regulating corporate vc

Electronic copy available at: https://ssrn.com/abstract=2889443

Catching Disruption:

Regulating Corporate Venture Capital Jennifer S. Fan | [email protected]

University of Washington School of Law

Legal Studies Research Paper No. 2016-25


CATCHING DISRUPTION:

REGULATING CORPORATE VENTURE CAPITAL

Jennifer S. Fan*

ABSTRACT

Household names like General Motors and Campbell Soup have

joined the ranks of high tech titans such as Google and Intel in the world of

corporate venture capital (“CVC”). CVC—equity investments in external

startups made by corporations or investment entities designated by

corporations—has skyrocketed in recent years and now permeates every

stage of venture capital. In the race to become synonymous with innovation,

companies engage in CVC endeavors to identify the next market disrupter.

But the recent explosion of CVC also has a dark side. CVC money led to a

glut of capital and fostered a new environment where private companies

stay private longer. CVC is one of the primary drivers of the rise of

unicorns—private companies with billion-dollar valuations—which have

populated the startup landscape at an alarming rate, creating an enormous

private economy unchecked by our current regulatory tools. Despite their

impact on the innovation ecosystem, very little is known about CVC because

of the way it is reported pursuant to current securities laws. As corporate

venture capitalists increasingly take an active role on boards and as the

lead investors in deals, conflicts of interest also arise.

Although business scholars and economists have conducted

numerous studies on CVC, legal scholars have largely overlooked this

subset of venture capital. This Article aims to broaden the scholarly

discussion by identifying the legal implications of this new wave of CVC in

two areas: securities regulation and conflicts of interest. By doing so, this

Article will highlight the shortcomings of the integrated disclosure regime

within the context of CVCs. In addition, this Article discusses the

importance of paying special attention to shifting dynamics on the board of

directors and to identifying and implementing best practices to meet

fiduciary duties.

*Jennifer S. Fan is Faculty Director of the Entrepreneurial Law Clinic at the University

of Washington School of Law. The author wishes to thank Alina Ball, Anita Krug, Sean

O’Connor, Lynnise Pantin, and Elizabeth Porter for their insightful comments. Also,

special thanks to Sarah Ashmore, Cheryl Nyberg, Mary Whisner, and Zoe Wong for their

superb research assistance.


2 CORPORATE VENTURE CAPITAL [23-Dec-16

PLEASE DO NOT DISTRIBUTE OR CITE WITHOUT AUTHOR’S PERMISSION.

TABLE OF CONTENTS

Introduction ............................................................................................................. 3 I. The Evolution of Corporate Venture Capital ...................................................... 10

A. History of Corporate Venture Capital: Four Waves ................................... 12 B. Features of Corporate Venture Capital........................................................ 17 C. Four Types of Corporate Venture Capital ................................................... 19

II. The Effect of Corporate Venture Capital on the Innovation Ecosystem .......... 21 III. Applicable Securities Laws and CVC Investments ......................................... 30

A. Regulation S-K and Regulation S-X ........................................................... 30 B. Materiality ................................................................................................... 33 C. Five Corporate Venture Capital Case Studies ............................................. 36

1. GV Case Study .................................................................................. 36 2. Intel Capital Corporation Case Study ................................................ 42 3. Campbell Soup Company Case Study ............................................... 45 4. Well Ventures, LLC Case Study ....................................................... 49 5. General Motors Ventures Case Study ................................................ 52

D. The Need for More Disclosure.................................................................... 54 IV. How CVC Impacts the Boards of Private Companies ...................................... 57

A. CVC as Board Observer .............................................................................. 58 B. CVC as Board Member ............................................................................... 59

1. Duty of Care ...................................................................................... 60 2. Duty of Loyalty .................................................................................. 64

Conclusion .............................................................................................................. 66

23-Dec-16] CORPORATE VENTURE CAPITAL 3


INTRODUCTION

Patagonia,1 Sesame Street,

2 Walgreens,

3 7-Eleven,

4 General

Motors,5 Campbell Soup

6—these are not the names of companies that come

1 Patagonia Ventures was started in 2009 and focuses on software industry

investments. Patagonia Ventures, CRUNCHBASE,

https://www.crunchbase.com/organization/patagonia-ventures#/entity (last visited Apr. 28,

2016); Patagonia Ventures, PITCHBOOK,

https://my.pitchbook.com/#page/profile_1716209723 (last visited Apr. 28, 2016). Unlike

some of the other examples cited, Patagonia is not a public company; it is a privately-held

social enterprise. 2 Sesame Workshop, a nonprofit organization, which created Sesame Street and other

children’s programming, will help the Collaborative Fund choose companies to invest in at

the seed stage. Matthew Lynley, Yep, Sesame Street Now has a Venture Fund,

TECHCRUNCH (Feb. 1, 2016), http://techcrunch.com/2016/02/01/yep-sesame-street-now-

has-a-venture-fund/. This example illustrates the breadth of involvement in venture capital

from public companies to private companies to nonprofits. 3 Founded in 2009, Well Ventures™ is described as “the venture and growth capital

investment arm of Walgreen Co.” with a focus on being “the preeminent strategic investor

and partner for companies with disruptive technologies, products, and services that align

with Walgreens’ mission to ‘help people get, stay, and live well.’” WALGREENS: WELL

VENTURES, https://web.archive.org/web/20151025144221/http://www.walgreens.com/topic

/well-ventures/well-ventures-info.jsp (archived Oct. 25, 2015) (emphasis omitted). 4 7-Eleven’s corporate venture capital arm is called 7-Ventures. It began in 2010 and

focuses on investments in the software industry. 7-Ventures, PITCHBOOK,

https://my.pitchbook.com/#page/profile_1884716116 (last visited Apr. 28. 2016). As one

reporter observed, “[B]ig, mature businesses like 7-Eleven and Walgreens want to plug

their own innovation gap and stay relevant in the marketplace. So they’re investing in

companies that are likely to help them broaden their offerings.” Jeremy Quittner, What’s

Really Driving the Boom in Corporate VC Firms, INC. (Aug. 8, 2014),

http://www.inc.com/jeremy-quittner/corporate-venture-capital-drives-innovation-for-big-

companies.html. Since 7-Ventures’ launch, it has invested in two companies—a coffee

startup, and a startup called Belly that produces a customer loyalty marketing software. See

id. 5 General Motors has become active in venture capital in a big way, having recently

invested $500 million in Lyft. See Mike Isaac, General Motors, Gazing at Future, Invests

$500 Million in Lyft, N.Y. TIMES (Jan. 4, 2016),

http://www.nytimes.com/2016/01/05/technology/gm-invests-in-lyft.html; Kyle Stanford,

Cruise Control: GM Buying Driverless Car Technology for $1B, PITCHBOOK (Mar. 16,

2016), http://pitchbook.com/news/articles/cruise-control-gm-buying-driverless-car-

technology-for-1b. General Motors invests directly in startups as well as through its

corporate venture capital arm, General Motors Ventures, which was formed in 2010.

General Motors Ventures, PITCHBOOK, https://my-pitchbook-

com/#page/profile_1450137885 (last visited May 16, 2016). 6 Campbell Soup’s newly-created venture arm (founded in 2016) is being run

externally and is called Acre Venture Partners; $125 million has been allocated to it. See

discussion infra Section III.B.3 and accompanying notes. The Chief Executive Officer of

Campbell Soup, Denise Morrison said that the company “wants to aggressively participate

in the ‘disruption’ in food trends. ‘We believe that defining the future of real food requires

https://www.crunchbase.com/organization/patagonia-ventures#/entity



to mind when thinking about the startup world. Yet, each of these

companies started its own corporate venture capital arm in the last seven

years. Corporate venture capital (“CVC” or “corporate venture capital”) is

defined as “an equity investment by an established corporation in

entrepreneurial ventures. In contrast to traditional venture capitalists who

purely focus on financial returns, most corporations seek strategic benefits

in addition to financial returns.”7 Although CVC started in the 1960s, it

plays a new and often unrecognized role in the fast–evolving technology

landscape that focuses on disruptive innovation.8 Historically, corporate

venture capital funds (“CVCs” or “CVC fund” if referring to only one fund;

also referred to as corporate venture capital arms in this Article), invested in

the later stages of the startup and their employees—who were employees of

the parent company—did not serve on boards of investment targets. Now

the opposite is true: corporations increasingly make investments in the early

stages of the startups through their CVCs, and CVC employees frequently

serve on boards, heavily influencing all stages of startup investees. As a

result of these recent changes, the new CVCs now bear a striking

resemblance to traditional venture capital firms which raise capital from

limited partners (i.e., passive investors) for their venture capital funds.9 The

new approaches, new business models, smart external development and an ecosystem of

innovative partners[.]’” John Kell, Campbell Soup Joins the Venture Capital Craze,

FORTUNE (Feb. 17, 2016, 4:17 PM), http://fortune.com/2016/02/17/campbell-soup-vc-

fund/. 7 Equity, EWING MARION KAUFFMAN FOUNDATION,

http://www.kauffman.org/microsites/state-of-the-field/topics/finance/equity (last visited

July 20, 2016); see also VOLANS & GLOBAL CORPORATE VENTURING, INVESTING IN

BREAKTHROUGH: CORPORATE VENTURE CAPITAL 9 (2014),

http://www.breakthroughcapitalism.com/files/volans-investing-breakthrough-report.pdf.

This differs from the goal of traditional venture capital firms which aim to get extremely

high returns (i.e., homeruns) on investments made on behalf of limited partners who invest

in venture capital funds. See BRAD FELD & JASON MENDELSON, VENTURE DEALS 115–28

(2d ed. 2013). “[CVC] is a subset of venture capital wherein corporations make systematic

investments into startup companies, often by taking an equity stake in an innovative firm

tangentially related to the company’s own industry. They often also provide marketing

expertise, management, strategic direction, and a line of credit.” Jack Du, The Rise of

Corporate Venture Capital (TWTR, FB), INVESTOPEDIA,

http://www.investopedia.com/articles/investing/082815/rise-corporate-venture-capital.asp

(last visited Apr. 29, 2016). 8 Clayton Christensen coined the term “disruptive innovation.” Joseph L. Bower &

Clayton M. Christensen, Disruptive Innovation: Catching the Wave, HARV. BUS. REV., Jan.

1995, at 45. See also infra note 81 (for a full definition of disruptive innovation). 9 Typically, the limited partners are public employee pension funds, endowments,

philanthropic foundations, and insurance companies, to name a few. Funding Innovation,

NAT’L VENTURE CAPITAL ASS’N, http://nvca.org/ecosystem/funding-innovation/ (last

visited June 5, 2016). Traditional venture capital is what most people think of when venture

capital is discussed—they are standalone investment entities. “Venture capital is financing



professional investors who work at these firms decide which companies to

invest in—typically at the early stages of the private company focused on a

particular sector—and play an active role, often times serving on the

board.10

The goals of CVCs are both financial and strategic.11

Engaging in

corporate venture capital activities enables parent companies of the CVCs

access to more disruptive research and development (“R&D”), gives R&D

more scale, and provides companies access to talent and markets that they

would not otherwise be exposed to.12

Traditional R&D within the parent

company, in contrast, is increasingly seen as costly and ineffective.13

Since the financial crisis in 2008, the ranks of corporate venture

capital have swelled dramatically.14

CVCs’ influence is perhaps most acute,

that investors provide to startup companies and small businesses that are believed to have

long-term growth potential. For startups without access to capital markets, venture capital

is an essential source of money.” Venture Capital, INVESTOPEDIA,

http://www.investopedia.com/terms/v/venturecapital.asp (last visited July 17, 2016). 10

The venture capital investors (i.e., the investment professionals at the venture capital

firm) and the limited partners will enter into a limited partnership agreement. Funding

Innovation, supra note 9. 11

VOLANS & GLOBAL CORPORATE VENTURING, supra note 7, at 9. Strategy includes

“[d]eveloping capabilities, access and…markets of the parent company, aligning with long-

term strategy. Multiple CVC units may be created to focus on different aspects of the

strategy—and they often adapt and evolve over time. A strategic CVC investment will

identify and amplify synergies between itself and the venture.” Id. 12

Not the Same: Understanding Corporate Venture Capital Versus Institutional VCs,

CB INSIGHTS (Feb. 5, 2016), https://www.cbinsights.com/blog/corporate-venture-capital-

institutional-venture-capital/. CVCs also look at what type of startup will benefit the

corporation. As one CVC head noted, as a startup, “[y]ou must convey how you can benefit

the organization, not how it can help you solve the challenges you're facing as a startup.

