spin-off process to find possible explanations for this non-intuitive behavior. We develop a model based on the increasing costs to decrease information asymmetries between the corporate venturing unit and external actors when more resources are devoted to the nascent venture. The model illustrates the competitive advantage of the corporate venturing unit in the early-stage development of internal ventures. We argue that a corporate venturing unit can gain strategic benefits by developing and supporting non-strategic ventures at low cost and low risk by functioning as a strategic trashcan, while at the same time providing direct financial return from the spin-off ventures. Although the venture is non-core, the parent firm has an informational advantage about its value, but needs to further develop the venture for subsequent sale. The results indicate that the challenge for parent firms is to estimate when they no longer can profit from the information asymmetry, i.e. when the cost for further venture development has reached some critical level. The analysis illustrates how a low-cost/low-risk corporate venturing strategy can force the corporate venturing unit to guesstimate this point. In relation to this, we suggest an explanation of sponsored spin-offs where the parent firm retains partial ownership as an emergent phenomenon, caused by relatively simple environmental restrictions (low cost/low risk), rather than a carefully planned-for strategy.