This requires understanding the core business of the fund . . . as well as why pursuing a

relationship would be mutually beneficial for both organizations.” Ilya Pozin, Three Things

to Know About Corporate Venture Capital, INC. (Jan. 3, 2014), http://www.inc.com/ilya-

pozin/3-things-to-know-corporate-venture-capital.html. 13

Josh Lerner, How Corporate Venture Capital Helps Firms Explore New Territories,

HARV. BUS. REV. (Sept. 10, 2013), https://hbr.org/2013/09/how-corporate-venture-

capital.html. “Corporate R&D too often focuses on refining technologies that are already in

use . . . . For decades in the U.S., billions were spent on big science, and the commercial

returns were disappointing . . . . R&D has a tendency to be slow, rigid, and expensive.”

Id. 14

See Kevin Dowd, What’s Happened with the 10B+ Mega-Funds of 2008?,

PITCHBOOK (April 26, 2016), http://pitchbook.com/news/articles/whats-happened-with-the-

10b-mega-funds-of-2008 (citing the financial crisis of 2008 and how the $10B+ mega-

funds fared 8 years after the crisis); The Investors Fueling the Mega-Round Phenomenon,

CB INSIGHTS (May 16, 2016), https://www.cbinsights.com/blog/hedge-mutual-funds-

investing-big-deals-tech-startups/. Global corporations spend more than $650 billion on



and most unrecognized, in the setting of the unicorn15

phenomenon. In July

2015, there were seventy-four unicorns; fifty-one percent of them had a

CVC as an investor.16

For example, the unicorn DocuSign had a staggering

ten CVC investors.17

One could argue that CVCs contributed to the unicorn

phenomenon by investing in so many of them, especially in the later stages

of financing,18

thereby creating a private economy19

largely unchecked by

our current regulatory framework. Uber, one of the most well-known

private companies, exemplifies the unicorn phenomenon.20

As we continue

to raise unicorns in captivity, private companies stay private longer.21

Although startups cost less to launch than in the past, investors continue to

give them large amounts of cash “to help them ‘own the market.’”22

As of

research and development on an annual basis primarily on technological advancements.

Igor Sill, New Era for Corporate Venture Capital, ENTREPRENEUR COUNTRY GLOBAL

(Sept. 14, 2015), http://www.entrepreneurcountryglobal.com/united-kingdom/ecosystem-

economics/item/new-era-for-corporate-venture-capital. See infra Section II (discussing

current state of CVC). 15

Unicorns are defined as private companies valued at over $1 billion or more. See

Aileen Lee, Welcome to the Unicorn Club: Learning from Billion-Dollar Startups,

TECHCRUNCH (Nov. 2, 2013), http://techcrunch.com/2013/11/02/welcome-to-the-unicorn-

club/. 16

Note that the numbers exclude direct investments by corporations. See Among

Corporate VCs, Salesforce Ventures Counts the Most Unicorns, CB INSIGHTS (July 22,

2015), https://www.cbinsights.com/blog/corporate-venture-unicorns/. 17

See id. 18

179 CVCs invested in early stage rounds (defined as Series A or earlier) of unicorns

and 222 CVCs participated in later stage rounds (defined as Series E-K, 1-3 by PitchBook)

of unicorns. Investors & Funds Search, PITCHBOOK, www.my-pitchbook-com/ (Investor

Types: Venture Capital; Search for Primary Investor Type Only; Deal Date: From 01-Jan-

2014); Deal Status: Completed; Deal Types: All VC Stages; All Series) (last visited June

13, 2016). According to data obtained from CB Insights, 47% of unicorns had CVC

investment participation. 19

See generally Jennifer S. Fan, Regulating Unicorns: Disclosure and the New Private

Economy, 57 B.C. L. REV. 583 (2016) (discussing the recent unicorn phenomenon and the

need for more disclosure). 20

See Geoff Colvin, Private Desires, FORTUNE, June 1, 2016, at 52, 52–53 (noting

Uber “is an extreme example of a significant trend.”) 21

See Fan, supra note 19, at 641–42. The Reforming Access for Investments in Startup

Enterprises (“RAISE”) Act passed by Congress at the end of last year, codifies the resale of

private company stock in the secondary market. Shiriam Bhashyam, With RAISE Act,

Congress Paves Way for Private Secondary Markets, TECHCRUNCH (Dec. 20, 2015),

https://techcrunch.com/2015/12/20/with-raise-act-congress-paves-way-for-private-

secondary-markets/. One of the major components of the RAISE Act exemption is that the

issuer is required to give certain disclosure to the employees, ex-employees, and others

who may want to sell their private company stock. While this exemption provides much-

needed transparency, some say it may be too cumbersome for companies. See id. 22

E-mail Newsletter from Anand Sanwal, CEO & Co-Founder, CB Insights, to CB

Insights subscribers (Oct. 12, 2016, 4:54 PM) (on file with author). “What’s interesting



December 18, 2016, there were 179 unicorns.23

There is “significant

uncertainty about their ability to grow into their outsized private market

valuations.”24

Although the total number of U.S. companies continues to

grow, there was a dramatic forty-five percent decrease in the number of

companies that are traded on stock exchanges.25

On the positive side, some business scholars see corporate venture

capital’s potential advantages as CVCs broaden their investment scope and

have longer-term expectations.26

Other advantages for the startups that

receive corporate venture capital include access to the resources and

opportunities afforded to parent companies of CVCs; possible collaboration

with market development and sales; access to follow-on funding; and the

infrastructure of the corporate parent.27

Some signs indicate that corporate

venture capital is effective, or at least profitable. As examples, “[s]tartups

backed by firms are more likely to list their shares than those championed

by conventional venture groups. A bank in Silicon Valley estimated last

year that corporate [venture capital] yields three times the number of patents

per dollar invested than in-house R&D.”28

CVCs also have longer lifespans

now, with an average age of five years and 120 lasting ten years or more—

this is longer than the tenure of many chief executive officers.29

given these successes is that while the cost of launching a startup has come down (thanks

AWS, Azure, etc.), the funding methods for them haven’t evolved that much. Bryce

Roberts with his Indie VC effort is doing interesting things, but overall, we’ve not seen a

lot of innovation in how private tech companies get funded.” Id. In particular, there is a

focus on “growth hacking” meaning that the goal of startups is to grow as fast as possible

and own their particular market space. Ryan Holiday, What is Growth Hacking? A

Definition and a Call to Action, THE HUFFINGTON POST: THE BLOG (Sept. 4, 2013, 2:46

PM), http://www.huffingtonpost.com/ryan-holiday/what-is-growth-hacking-a-

_b_3863522.html. 23

They are collectively valued at $626 billion. The Unicorn List: Current Private

Companies Valued at $1B and Above, CB INSIGHTS (updated daily),

https://www.cbinsights.com/research-unicorn-companies. 24


Insights subscribers (Oct. 12, 2016, 4:54 PM) (on file with author). 25

The number of companies traded on stock exchanges peaked twenty years ago. See

Colvin, supra note 20, at 53. In the 1990s an average of 436 companies went public each

year; last year it was 120. See id. at 54. 26

Robert C. White, Jr., Corporate Venture Capital Investments — Good for Startups?,

THE SEC. EDGE (Feb. 2, 2016), http://www.thesecuritiesedge.com/2016/02/corporate-

venture-capital-investments-good-for-startups/. 27

Id. 28

If You Can’t Beat Them, Buy Them, THE ECONOMIST (Nov. 22, 2014),

http://www.economist.com/news/finance-and-economics/21633883-fear-being-displaced-

startups-turning-firms-venture-capitalists-if. 29

Id.; see also infra notes 90–94 and accompanying text for discussion on CVC life

spans.



With notable exceptions, such as Intel Capital30

and GV (formerly

Google Ventures),31

however, traditional venture capitalists generally do

not hold CVCs in high esteem, derisively characterizing them

as “innovation theater”32

or “dumb money.”33

In fact, some traditional

venture capitalists argue that such investments can be harmful to startups.34

When Alphabet (formerly Google) considered forming a corporate venture

capital arm, it was not well received.35

Union Square Ventures’ Fred Wilson

said as recently as 2013 that he would “never ever ever ever do” a deal with

CVCs.36

Wilson then said, “These type of investments and relationships

have almost universally ‘sucked’ for our portfolio companies. The corporate

strategic investor’s objectives are generally at odds with the objectives of

the entrepreneur, the company, and the financial investors. I strongly advise

30

INTEL CAPITAL, http://www.intelcapital.com/ (last visited Apr. 29, 2016). 31

When Google first contemplated a corporate venture capital arm, noted venture

capitalist Fred Wilson, a partner at Union Square Ventures, one of the most prominent

venture capital firms, said:

We like working with corporate investors in the right situations and

we’d certainly love to work with Google considering all that they bring

to the table. But I do think that venture investing is not the best use of a

corporation’s capital and that it is inevitable that it will produce sub-par

returns at best and significant losses at worst. And as a Google

shareholder, I’d prefer to see them do something else with all that

money they are making.

Fred Wilson, Corporate Venture Capital, AVC (July 31, 2008),

http://avc.com/2008/07/corporate-ventu/. Mr. Wilson also states that corporate venture

capital can’t keep the talent that it needs; a successful investment is just a one-time gain for

the parent company; and there is a misalignment of the motives of the corporate venture

capital arm on the one hand and the founders, management, and financial investors on the

other. See id. 32

CB Insights Presents: Corporate Innovation Theater in 8 Acts, CB INSIGHTS (Dec.

16, 2015), https://www.cbinsights.com/blog/corporate-innovation-theatre/. 33

Mark Lennon, Corporate Venture Investors Starting to Look a Lot More Like

Private VCs, TECHCRUNCH (Nov. 5, 2013), http://techcrunch.com/2013/11/05/corporate-

venture-investors-starting-to-look-a-lot-more-like-private-vcs. 34

See discussion supra note 31. 35

“‘There were some in the venture world who weren’t particularly welcoming to Bill

[Maris, head of what was then called Google Ventures,] or Google Ventures,’ recalls John

Doerr, a legendary partner at Kleiner Perkins Caufield & Byers, one of the most important

first-generation California [traditional venture capital] firms.” Katrina Brooker, Google

Ventures and the Search for Immortality, BLOOMBERG: MARKETS (Mar. 8, 2015, 9:01 PM),

http://www.bloomberg.com/news/articles/2015-03-09/google-ventures-bill-maris-

investing-in-idea-of-living-to-500. 36

The Rise of Corporations in Tech Venture Capital Investment — Are Tech VCs

Going to Have to Play Nice with Corporate Investors?, CB INSIGHTS (Sept. 23, 2013),

https://www.cbinsights.com/blog/tech-corporate-venture-capital-balance-sheet/.

http://www.covestor.com/mbr/fredwilson/holdings

http://www.covestor.com/mbr/fredwilson/holdings



against entering into these kinds of relationships.”37

He is not alone in his

unfavorable sentiment about CVCs. Keith Rabois, a partner at Khosla

Ventures, intimated that GV’s ability to lead rounds in high profile

companies was easier because financial returns did not concern GV.38

He

said, it was “much easier to lead rounds if you don’t care about earning a

return.”39

Bill Gurley, a general partner at another VC firm, Benchmark

Capital, observed, “There is an inherent paradox to the notion of corporate

venture[.]”40

CVCs are here to stay and play an increasingly expansive role in the

innovation ecosystem, however little information is known about them. This

Article examines the legal issues that arise in this new era of CVCs in the

following areas: securities regulation and conflicts of interest.41

As this

Article will illustrate, there are limitations of current securities regulations

in providing transparency on the CVC investments of public companies.

Information about CVCs is buried in the notes to financial statements. As

corporate venture capitalists take on the role of strategic investor,42

there are

also conflicts of interest that arise as more of them take an active role on the

board of directors of the private companies they invest in. As public

companies strive to change their reputations as staid, stodgy entities of

yesteryear by investing in startups through their CVCs, they may take risks

on a new scale in the name of disruptive innovation.43

Though seemingly

innocuous, this risk taking may lead to excesses, such as the glut of capital

invested in private companies.44

The law could help mitigate these excesses

37

Fred Wilson, On Corporate VCs, AVC (June 20, 2013), http://avc.com/2013/06/on-

corporate-vcs/. 38

Keith Rabois (@Rabois), TWITTER (Sept. 22, 2013, 2:40 PM),

https://twitter.com/rabois/status/381895737505624064. 39

Id. 40

Brooker, supra note 35. “The conflict is, do the fund’s loyalties lie with the startup

or with the parent? Just about every independent venture capitalist in tech has stories of

being burned by corporate funds.” Id. The corporation either uses its CVC investment to

gather intelligence and competes with the startup or no longer has an interest and decides

not to fund the startup. Id. 41

As mentioned earlier in this Article, there are private companies that make

investments in other private companies, but this Article focuses on public companies that

are engaged in venture capital. 42

Strategic investor is defined as “a relatively large corporation that agrees to invest in

a young or a smaller company in order to have access to its proprietary technology, product

or service.” See NAT’L VENTURE CAPITAL ASS’N, 2016 NATIONAL VENTURE CAPITAL

ASSOCIATION YEARBOOK 94 (2016) [hereinafter 2016 NVCA YEARBOOK]. 43

See infra note 81 for the definition of disruptive innovation. 44

In part, this mentality can be attributed to “growth hacking” which means that the

company grows as fast as it can to dominate the market—it is a growth at all costs

mentality (even at the expense of creating a strong infrastructure and making profit). See



and prevent CVCs and their parent companies from being victims of their

own eagerness by ensuring appropriate disclosure and transparency

regarding CVCs’ investments in private companies.

Part I explains how corporate venture capital has evolved over the

years and the role of corporate venture capital investments in the current

innovation ecosystem. Part II then analyzes the effects of this new era of

corporate venture capital in the startup landscape; specifically, this Part

discusses how corporate venture capital investments affects startups,

investors, and the economy. Part III discusses how CVC investments are

currently reported by public companies under relevant securities

regulations. It then analyzes the shortcomings of how such investments are

reported, proposes what information should be disclosed, and specifies

certain revisions to current laws to address such deficiencies. Part IV

scrutinizes the role of CVCs on boards as the influence of corporate venture

capital continues to rise and impact the innovation ecosystem. It discusses

how to address the inherent tension between the corporate venture capitalist

as a board member and the interests of the parent company of the CVC.

This Article concludes that information presented about CVC investments

in periodic reports needs to be more coherent and clear. Furthermore,

implementing the framework for best practices for a board that has a CVC

representative is in the best interest of investors and the public generally

and can address the harms of increased CVC activities. Robust disclosures

and well-run boards are not just for the parent company of the CVCs but

benefit startups, investors, and the economy.

I. THE EVOLUTION OF CORPORATE VENTURE CAPITAL

This Part discusses the four waves of corporate venture capital and

how legal changes made the different waves possible. Sources of capital for

CVCs include the corporate level of the parent company, one of the parent

company’s business units, or external investment partners, such as a venture

capital firm; the former is the most common.45

The purpose of CVCs, their

levels and stage of investment, and their role in the startup ecosystem have

likewise metamorphosed over the years.46

Corporations have different

Holiday, supra note 22.

45 IAN MACMILLAN ET AL., NAT’L INST. OF STANDARDS & TECH., NIST GCR 08-916,

CORPORATE VENTURE CAPITAL (CVC): SEEKING INNOVATION AND STRATEGIC GROWTH

(2008). 46

Benchmarking Corporate Venture Capital, CB INSIGHTS,

https://www.cbinsights.com/research-benchmarking-corporate-venture-capital (last visited

May 19, 2016).



rationales for forming corporate venture capital arms, including financial

returns and gaining perspective on what could be the “newest new thing.”47

They are also motivated by the opportunity to “identify[] novel technologies

to enhance revenue streams and amplify a corporation’s competitive

position [and] validation of new market segments, as well as [to] leverage[]

relationships between the corporate venture capital portfolio and corporate

business units.”48

In a later section of Part I, the Article analyzes the

features and types of CVC in greater detail as well.

In terms of the legal mechanics, CVCs are structured in a few

different ways: (1) corporations join existing venture capital funds as

limited partners;49

(2) current operating business units are tasked with

venture capital investing;50

(3) wholly-owned subsidiaries are organized for

the exclusive purpose of CVC;51

(4) dedicated funds are co-managed by a

traditional venture capital firm and the corporation;52

and (5) evergreen or

discretionary funds make investments opportunistically and capital is

allocated when such opportunities arise.53

CVC operations are structured in

a variety of ways ranging from simple (resembling the general partner,

limited partner structure of a traditional venture capital firm) to complex.54

“The simplest way to structure a [CVC] operation is for the corporation to

invest as a [venture capitalist] directly from the corporate treasury, with

employees managing the investment activities.”55

Due to myriad issues (i.e.,

accounting, tax and compensation) and internal corporate politics, however,

corporations have had to implement creative structures or contractual

arrangements.56

As an example, CVCs may be structured as independent or

semi-independent funds to ensure that corporations can recruit and retain

talent to manage their respective CVC investments by offering market

47

MAHENDRA RAMSINGHANI, THE BUSINESS OF VENTURE CAPITAL 22 (2d ed. 2014). 48

Id. at 22–23. Ramsinghani also notes that “[a]bout 60 percent of corporations invest

in ventures funds as LPs, and 90 percent of CVCs invest directly in [startups].” Id. at 23. 49

Gary Dushnitsky, Corporate Venture Capital: Past Evidence and Future Directions,

in THE OXFORD HANDBOOK OF ENTREPRENEURSHIP 22 (Anuradha Basu et al. eds., 2008). 50

Id.; see discussion infra Section III.B.3 (discussing General Mills’ structure). 51

Nokia Ventures is an example of this. Dushnitsky, supra note 49, at 22; see

discussion infra Sections III.B.1, III.B.2 (discussing the structures of GV and Intel Capital). 52

Sequoia Seed Capital, a joint venture between Sequoia Capital and Cisco Systems is

an example of a dedicated fund. Dushnitsky, supra note 49, at 22. 53

IAN MACMILLAN ET AL., supra note 45. 54

Asher Bearman, Corporate Venture Capital—An Introduction, DLA PIPER: THE

VENTURE ALLEY (Feb. 23, 2012), https://www.theventurealley.com/2012/02/corporate-

venture-capital-an-introduction/. 55

Id. This type of structure may be best suited for new players to CVC that are able to

be the sole capital source for the venture capital investments. Id. 56

Id.



compensation of traditional venture capital firms, such as carried interest.57

A. History of Corporate Venture Capital: Four Waves

The evolution of corporate venture capital can be tied to four distinct

time periods, or waves.58

The first wave took place in the 1960s and was

concentrated in the areas of technology and pharmaceuticals.59

When the

initial public offering market collapsed and the oil crisis emerged in the

1970s, the first wave ended.60

The second wave occurred in the 1980s when

venture capitalists re-emerged due to less stringent pension fund regulations

and tax cuts.61

Biotechnology and technology companies received the bulk

of the investments in that time period until the market downturn in 1987.62

The third wave took place during the dot-com boom in the late 1990s—

investments by CVCs surged again due to the allure of riches in the Internet

realm and rising stock markets.63

In the early 2000s, however, the bubble

57

Id. 58

There is no substantive or authoritative research about the origins of CVCs. It is

difficult to pinpoint the number of CVCs in earlier waves. 59

VOLANS & GLOBAL CORPORATE VENTURING, supra note 7, at 20. The traditional

venture capital model drove the success of the first CVC wave. “[A]s corporations grew in

size and scope in the 1960s, a need to diversify. They focused on internal ventures or

external [startups]; the emergence of spin-out businesses benefiting from wider parent

company support was yet to come. The activity was mainly in innovation-intensive

industries such as technology and pharmaceuticals.” Id. In the mid-1960s, corporations

entered the venturing world with the goal of “generating above-average financial returns.”

Falk Bielesch et al., Corporate Venture Capital: Avoid the Risk, Miss the Rewards,

BCG.PERSPECTIVES (Oct. 31, 2012),

https://www.bcgperspectives.com/content/articles/innovation_growth_mergers_acquisition

s_corporate_venture_capital/. “It was a period of rapid technological advancement, robust

corporate profits, a soaring stock market, and widespread management faith in the strategic

value of diversification.” Id. U.S. corporations in the technology and pharmaceutical

sectors invested in new ventures, but shut down their corporate venture capital arms when

the initial public offering market collapsed in 1973. Id. 60

Bielesch et al., supra note 59. 61

Due to the loosening of pension fund regulations and tax cuts, traditional venture

capital firms re-emerged in the 1980s and CVCs followed suit, hoping to match the returns

of traditional VC firms. Id. “CVC as a broad theme lay dormant until the early 1980s, when

a new generation of independent venture capitalists emerged, their coffers bulging with

cash from U.S. investors taking advantage of a cut in the capital gains tax and the

relaxation of restrictions on pension fund investments.” Id. As was the case in the 1970s,

the technology and pharmaceutical industries were the most active CVC investors, but

when the stock market crash of 1987 occurred, their interest faded and they “went into

retreat.” Id. 62

VOLANS & GLOBAL CORPORATE VENTURING, supra note 7, at 21. 63

“The third CVC wave boomed in investment levels around the time of the dotcom

bubble, fueled by the seemingly limitless potential of the Internet and rising stock markets



burst and CVCs reduced their venture capital activity.64

These dramatic

shifts in corporate venture capital investments contribute to the low esteem

in which many traditional venture capital firms hold in-house corporate

venture capital operations. Specifically, they view public companies that

engage in CVC as having neither the fortitude nor nimbleness to manage

the high-risk, quick moving environment of venture capital investing.65

From a historical perspective, earlier cycles of corporate venture capital

reflected the ups and downs of the broader economy.66

Today, however,

companies take proactive measures to address market trends by shifting

their CVC investment priorities and partnering with different ventures than

they would have in the past.67

Currently, we are in the fourth wave of CVC activity.68

More than

1,200 corporations across the globe have CVC programs, of which over half

were formed since 2010.69

“Companies are using CVC as a compelling way

— and fell victim to the bubble’s pop in the early 2000s.” Id. It also marked the first time

that European corporations and emerging markets engaged in venture investing. Id. 64

Id. In the late 1990s, corporations invested heavily in startups until the economic

downturn. From September 2000 to September 2001, investments in startups fell by 80%.

Henry Chesbrough, Making Sense of Corporate Venture Capital, HARV. BUS. REV., Mar.

2002, at 90, 101, https://hbr.org/2002/03/making-sense-of-corporate-venture-capital.

“Quarterly corporate venture-capital investments in [startups] rose from $468 million at the

end of 1998 to $6.2 billion at the beginning of 2000 and then tumbled to $848 million in

the third quarter of 2001.” Id. “The advent of the Internet in the mid-1990s heralded the

beginning of the third CVC cycle. Amid a strong market for stocks, especially dot-com

issues, and hungry for above-market returns, corporations returned in force to the game,

with more than 400 of them worldwide launching CVC programs.” Bielesch et al., supra

note 59. European corporations and emerging markets “entered the market in force. CVC

activity reached a high point in 2000, when corporate equity investments in new ventures

soared to more than $4.5 billion, according to GCV.” Id. With the dot-com bust in 2000 and

the recession of 2001 and 2002, however, the third wave ended. Id. “In a newly risk-averse

business environment and amid high uncertainty over new accounting and governance

regulations, corporations wound down their VC operations.” Id. 65

“In their eyes, the wild swings are further evidence that big companies have neither

the stomach nor the agility to manage investments in high-risk, fast-paced environments.”

Chesbrough, supra note 64, at 92. 66

See VOLANS & GLOBAL CORPORATE VENTURING, supra note 7, at 21. 67

See id. 68

See id. 69

Press Release, DLA Piper, Corporate Venture Capital Compensation Report

Released to Support High Performance Teams and Innovation Programs (Jan. 27, 2016),

https://www.dlapiper.com/en/us/news/2016/01/corporate-vc-compensation-report-released/

[hereinafter DLA Piper, Corporate Venture Capital Compensation Report]; but cf. Du,

supra note 7 (which states that between 2010-2014 over 475 new CVC funds started and

over 1,100 are currently operational). The number of traditional venture capital firms has

changed significantly over a period of 20 years. In 1995, there were 425 venture capital

firms; in 2005 and 2015, there were 1009 and 798 such firms, respectively. 2016 NVCA



to drive outside-in innovation for access to new and disruptive technologies,

the development of new business models and participation in emerging

markets, all of which may provide meaningful contributions to corporate

growth.”70

In the past, CVCs tended to mirror the VC investment climate.71

In

this fourth wave of CVC, however, the numbers indicate that CVCs are

developing their own investment rhythm independent of the traditional

venture capital firms.72

One-third of all venture-backed companies that were

ultimately acquired received funding from at least one CVC investor; in

contrast, for those startups that only received funding from venture capital

firms only ten percent were acquired.73

Some argue that this may be a

function of CVCs investing in later stage companies.74

Since 2005 to 2013,

CVC investing has closely tracked the S&P 500.75

As the facts demonstrate,

CVCs are only increasing their presence in the venture capital arena. Using

data on 477 firms from 1990 to 2000, one study showed that there is more

CVC activity when there is “rapid technological change, high competitive

intensity and weak appropriability. . . . [T]he strength of an incumbent’s

technological and marketing resources and the diversity of its prior CVC

experience increased its CVC activity.”76

Yet another study looked at more than one thousand U.S. public

corporations from 1990-99 and found that CVC investments are more

robust in sectors that have weaker patents and complementary assets play a

more prominent role.77

Additionally, one study analyzed U.S. information

YEARBOOK, supra note Error! Bookmark not defined..

70 DLA Piper, Corporate Venture Capital Compensation Report, supra note 69.

71 “In the past, corporate interest in creating venture funds tended to wax and wane in

sync with the general VC climate. Waves of corporate venture activity—in the late 1960s,

the mid-1980s, and the late 1990s—corresponded with booms in VC investments and

venture-backed IPOs.” Josh Lerner, Corporate Venturing, HARV. BUS. REV., Oct. 2013, at

86. 72

“But now we’re seeing a corporate-venturing surge even during lackluster days for

traditional venture capital.” Id. During the global financial crisis, CVC funds invested more

than 11% of the venture capital dollars—this was reminiscent of the amount invested by

CVC funds during the dot-com boom. Id. “This new activity may indicate that as research

functions face severe pressure to rein in costs and produce results, companies are looking

for alternative means to learn and innovate.” Id. 73

Lennon, supra note 33. 74

Id. 75

Id. 76

Sandip Basu, et al., Towards Understanding Who Makes Corporate Venture Capital

Investments and Why, 26 J. BUS. VENTURING 153, 167–68 (2011). 77

See Gary Dushnitsky & Michael J. Lenox, When Do Firms Undertake R&D by

Investing in New Ventures?, 26 STRATEGIC MGMT. J. 947, 962 (2005).



technology programs within the CVC context.78

It was conducted to

determine whether CVCs ultimately brought value through investment

activity and direct returns back to the parent company of the CVC. The

result was as follows: forty-four percent of CVCs had a significant

economic impact on the parent company.79

Regarding CVCs, corporations want the ability to enhance their

R&D efforts in a more nimble way and perhaps have even better acquisition

opportunities.80

In short, they want to be part of the disruptive innovation

that the media, companies, and Wall Street all laud.81

One might argue in

fact that CVCs themselves are disruptive.82

Additionally, CVCs want to

look more closely at potential disruptors to their line of business. By

identifying and holding equity in these startups, CVCs hope to prevent the

failure of the parent company in the future.83

“The entire technology

78

Stephen A. Allen & Kathleen T. Hevert, Venture Capital Investing by Information

Technology Companies: Did it Pay?, 22 J. BUS. VENTURING 262, 262 (2007). 79

See id. at 273. 80

“For the corporations, the purpose of CVCs is to increase the flexibility and

entrepreneurial spirit of otherwise large, bureaucratic, multi-billion dollar companies.

CVCs essentially act as a supplement to internal research and development. In this way,

investing in small companies serves as a gateway for possible acquisition.” Du, supra note

7. 81

“‘Disruption’ describes a process whereby a smaller company with fewer resources .

. . successfully challenge[s] established incumbent businesses. Specifically, as incumbents

focus on improving their products and services for their most demanding . . . customers,

they exceed the needs of some segments and ignore the needs of others.” Clayton M.

Christensen et al., What is Disruptive Innovation?, HARV. BUS. REV., Dec. 2015, at 46,

https://hbr.org/2015/12/what-is-disruptive-innovation. Smaller companies target

overlooked segments typically at a lower price. Id. Incumbents don’t respond vigorously

since they are focused on customers that will give them greater profits. Id. “Entrants then

move upmarket, delivering the performance that incumbents’ mainstream customers

require, while preserving the advantages that drove their early success. When mainstream

customers start adopting the entrants’ offerings in volume, disruption has occurred.” Id.

The authors also noted that disruptive innovations get started in low-end or new-market

footholds. Id. at 47. In the case of the low-end market, disrupters are initially focused on

giving low-end customers a product that is “good enough.” Id. With respect to new-market

footholds, disrupters figure out how to convert nonconsumers into consumers. Id. The

authors contend that Uber is not a disrupter because it started off by establishing itself as a

contender in the mainstream market and then appealed to overlooked markets. Id. 82

“Our current belief is that companies should create a separate division that operates

under the protection of senior leadership to explore and exploit a new disruptive model.”

Id. In other words, perhaps the fact that public companies want to figure out a better way of

identifying future disrupters in their respective industries or the next big innovation through

small bets, like Alphabet does with Other Bets (see discussion infra Section III.B.1

regarding GV and other entities under the banner of Other Bets) shows how leaders in

public companies explore and exploit new, disruptive models. 83

Du, supra note 7.



industry is easily disrupted, with small companies exploding onto the scene

and overtaking giants every couple years.”84

At first blush it may appear

that CVCs are heading toward another boom-and-bust cycle. In one study,

extensive evidence was analyzed and the authors of the study concluded

that CVCs were not destined to repeat such a cycle.85

No longer an

experiment, CVCs have entered a more mature chapter in the fourth wave

of CVC activity. CVCs are also becoming more sophisticated and strategic

as they expand to new industries, looking toward adjacent and downstream

industries and reallocating resources to corporate venture capital instead of

R&D.86

CVCs offer other benefits, including that they have a funding source

(the parent company), there are no limited partners that they need to worry

about, and their investment horizon can be longer term than a traditional

venture capital firm.87

Like traditional venture capital firms, CVCs have a

global reach, too. They invest in private companies in countries such as

China, the United Kingdom, and India.88

Intel Capital is the top CVC

investor in China and India and Qualcomm Ventures ranks in the top four

for the three aforementioned markets.89

Another notable change in the newest iteration of CVCs is that they

have longer life spans.90

In the past, CVC programs lasted no longer than

one to two years.91

In contrast, the majority of CVC programs during the

fourth wave have been active for at least four years or longer.92

“The

84

Id. 85


“In many cases, they are looking past the boundaries of their own industries toward

adjacent and downstream industries, and they are banding together with companies from

other industries to fund promising new ideas.” Id. 87

Du, supra note 7. 88

Corporate Venture Capital Abroad: These are the Top CVCs in the UK, China, and

India, CB INSIGHTS (Mar. 30, 2016), https://www.cbinsights.com/blog/top-corporate-

venture-firms-uk-china-india/. 89

Id. 90

There are two groups of CVCs—one with a long history of corporate venturing

(technology, pharmaceutical, telecommunications, and media and publishing) called “CVC

first movers” and the other, “CVC follower” group comprising of machinery, power and

gas production, consumer, and construction. Bielesch et al., supra note 59. 91

Corporate Venture Capital (CVC), EWING MARION KAUFFMAN FOUNDATION,

http://www.kauffman.org/microsites/state-of-the-field/topics/finance/equity/corporate-

venture-capital (last visited July 31, 2016). 92

Id. But cf. Gary Dushnitsky, Riding the Next Wave of Corporate Venture Capital,

BUS. STRATEGY REV., Aug. 2011, at 44 (which states that the average lifespan for CVC in

the past was 2.5 years and is now 3.8 years with more prominent CVCs now in their second

decade of activity). Furthermore, forty percent of the approximately 350 corporate



lengthening life spans of CVC units may be the most compelling evidence

that venture investing is finding a permanent place in the corporate-

development arsenal and has become a must-have innovation tool in many

industries.”93

The increasing duration of CVCs indicates the level of

commitment of corporations to CVCs and shows how commonplace CVC

investing is becoming.94

In order to ensure that funds are deployed effectively, corporate

venture capitalists cannot “become entangled in the agendas of various

corporate stakeholders or demotivated by inadequate or poorly designed

financial incentives. That’s why it’s important that venture funds’ goals be

aligned with corporate objectives, approvals for funding be streamlined, and

compensation levels match those offered by independent venture groups.”95

One study showed that there was a direct correlation between the

performance of CVCs and payment structure—if the investment

professionals employed by CVCs had similar performance pay to traditional

venture capital firms then their performance was better.96

B. Features of Corporate Venture Capital

CVCs have the following benefits: (1) they can respond quickly to

market transformations; (2) gather intelligence on competitive threats; (3)

more easily extricate themselves from investments that are no longer doing

well (as compared to the reluctance of companies to let go of languishing

R&D project); (4) have a greater impact since they are co-investing with

others; (5) develop technologies that require the use of the parent

company’s platform (as Apple did with the iFund); and (6) enjoy higher

investors in the 2000-2009 timeframe were in operation for four or more years, which was

almost double the longevity of CVCs in previous wave. Id. 93

“Average lifetimes of corporate venture units are increasing across the board, in

industries with a long history of venture activity as well as industries that are relative

newcomers to the game.” Bielesch et al., supra note 59. Since 2002, the life span of CVC

units in the pharmaceutical industry has increased by fifty percent and, in the case of CVCs

in technology, from 2002 to 2012, it has increased to almost six years. Id. Newcomers to

the CVC world also have longer life spans. Id. As an example, CVCs in the consumer

industry had a lifespan of 10.5 years in 2012 compared to 3.3 years in 2002. Id. 94

“No longer an exotic sideline indulged in by a handful of well-heeled giants in

clearly circumscribed industries, it is . . . well on its way to becoming a mainstream

innovation and corporate-development activity, alongside R&D, M&A, and joint

venturing.” Id. 95

Lerner, supra note 13. 96

See Gary Dushnitsky & Zur Shapira, Entrepreneurial Finance Meets Organizational

Reality: Comparing Investment Practices and Performance of Corporate and Independent

Venture Capitalists, 31 STRATEGIC MGMT. J. 990 (2010).



returns on investments.97

In one study, researchers found that startups with

money from corporations are more likely to attract the attention of

investment banks, equity analysts and institutional investors when they go

public when compared to those backed by traditional venture capital

firms.98

The researchers further showed that in the first three years as public

companies, those that were backed by corporate venture capital funds did

better, on average, on stock price performance than such traditional venture

capital firms.99

On the other hand, some startups worry that by allowing

CVCs to participate, they will have fewer options in the future. In

particular, they fear that taking corporate money comes with obligations—

such as the right to acquire the startup in the future—that would make them

unattractive to other potential investors.100

Furthermore, compensation

structures at CVCs may be less competitive than their traditional venture

capital firm counterparts and, as a result, CVCs may have retention

issues.101

Josh Lerner, a Harvard Business School professor, suggests the

following framework for a successful corporate venture: (1) align goals

with corporate objectives, (2) streamline approvals, (3) create an

experimental, failure-tolerant mindset, (4) provide powerful incentives,102

(5) stick to your commitments,103

and (6) harvest valuable information.104

Two characteristics in particular define a corporate venture capital

investment: “its objective and the degree to which the operations of the

investing company and the [startup] are linked.”105

With respect to

objective, investments are either strategic106

or financial.107

GV would be an

example of the former as its investments are focused on areas outside of

Alphabet’s core areas.108

Dell Ventures would be an example of the

97


See Chemmanur et al., Corporate Venture Capital, Value Creation, and Innovation,

27 REV. FIN. STUD. 2434 (2014). 99

See id. 100

See Jessica Vascellaro, Google to Extend Reach with Venture-Capital Arm, WALL

ST. J. (July 31, 2008, 12:01 AM), http://www.wsj.com/articles/SB121747323523899779. 101

“Some funds with less competitive compensation have struggled to retain

managers, and corporate venture funds often don’t allow senior employees to invest

personal money in their funds, while other venture funds typically do.” Id. 102

For example, pay should be comparable to their venture capital firm counterparts. 103

In other words, provide funding to startups on a consistent basis. 104



Id. 107

Id. 108

See discussion infra Section III.B.1 (discussing GV and Alphabet’s Other Bets).



latter.109

The linkage between the operations of the investing company and

the startup is dependent on resources and processes.110

The link to

operational capability ranges from tight to loose.111

Using Chesbrough’s112

map as a starting point, corporate venture capital investments are grouped

into four types and purposes: driving, emergent, enabling, and

passive.113

Each one will be described in more detail below.

C. Four Types of Corporate Venture Capital

Professor Henry Chesbrough of Harvard Business School wrote the

seminal piece on corporate venture capital.114

He puts corporate venture

capital into four different investment categories: (1) driving; (2) enabling;

(3) emergent; and (4) passive.

A driving investment is both strategic and tightly linked to the

operations of the company that is investing.115

Such an investment sustains

the current strategy of the company, but does not address when a company

is faced with disruptive strategies or new opportunities.116

An enabling investment is where investments are not as tightly

interwoven with the company’s own operations, but the goal of the

investment is primarily strategic.117

This type of investment will encourage

the development of the company’s current ecosystem of suppliers,

customers and third-party developers which will in turn enhance the

demand for the company’s own products.118

Intel Capital is cited as an

example.119

109

Chesbrough, supra note 64. Dell Ventures is the venture capital arm to its parent

company, Dell, and primarily invests in the cloud, mobile, security, and big data sectors at

the early-to-growth stage. See Dell Ventures, PITCHBOOK,

https://my.pitchbook.com/#page/profile_1828499020 (last visited May 19, 2016). 110


Id. 112

See discussion infra Section I.C (describing who Henry Chesbrough is and his

scholarship on corporate venture capital). 113

Chesbrough, supra note 64, at 94–97. 114

Id. at 94. 115

Id. 116

“The tight coupling of these investments with a company’s current processes means

that these investments will sustain the current strategy. They will be unlikely to help a

corporation cope with disruptive strategies or to identify new opportunities when the

company must . . . respond to . . . a change in the environment.” Id. 117

Id. 118

“A company can take advantage of this notion by using its [venture capital]

investments to stimulate the development of the ecosystem in which it operates—that is,



Emergent investments are not focused on enhancing strategy, but

rather aim for the startup to be tightly linked to its operating capabilities.120

This investment strategy can be helpful if the company’s strategy or the

business environment changes.121

In other words, it means that the company

is investing in a technology that it was involved in developing.122

Lastly, a passive investment is neither connected to the

corporation’s strategy nor is it tightly linked to its operational

capabilities.123

Therefore, the company cannot advance its own

business.124

Chesbrough even characterizes passive investing as

“arguably a misuse of shareholders’ funds.”125

The other three investment

types, in contrast, each cultivate the expansion of a company’s current or

future businesses.126

As Chesbrough notes, however, a company’s “resources and

processes can become liabilities rather than capabilities, particularly when it

faces new markets or disruptive technologies.”127

The investments “are

made primarily to increase the sales and profits of the corporation’s own

businesses. A company making a strategic investment seeks to identify and

exploit synergies between itself and a new venture.”128

If the objective is

financial, the company’s primary goal is a high rate of return.129

In Part III

which follows below, this Article discusses the legal framework which is

applied when disclosing information about CVC investments. Specifically,

it analyzes Regulations S-K130

and S-X131

and provides examples of the

different types of corporate venture capital investments discussed above.

the suppliers, customers, and third-party developers that make goods and services that

stimulate demand for the company’s own offerings.” Id. at 95. 119


Id. at 96. 121

Id. 122

Id. at 96–97. 123

Id. at 97–98. 124

“[T]he corporation lacks the means to actively advance its own business through

these investments.” Id. at 98. 125


Id. (see “Paths to Growth” chart for further discussion). 127


Id. at 92. 129

“Here, a corporation seeks to do as well as or better than private VC investors, due

to what it sees as its superior knowledge of markets and technologies, its strong balance

sheet, and its ability to be a patient investor.” Id. The company’s brand may also attest to

the startup’s quality to other investors and potential customers. Id. 130

17 C.F.R. pt. 229 (2016).



II. THE EFFECT OF CORPORATE VENTURE CAPITAL ON THE

INNOVATION ECOSYSTEM

Venture capital investments have increased at a rapid pace. Other

than the peak of the dot-com boom in 2000, 2015 was the biggest year for

venture capital investing.132

Against this favorable investing climate,

corporate venture capital had a banner year in 2015, hitting a fifteen-year

high133

and accounting for twenty-five percent of later stage deals

globally.134

Not since the year 2000 has corporate venture capital reached

such heights.135

In 2015, CVCs poured in roughly $7.7 billion in 930

venture rounds that equated to twenty-one percent of all deals and thirteen

percent of all venture capital dollars.136

The sectors benefitting the most

from this influx of money were software companies,137

biotechnology

companies,138

and industrial/energy companies.139

Software companies

131

17 C.F.R. pt. 210 (2016). 132

Paresh Dave, Venture Capital Investments Hit $16.5 Billion in Quarter Despite

Worrying Trends, L.A. TIMES, Oct. 19, 2015, http://www.latimes.com/business/la-fi-

venture-capital-20151020-story.html. 133

Press Release, Nat’l Venture Capital Ass’n, Corporate Venture Investment to

Entrepreneurial Ecosystem Hits Fifteen Year High in 2015 (Jan. 19, 2016),

http://nvca.org/pressreleases/corporate-venture-investment-to-entrepreneurial-ecosystem-

hits-fifteen-year-high-in-2015/ [hereinafter NVCA, Corporate Venture Investment Hits

Fifteen Year High]. 134

Rachael King, Corporate VC Investments Hold Steady Amid Broader Downturn in

Market, WALL ST. J. (Jan. 22, 2016, 5:45 PM),

http://blogs.wsj.com/cio/2016/01/22/corporate-vc-investments-hold-steady-amid-broader-

downturn-in-market/. 135

Id. 136

See 2016 NVCA YEARBOOK, supra note ERROR! BOOKMARK NOT DEFINED.. In

light of the increasing number of corporations starting CVCs, the authors of the 2016

NVCA Yearbook note that corporate venture groups will continue to invest alongside

traditional venture capital firms. See id.; see also NVCA, Corporate Venture Investment

Hits Fifteen Year High, supra note 133. In the fourth quarter of 2015 alone, investment

from corporate venture capital amounted to “$1.2 billion in 199 deals, representing 10.3

percent of dollars invested and 21 percent of deals for the quarter.” NVCA, Corporate

Venture Investment Hits Fifteen Year High, supra note 133. 137

“As has been the trend with overall venture investing, software companies continue

to receive the largest amount of corporate venture dollars, drawing $2.5 billion in 389 deals

in 2015, representing 32.6 percent of all corporate venture dollars deployed.” NVCA,

Corporate Venture Investment Hits Fifteen Year High, supra note 133. 138

In the biotechnology sector, CVCs deployed $1.2 billion in 133 deals which

amounted to 16.3 percent of all CVC dollars in 2015. Id. To highlight one example, with

respect to cancer startups, “[e]xcept for a drop in funding in 2012 (consistent with overall

funding trends to this sector that year), funding dollars from rounds involving corporate

investors—including corporate parents and differentiated venture arms—increased nearly

five-fold, from $259M in 2011 to $1.24B in 2015.” Corporate Deal Activity in Cancer



received the largest amount of money from CVCs,140

with biotechnology

companies and industrial/energy companies coming in second and third,

respectively.141

Historically, money from corporate venture capital has come in the

later stage funding rounds.142

Even in 2015, this continued to be the case,

with $2.7 billion in corporate venture dollars allocated to later stage

companies across 159 deals representing 35.7 percent of all such dollars.143

A new trend has emerged, however, as CVCs increased their participation

in early stage deals, deploying $2.4 billion in 442 deals.144

Although there

was a marked decline in venture capital investing in the fourth quarter of

2015, corporate venture capital activity held steady ending at twenty-one

percent of all deals for the year.145

There were also a high number of initial

investments—approximately eighty-five—made by newcomers to the

corporate venture capital realm.146

In the fourth quarter of 2015, CVCs

invested more money in early stage startups than in expansion stage

companies.147

CVCs also invested in unicorns at a high rate.148

According to

Therapeutics Startups Nearly Doubles in 2015, CB INSIGHTS (Mar. 25, 2016),

https://www.cbinsights.com/blog/corporate-investors-oncology-startups/. 139

In the industrial/energy sector, CVCs deployed $1.2 billion in forty-six deals which

amounted to 16.1 percent of all CVC dollars and nearly forty percent of all venture

investments in this sector in 2015. NVCA, Corporate Venture Investment Hits Fifteen Year

High, supra note 133. “[C]orporate venture investment in industrial/energy companies

continued to be over-weighted as compared to overall venture investment into the

sector. In 2015, corporate venture groups accounted for nearly forty percent of all venture

investment into industrial/energy companies.” Id. 140

CVCs invested $2.5 billion in 389 deals for software companies, which equaled

32.6 percent of all CVC money in 2015. Id. 141

See supra notes 137–139 (discussing details of corporate venture capital

investments in 2015 for each of these sectors). 142

See NVCA, Corporate Venture Investment Hits Fifteen Year High, supra note 133. 143

Id. 144

Id. This represents thirty-one percent of corporate venture capital invested in 2015.

Id. The increasing sophistication of corporate investors and the fact that “companies in

industries that live or die by innovation, such as telecommunications and pharmaceutical,

are increasingly eager to capture new ideas and thus are willing to shoulder the risk of

investing in the dwindling number of [startups] in their sectors.” Bielesch et al., supra note

59. 145

NVCA, Corporate Venture Investment Hits Fifteen Year High, supra note 133. 146

King, supra note 134. 147

Id. In the fourth quarter of 2015, corporate venture capitalists invested $650 million

in ninety-eight early stage company deals, representing 55.7 percent of all dollars invested

for the quarter. NVCA, Corporate Venture Investment Hits Fifteen Year High, supra note

133. Expansion stage companies received 23.4 percent of all dollars invested in that same

quarter, deploying $273 million in fifty-six deals. Id. 148

See ANAND SANWAL, CB INSIGHTS LIVE: STARTUPS AND ACCELERATING



PitchBook data, Intel Capital remains the most active CVC having made

395 venture investments since 2010.149

GV comes in second at 314 deals

followed by Qualcomm Ventures (189 deals), Salesforce Ventures (141

deals), and SoftBank Capital (115 deals).150

CVCs had a busy first quarter in 2016 as well, investing $2.5 billion

in 228 deals.151

This was the ninth consecutive quarter where CVC

participation rose, which amounted to 23.5 percent of all venture capital

deals—this was the highest level of CVC participation since the third

quarter of 2008 where it CVC money comprised 24.1 percent of

deals.152

Overall, CVCs invested 20.6 percent of all VC money in the first

quarter of 2016.153

In the second quarter of 2016, venture capital investments continued

to be strong with $22.3 billion invested. Mega-rounds and unicorns account

for the high amount.154

GV and Intel were the third and fourth most active

investors in early stage companies in the second quarter of 2016; Intel was

the fifth most active investor in late stage companies.155

CORPORATE INNOVATION (Nov. 10, 2015), slides 70–91,

http://www.slideshare.net/NikunjSanghvi/cb-insights-live-startups-and-accelerating-

corporate-innovation (Sanwal is Chief Executive Officer and Co-Founder of CB Insights);

2016 NVCA YEARBOOK, supra note Error! Bookmark not defined., at 26. 149

Mikey Tom, The 10 Most Active Corporate Venture Capital Firms, PITCHBOOK

(Apr. 14, 2016), http://pitchbook.com/news/articles/the-10-most-active-corporate-venture-

capital-firms. 150

Id. Interestingly, earlier this year Intel Capital was considering the sale of a portion

of its VC portfolio with an estimated value of up to $1 billion. Kiel Porter, Intel Mulls Sale

of $1 Billion Venture Capital Portfolio, BLOOMBERG: TECHNOLOGY (Mar. 11, 2016, 9:52

AM), http://www.bloomberg.com/news/articles/2016-03-11/intel-said-to-mull-sale-of-1-

billion-venture-capital-portfolio. Since that time, Intel Capital said that it no longer planned

to go through with the sale. See Dan Primack, Intel Capital Cancels $1 Billion Portfolio

Sale, FORTUNE (May 26, 2016, 10:40 AM), http://fortune.com/2016/05/26/intel-capital-

cancels-1-billion-portfolio-sale/. 151

Press Release, Nat’l Venture Capital Ass’n, Corporate Venture Engagement in

Entrepreneurial Ecosystem Continues to Rise (Apr, 22, 2016),

http://nvca.org/pressreleases/corporate-venture-engagement-entrepreneurial-ecosystem-

continues-rise/ [hereinafter NVCA, Corporate Venture Engagement Rise]. 152

Id. 153

Id. 154

Joshua Mayers, What You Need to Know About U.S. Venture in 13 Charts,

PITCHBOOK (July 12, 2016), http://pitchbook.com/news/articles/what-you-need-to-know-

about-us-venture-in-13-charts. 155

NAT’L VENTURE CAPITAL ASS’N, 2Q 2016 U.S. VENTURE INDUSTRY REPORT 19

(2016),

http://files.pitchbook.com/pdf/PitchBook_2Q_2016_U.S._Venture_Industry_Report.pdf.



Over a twenty-year period, investments by CVCs have increased

seventeen-fold.156

In 2009, CVCs invested nearly $1.4 billion in 411 deals

or 12.9 percent of all venture capital deals;157

2010 was much of the same

with CVCs investing $1.8 billion in 473 deals or 12.8 percent.158

Then,

beginning in 2011, there was an uptick in CVC investments in terms of

number of deals—CVCs invested almost $2.4 billion in 595 deals that

equaled 14.6 percent of all venture capital financings.159

The increase in the

number of venture capital financings and percent of venture capital deals

CVCs participated in continued—619 deals or 15.5 percent of all venture

capital financings, 718 deals or 16.7 percent, 807 deals or 18 percent, and

983 deals or 21.9 percent in 2012, 2013, 2014, and 2015, respectively.160

As evidenced by their expanded investment activity, “corporations

are increasingly engaging in a more meaningful way with startup founders

and the broader entrepreneurial ecosystem,” said Bobby Franklin, President

and Chief Executive Officer of the National Venture Capital

Association.161

An increasing number of corporations choose to start CVCs

recognizing the importance of keeping up with the newest innovations.

“The benefits of this deeper engagement accrue not only to the parent

corporations but also the startups as they draw on the knowledge, expertise

and networks of the parent corporations to scale and grow.”162

Unsurprisingly, CVCs deployed half of their corporate venture

capital dollars to software companies ($1.2 billion) and nearly thirteen

percent ($320 million) to biotechnology companies.163

CVCs participated in

twenty-five percent of all venture deals and nearly eighteen percent in the

biotechnology company context.164

Other notable highlights include CVCs

more actively participating in the seed stage, and CVCs’ continued focus on

early stage companies.165

CVCs also expanded to more industries and not in

their core areas of expertise. As an example, the top corporate investors in

156

In 1995, there was $433 million in CVC investments. By 2015, CVCs invested

$7.76 billion in private companies. NAT’L VENTURE CAPITAL ASS’N, Q1 2016 CORPORATE

VENTURE ACTIVITY (2016), http://nvca.org/pressreleases/corporate-venture-engagement-

entrepreneurial-ecosystem-continues-rise/ (link for download available at the bottom of the

page). 157

Id. 158

Id. 159

Id. 160

Id. 161

NVCA, Corporate Venture Engagement Rise, supra note 151. 162

Id. 163

Id. 164

Id. 165

Id.



e-commerce companies for the period of 2010 to August 29, 2016 were

Intel Capital and GV, ranked at numbers one and two, respectively.166

Note,

however, that the parent company of each of the aforementioned CVC arms

is not focused on e-commerce.167

Intel Capital and GV, along with Motorola

Solutions Venture Capital and Qualcomm Ventures round out the top four

in terms of investments in private in-store technology companies from the

period of 2010 to August 4, 2016.168

The parent companies of each of these

CVCs are not centered on in-store technology the way one might imagine a

retail company like Walmart (which is ranked 46th in terms of investments

in this space) would be.169

Corporate venture capital arms of public companies may be funded

differently as well with some corporations investing from their balance

sheets and others raising a specific fund for investments in startups.170

Hyunsung Daniel Kang and Vikram K. Nanda of Georgia Tech studied 71

venture initiatives by biopharmaceutical firms over a ten-year period (from

1985–2005). They discovered a correlation between companies that made

financially successful investments and greater success in drug

development.171

Pharmaceutical companies would have taken much longer

and spent a great deal more to develop such capabilities on their own.172

The amount of time for research and money for facilities to facilitate such

research coupled with the necessity of recruiting scientists with the

appropriate expertise makes any knowledge gains in R&D occur at a slow

rate.173

Put differently, by gathering intelligence through investments in

startups, a company can better protect itself from threats that may emerge

from competitors or potential competitors.174

Furthermore, companies

whose CVCs invest in startups can increase their innovativeness.175

166

Big Box vs. Big Tech: Retailers Sit on Hands when it Comes to Startup Bets and

M&A, CB INSIGHTS (Sept. 14, 2016), https://www.cbinsights.com/blog/big-retail-vs-tech-

future-commerce/. 167

Id. 168

Id. 169

Id. 170

“[N]ot all corporate venture groups are created equal and not all of them engage in

the startup ecosystem for the same reasons.” Bobby Franklin, Corporate Venture: A

Growing Part of the Venture Capital Ecosystem, VENTURE CAPITAL J. (Sept. 2015),

http://nvca.org/columns/corporate-venture-a-growing-segment-of-the-venture-ecosystem/. 171


Id. 173

“[T]he growth of knowledge in internal laboratories . . . [is] painfully slow.”


See Bielesch et al., supra note 59. 175

See Anu Wadhwa, et al., Corporate Venture Capital Portfolios and Firm

Innovations, 31 J. BUS. VENTURING 95, 98 (2016).



Despite their benefits for some financial players, however, CVCs

harm startups, investors, and the economy. Their benefits are unevenly

distributed overall and investments are concentrated in fewer companies.176

The unprecedented access to unlimited capital, especially in the

unicorn category, has made startups less fiscally disciplined. One prominent

venture capitalist observed that too much capital was placed in the VC-

backed startup market.177

This led to burn rates (the amount of money

spent) at record highs, companies operating nowhere near profitability,

brutal competition driven by access to the glut of capital, delayed or no

liquidity for employees and investors and “solicitous fundraising practices.

More money will not solve any of these problems—it will only contribute

to them. The healthiest thing that could possibly happen is a dramatic

increase in the real cost of capital and a return to an appreciation for sound

business execution.”178

Individual investors (who are also called retail investors179

in the

financial literature) of the public companies which have CVC arms have

limited information about the corporate venture capital activities. In Part III

below, this information gap is highlighted.180

Institutional investors may not

have adequate information either if they only serve as a board observer or

do not have a large team of analysts doing research or using paid services to

get more detailed information.181

The dramatic increase in corporate venture capital activity also

176

See Dave, supra note 132 (explaining that median valuations of companies have

soared and citing a PitchBook report recognizing the “alarming” trend of late stage

companies receiving a “disproportionate share” of money); Rolfe Winkler, Venture-Capital

Firms Draw a Rush of New Money, WALL ST. J. (Mar. 29, 2016, 7:50 PM),

http://www.wsj.com/articles/funds-flow-to-venture-firms-1459295426. Even private

companies are beginning to start their own venture arms. See Ron Miller, Suddenly Every

Company is Becoming a Venture Capitalist, TECHCRUNCH (Nov. 10, 2015),

http://techcrunch.com/2015/11/10/suddenly-every-company-is-becoming-a-venture-

capitalist/. One example of a venture arm for a privately-held company is Dell Ventures.

See Dell Ventures, supra note 109. 177

See Gurley, supra note 187. 178

See id. 179

Investopedia defined retail investors as individuals (as opposed to institutional

investors) who buy and sell securities for their personal accounts. Retail Investor,

INVESTOPEDIA, http://www.investopedia.com/terms/r/retailinvestor.asp (last visited Nov. 9,

2016). 180

See discussion infra Section III.B and accompanying notes for case studies. 181

See discussion infra Section III.A and accompanying notes.



harms the economy. When corporate venture capital was deployed in later

stage financings (at a rate of nearly thirty-six percent)182

with “tourist”

investors, such as hedge funds and mutual funds who joined the venture

capital financing bandwagon, company valuations spun out of control.183

This, in turn, created the explosion of the unicorn phenomena.184

Now,

private companies with arguably more weight and influence than some

public companies, are choosing to stay private longer.185

There is a dearth of

public company offerings and many companies are unwilling to contemplate

a possible down round186

because they view it as a failure.187

Acquisitions

are also not likely options for highly valued private companies since few

companies can afford them. Investors in unicorns then turn to the secondary

markets for liquidity while at times implementing mechanisms to prevent

rank and file employees from doing so.188

The unicorn189

phenomenon highlights the strengths and weaknesses

of corporate venture capital. If an investor invests for the first time in the

182

See NVCA, Corporate Venture Engagement Rise, supra note 151. 183

See Unusual Suspects: Hedge Funds, Mutual Funds, and Banks Put the Brakes on

Tech Startup Deals, CB INSIGHTS (Mar. 15, 2016), https://www.cbinsights.com/blog/tech-

crossover-investors-slowdown/ (noting effect of crossover or tourist investors, such as

hedge funds and mutual funds during the unicorn boom; in 2015 alone, crossover investors

invested more than $40 billion in almost 800 deals related to private technology

companies). 184

See Fan, supra note 19 (discussing how the outsized effect of unicorns on the

marketplace necessitates changes in the current disclosure regime under federal securities

laws); Brad Feld, Current Startup Market Emotional Biases, FELD THOUGHTS (Apr. 21,

2016), http://www.feld.com/archives/2016/04/current-startup-market-emotional-

biases.html (reflecting on Bill Gurley’s post and discussing emotional biases which prevent

the unicorns from taking part in down rounds; Feld urges looking to long-term value rather

than paper value); Fred Wilson, Don’t Kick the Can Down the Road, AVC (Apr. 21, 2016),

http://avc.com/2016/04/dont-kick-the-can-down-the-road/ (calling for hard decisions to be

made now rather than later regarding unicorns and other startups). For the definition of a

down round, see infra note 186. 185

See Fan, supra note 19. 186

“A down round is a round of financing where investors purchase stock from a

company at a lower valuation than the valuation placed upon the company by earlier

investors. Down rounds cause dilution of ownership for existing investors.” Down Round,

INVESTOPEDIA, http://www.investopedia.com/terms/d/downround.asp (last visited May 15,

2016). 187

See Bill Gurley, On the Road to Recap: Why the Unicorn Financing Market Just

Became Dangerous . . . For All Involved, ABOVE THE CROWD (Apr. 21, 2016),

http://abovethecrowd.com/2016/04/21/on-the-road-to-recap/. 188

Unicorns do this all under the cloak of secrecy since very little disclosure is

required of them. See Fan, supra note 19 (discussing the adverse consequences of the lack

of disclosure required of unicorns). 189

See Fan, supra note 19.



later rounds, as corporate venture capital typically does, it drives up the

valuation of the company, thereby allowing the company to stay private

longer.190

There are many in the venture capital industry—both in

traditional venture capital and CVC—who are becoming increasingly

rattled by the lack of exits. In the first quarter of 2016, there were no initial

public offerings (“IPOs”) of venture capital-backed technology

companies;191

the technology initial public offering market hasn’t been this

dire since the Great Recession.192

Paradoxically, during this same time

period, the funding for venture capital funds continued to flourish, with

traditional venture capital firms raising $13 billion during the first quarter of

2016 alone.193

This rivals the amounts raised during the dot-com bubble.194

Although IPO activity was up in the second quarter of 2016 with sixteen

IPOs (with eight VC-backed technology companies in this group), the first

half of 2016 still lags significantly behind the first half of 2015 with a forty-

one percent drop.195

Twilio, a communications application startup,

completed the largest IPO for the quarter.196

In the third quarter, fourteen

190

The author of one article suggests that the frothy venture capital market of the past

few years benefitted the 357 U.S. VC-backed companies valued at more than $250 million

because they were able to stockpile capital. As a result, they are better able to weather any

downturn in the market provided that they spend their money pragmatically. See Adley

Bowen, A Pile of Dead Unicorns is Not Around the Corner, PITCHBOOK (May 9, 2016),

http://pitchbook.com/news/articles/a-pile-of-dead-unicorns-is-not-around-the-corner. 191

William D. Cohan, Good Luck Getting Out!, FORTUNE (Feb. 1, 2016),

http://fortune.com/silicon-valley-tech-ipo-market/ (discussing problems with the current

way initial public offerings are conducted). There were, on average, thirty-six VC-backed

IPOs per year from 2012–2014; that number decreased to twenty-three in 2015 with only

seven IPOs occurring in the latter half of the year. Id. Also, the profitability of technology

companies has plummeted—in 2015, the median EBITDA for tech companies was –$9

million. Id. 192

See Alison Griswold, The Market for Tech IPOs Hasn’t Been This Awful Since the

Great Recession, QUARTZ (Apr. 1, 2016), http://qz.com/652261/the-market-for-tech-ipos-

hasnt-been-this-awful-since-the-great-recession/; Rolfe Winkler, For Silicon Valley, the

Hangover Begins, WALL ST. J. (Feb. 19, 2016, 8:12 PM), http://www.wsj.com/articles/for-

silicon-valley-the-hangover-begins-1455930769 (discussing how once-high-flying startups

are now retrenching); Kevin Dowd, Lackluster Opening for SecureWorks in First U.S.

Tech IPO of 2016, PITCHBOOK (Apr. 25, 2016),

http://pitchbook.com/news/articles/lackluster-opening-for-secureworks-in-first-us-tech-ipo-

of-2016 (discussing how SecureWorks’s lackluster opening may dissuade other tech

companies from going public). 193

Griswold, supra note 192. 194

See Rolfe Winkler, Venture Capital Firms Draw a Rush of New Money, WALL ST.

J. (Mar. 29, 2016, 7:50 PM), http://www.wsj.com/articles/funds-flow-to-venture-firms-

1459295426. 195

CB INSIGHTS, THE H1 2016 GLOBAL TECH EXITS REPORT 5 (2016). 196

Twilio raised $150 million on the first day of its IPO. Corrie Driebusch, Twilio

Raises More Than Expected in IPO, WALL ST. J. (June 22, 2016, 7:31 PM),



venture-backed companies went public.197

On the merger and acquisition front, in the first three quarters of

2016, “[d]eal flow has slowed considerably” and there are fewer quality

companies.198

“There have been an average of [three] $1 [billion plus] exits

in tech over the last six quarters. At this rate, it would take . . . [a] two-term

presidency, plus another five years, for all the . . . tech unicorns to exit.”199

SEC Chair Mary Jo White observed, “As the latest batch of

[startups] mature, generate revenue, achieve significant valuations, but stay

private, it is important to assess whether they are likewise maturing their

governance structures and internal control environments to match their size

and market impact.”200

She suggested that startups should look at expanding

board seats to include those who have had experience with large companies

and public companies.201

Additionally, she stressed the importance of

ensuring that having board members with the appropriate regulatory and

financial expertise, including those with relevant industry expertise to

ensure differing viewpoints and the ability to spot critical issues.202

In sum,

private and public companies need to consider all of their investors when

making decisions.203

Private companies that received a lot of money at very

high valuations catapulted a great number of them into the unicorn realm.204

This unfettered growth in unicorns created an unhealthy innovation

ecosystem where valuations spun out of control and non-institutional

venture capitalists jumped into the investment fray spurred on by the fear of

missing out.205

In essence, the resulting unicorn phenomenon and lack of a

http://www.wsj.com/articles/twilio-ipo-tests-markets-appetite-for-tech-companies-

1466606076. 197

NAT’L VENTURE CAPITAL ASS’N & PITCHBOOK, 3Q 2016 VENTURE MONITOR 3

(2016). 198

PITCHBOOK, 3Q 2016 M&A REPORT 5–6 (2016) (noting that the deals that do go

through command “outsized multiples”). 199

E-mail Newsletter from Marcelo Ballve, Research Director, CB Insights, to CB

Insights subscribers (Sept. 23, 2016, 4:18 PM) (on file with author). 200

Mary Jo White, SEC Chair, Keynote Address at the SEC-Rock Center on Corporate

Governance Silicon Valley Initiative (Mar. 31, 2016),

https://www.sec.gov/news/speech/chair-white-silicon-valley-initiative-3-31-16.html

(discussing private companies—with particular references to unicorns—and role of SEC’s

rules and regulatory actions to foster innovation while protecting investors). 201

See id. 202

See id. 203

Id. 204

As of November 4, 2016, there are 174 unicorns valued at $626 billion (on paper).

The Unicorn List, supra note 23. 205


Insights subscribers (Nov. 19, 2015, 2:17 PM) (on file with author); see generally Foot in



sufficient regulatory framework to reign it in has created a perfect storm,

which may now have unintended effects—and potentially catastrophic

implications—for startups.

III. APPLICABLE SECURITIES LAWS AND CVC INVESTMENTS

Part III begins by setting forth the securities law framework that

governs whether particular information is disclosed or not. It begins by

discussing Regulation S-K and Regulation S-X and then explains the

relevance of materiality. Part III then discusses how CVC investments have

been reported within the context of these laws and how they could be

reported differently.

A. Regulation S-K and Regulation S-X

One of the underlying principles of the federal securities laws is full

and fair disclosure.206

Specifically, “[t]he purpose of corporate disclosure is

to provide investors with information they need to make informed

investment and voting decisions.”207

Furthermore, “[t]he diversity of the

audience for disclosure, and how different subsets of this audience access

and digest information about registrants, will also affect decisions about

how best to format and disseminate disclosure.”208

This Article argues that the current business and financial disclosure

requirements under Regulations S-K and S-X do not adequately reflect

valuable information about the increasingly prominent role CVC

investments play in public companies that may be pertinent to investors

decisionmaking process. While CVC investments may not always meet the

Mouth: 26 Quotes from Big Corporate Execs Who Laughed Off Disruption When it Hit, CB

INSIGHTS (June 9, 2016), https://www.cbinsights.com/blog/big-compay-ceos-execs-

disruption-quotes/ (highlighting corporate executives who did not take disruptive threats

seriously when they first entered the scene—their casual dismissal of these threats turned

out to be big mistakes later on). 206

Securities Act of 1933, ch. 38, 48 Stat. 74 (1933) (codified as amended at 15 U.S.C.

§ 77a–77aa (2012)) (“An Act [t]o provide full and fair disclosure of the securities sold in

interstate and foreign commerce and through the mails, and to prevent frauds in the sale

thereof, and for other purposes.”) One of the goals of the U.S. Congress in enacting the

mandatory disclosure system under the Exchange Act was the promotion of complete and

accurate information in the secondary trading markets. See S. REP. NO. 73–1455, at 68

(1934) (stating “[o]ne of the prime concerns of the exchanges should be to make available

to the public, honest, complete, and correct information regarding the securities listed’’). 207

Business and Financial Disclosure Required by Regulation S-K, 81 Fed. Reg.

23,915, 23,919 (proposed Apr. 22, 2016). 208

Id.



level of materiality (which is discussed in more detail below), the

information about it is presented in such a way that it is often obscured or

difficult to find when it is relevant. How and where the disclosure is made

pursuant to Regulations S-K and S-X is not uniform and may not give

investors the necessary information to make informed investment decisions.

This Article examines the CVC investments of public companies

within the SEC’s current framework for disclosure—the integrated

disclosure regime. “When adopting the integrated disclosure system, the

[SEC’s] goals were to reduce the costs to registrants and eliminate

duplicative disclosures while continuing to provide material

information.”209

Regulation S-K is a central part of this integrated disclosure regime

for the registration statements under both the Securities Act of 1933

(“Securities Act”) and the Securities Exchange Act of 1934 (‘‘Exchange

Act’’), and other Exchange Act filings, including periodic and current

reports.210 “Regulation S–K reflects the [SEC’s] efforts to harmonize

disclosure required under both the Securities Act and the Exchange Act by

creating a single repository for disclosure regulation that applies to filings

by registrants under both statutes.”211

The relevant items of Regulation S-K

for purposes of this Article are Item 301 - Selected Financial Data, which

requires that financial information is furnished for the last five years in

tabular format;212

Item 302 - Supplementary Financial Information, which

requires certain registrants to disclose quarterly financial data of selected

operating results and any variances in results of amounts over a prior two

year time period;213

and Item 303 - Management’s Discussion and Analysis

(“MD&A”) of Financial Conditions and Results of Operations.214

The

MD&A section under Regulation S-K was meant to provide investors with

an opportunity to view the registrant from management’s perspective by

providing a short-term and long-term analysis of the business of the public

209

Id. at 23,917. 210

There are many articles on the topic of integrated disclosure. See, e.g., ___. 211

Business and Financial Disclosure Required by Regulation S-K, 81 Fed. Reg. at

23,918. 212

17 C.F.R. § 229.301 (2016). 213

17 C.F.R. § 229.302 (2016). 214

17 C.F.R. § 229.303 (2016). Item 303 “requires disclosure of information relevant

to assessing a registrant’s financial condition, changes in financial condition and results of

operations.” Business and Financial Disclosure Required by Regulation S-K, 81 Fed. Reg.

at 23,941.



company.215

Put another way, the aim of MD&A requirements was to

function as principles-based requirements rather than prescriptive-based

requirements (e.g., line-item disclosures). Under Item 303, one revision

might be to require an executive-level overview without duplicating

information available elsewhere.216

Regulation S-X also governs financial disclosures. For Regulation

S-X, the relevant articles are Article 1 - Application of Regulation S-X,217

Article 3 - General Instructions as to the Financial Statements,218

and

Article 3A - Consolidated Combined Financial Statements.219

Filings

compliant with Article 3A often include information on the consolidated

balance sheets about CVCs under “noncontrolling interests” or “equity

method invesments.”

Under the mandate of recent legislation, the SEC is revisiting

Regulation S-K to evaluate its business and financial disclosure

requirements.220

Pursuant to Section 108 of the Jumpstart Our Business

Startups Act (“JOBS Act”),221

the staff of the SEC completed a

comprehensive evaluation of Regulation S-K that resulted in the staff’s

Report on Review of Disclosure Requirements in Regulation S-K (“S-K

Study”) which was published in December 2013.222 At the request of SEC

Chair, Mary Jo White, and based on the recommendation of the S-K Study,

“Commission staff initiated a comprehensive evaluation of the type of

information our rules require registrants to disclose, how this information is

presented, where and how this information is disclosed and how we can

215

Management's Discussion and Analysis of Financial Condition and Results of

Operations; Certain Investment Company Disclosures, Securities Act Release No. 33-6835,

Exchange Act Release No. 34-26831, Investment Company Act Release No. 16,961 (May

18, 1989). 216


23,942. 217

17 C.F.R. §§ 210.1-01–210.1-02 (2016). 218

17 C.F.R. §§ 210.3-01–210.3-20 (2016). 219

17 C.F.R. §§ 210.3A-01––210.3A-04 (2016). 220


23,917–18. 221

Pub. L. No. 112-106, § 108, 126 Stat. 306, 313 (2012). 222

SEC. & EXCH. COMM’N, REPORT ON REVIEW OF DISCLOSURE REQUIREMENTS IN

REGULATION S-K (2013), https://www.sec.gov/news/studies/2013/reg-sk-disclosure-

requirements-review.pdf [hereinafter S-K Study]. In order to address Section 108’s focus

on how requirements impact issuers categorized as emerging growth companies, the staff

evaluated the requirements for public companies generally. “In this regard, the staff’s

review is intended to facilitate the improvement of disclosure requirements applicable to

companies at all stages in their development, not only for companies that qualify as

emerging growth companies.”



leverage technology as part of these efforts (collectively, ‘Disclosure

Effectiveness Initiative’).”223

The aim was to improve the SEC’s disclosure

regime not only for registrants but for investors as well.224

The SEC then

solicited public comments on Regulation S-K in a concept release issued on

April 13, 2016.225

As part of its review, the SEC reviewed the history of

every provision in Regulation S-K to provide the appropriate context for

“simplifications, modernizations, revisions or eliminations that would be

suitable for all issuers.”226

The SEC recognized that “[t]he disclosure

requirements in Regulation S-K have an impact on the costs and burdens of

conducting registered offerings, including IPOs by emerging growth

companies, but also have an impact on the ongoing compliance burden

associated with public company status.”227

Pursuant to the Fixing America’s

Surface Transportation Act (“FAST Act”), the SEC is conducting a study

“to determine how best to modernize and simplify the disclosure

requirements in Regulation S–K and to propose revisions to those

requirements.”228

The SEC is also required to revise Regulation S-K under

the terms of the FAST Act “to further scale or eliminate requirements to

reduce the burden on [emerging growth companies], accelerated filers,

smaller reporting companies, and other smaller issuers, while still providing

all material information to investors, and to eliminate duplicative,

overlapping, outdated or superseded provisions.”229

B. Materiality

In order to determine what information a public company should

disclose about CVCs, it is also important to address the concept of

materiality.230

Under the Securities Act, Section 17(a)(2) of the Securities

Act provides that with respect to the offer or sale of any securities, it is

unlawful for any person “to obtain money or property by means of any

untrue statement of a material fact or any omission to state a material fact

223


23,917. 224

Id. 225

Business and Financial Disclosure Required by Regulation S-K, 81 Fed. Reg.

23,915 (proposed Apr. 22, 2016). 226

See id. for the full details of the history of Regulation S-K. 227

S-K Study, supra note 222, at 3. 228

“The SEC must consult with Investor Advisory Committee and the Advisory

Committee on Small and Emerging Companies and to issue a report of findings and

recommendations to Congress.” Business and Financial Disclosure Required by Regulation

S-K, 81 Fed. Reg. at 23,921. 229

Id. 230

See George S. Georgiev, Too Big to Disclose: Firm Size and Materiality Blindspots

in Securities Regulation, 64 UCLA L. REV. (forthcoming 2016) (on file with author).



necessary in order to make the statements, in light of the circumstances

under which they were made, not misleading.”231

Material is the term “used

to qualify a requirement for the furnishing of information as to any subject,

limits the information required to those matters to which there is a

substantial likelihood that a reasonable investor would attach importance in

determining whether to purchase the security registered.”232

Put another

way, information is material if it would have been important to a reasonable

investor when deciding whether to purchase the registered security (i.e.,

common stock of a public company).

The concept of materiality is also included in the Securities

Exchange Act of 1934 (the “Exchange Act”). Under Section 18(a) of the

Exchange Act, a person is liable for making, or causing to make any

statement “in any application, report, or document . . . which statement was

at the time and in light of the circumstances under which it was made false

or misleading with respect to any material fact.”233

Under the SEC Staff Accounting Bulletin: No. 99 – Materiality,234

“Materiality concerns the significance of an item to users of a registrant’s

financial statements. A matter is ‘material’ if there is a substantial

likelihood that a reasonable person would consider it important.”235

The

popular belief, but one which is not proven fact, is that individual investors

rely only on information from intermediaries such as analysts, media and

data providers.236

However, “evidence exists that individuals read and use

companies’ financial disclosures to make investment decisions.”237

The

Task Force to Modernize Securities Legislation, commissioned a survey of

retail investors and it found that “fifty-six percent of stockholders . . . read

and use financial statements to make investment decisions . . . Moreover,

approximately 50% of stockholders in the survey reported they find annual

financial statements, including management’s discussion and analysis . . . to

be useful.”238

The Financial Accounting Standards Board (“FASB”) explained

materiality as follows in its Statement of Financial Accounting Concepts

231

15 U.S.C. § 77q (2012). 232

17 C.F.R. § 230.405 (2016). 233

15 U.S.C. § 78r (2012). 234

SEC Staff Accounting Bulletin No. 99, 17 C.F.R. part 211 (Aug. 12, 1999). 235

Id. 236

Id. 237

Alastair Lawrence, Individual Investors and Financial Disclosure, 53 J. ACCT. &

ECONOMICS 130, 132 (2013). 238

Id.



No. 2:

The omission or misstatement of an item in a

financial report is material if, in the light of

surrounding circumstances, the magnitude of the

item is such that it is probable that the judgment of

a reasonable person relying upon the report would

have been changed or influenced by the inclusion or

correction of the item.239

Case law explains materiality further.240

Ultimately, the “formulation in the

accounting literature is in substance identical to the formulation used by the

courts in interpreting the federal securities laws.”241

In short, when analyzing corporate venture capital investments in

the context of “surrounding circumstances” or the “total mix” of

information set forth by FASB and the U.S. Supreme Court, respectively, it

239

SEC Staff Accounting Bulletin No. 99, 17 C.F.R. part 211 (Aug. 12, 1999). 240

There has been a series of U.S. Supreme Court cases regarding the materiality

standard. See Mills v. Electric Auto-Lite Co., 396 U.S. 375, 384 (1970) (dealing with proxy

voting, “[w]here the misstatement or omission in a proxy statement has been shown to be

‘material,’ . . . that determination itself indubitably embodies a conclusion that the defect

was of such a character that it might have been considered important by a reasonable

shareholder”); TSC Industries, Inc. v. Northway Inc., 426 U.S. 428, 448 (1976) (using

materiality as a filtering mechanism and describing how a low materiality standard could

lead to bad results—“Some information is of such dubious significance that insistence on

its disclosure may accomplish more harm than good.”). The standard for materiality is as

follows:

An omitted fact is material if there is a substantial likelihood that a

reasonable shareholder would consider it important in deciding how to

vote. . . . It does not require proof of a substantial likelihood that

disclosure of the omitted fact would have caused the reasonable

investor to change his vote. What the standard does contemplate is a

showing of a substantial likelihood that, under all the circumstances,

the omitted fact would have assumed actual significance in the

deliberations of the reasonable shareholder. Put another way, there

must be a substantial likelihood that the disclosure of the omitted fact

would have been viewed by the reasonable investor as having

significantly altered the “total mix” of information available.

TSC Industries, Inc., 426 U.S. at 449; see also Basic Inc. v. Levinson, 485 U.S. 224

(1988) (affirming holding of TSC Industries and stating that the materiality of a specific

piece of information is an “inherently fact-specific finding” and a purpose of the analysis is

to prevent management from burying shareholders in an “avalanche of trivial

information.”); Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014)

(reaffirming the materiality standard first set forth in TSC Industries). 241

SEC Staff Accounting Bulletin No. 99, 17 C.F.R. part 211 (Aug. 12, 1999).



is not only the quantitative factors that must be considered, but the

qualitative factors as well.242

C. Five Corporate Venture Capital Case Studies

In the subsections that follow, this Article examines five different

CVCs in different industries. More specifically, it analyzes the information

that is available about the CVC investments of the five companies through

their parent company’s respective SEC filings and various media outlets.

Each example illustrates the shortcomings of how CVC investments of

public companies are currently reported in public company filings pursuant

to Regulation S-K and Regulation S-X and under the standard of

materiality.

The examples set forth below will illustrate why increased

disclosure and transparency are necessary, as the information regarding the

corporate venture capital arms of the public companies is not provided in an

accessible or clear manner. Furthermore, the way in which information

about the CVC investments of public companies is reported could either

undermine the materiality of the information presented or the relevance of

the information to an investor’s understanding of a company even if it does

not rise to the level of materiality.

1. GV Case Study

GV is one of the most prolific CVCs—in the seed stage alone, it is

the fourth most active seed investor in all of venture capital.243

GV has a

formidable array of resources to entice startups to work with them,

including that any startup it invests in can have access to anyone at

Google.244

They also have a design team that has been likened to a SWAT

team for startups that can troubleshoot any problem a startup may have.245

GV’s diverse investments are illustrated by its recent exits.246

Under

Chesbrough’s framework, GV would be engaging in emergent investments.

The startups they invest in are outside their core business (Google) and

242

Id. 243

Since 2010, GV has invested in 135 seed-stage deals making it the fourth most

active seed investor among all venture capital investors. The 5 Most Active Seed Investors,

PITCHBOOK (May 2, 2016), http://pitchbook.com/newsletter/the-5-most-active-seed-

investors. 244

Brooker, supra note 35. 245

Id. 246

Google Ventures Teardown: The Most Active Corporate Venture Firm Slows Down,

CB INSIGHTS (July 21, 2015), https://www.cbinsights.com/blog/google-ventures-teardown/.



instead suggest future directions the company is heading.

Alphabet Inc., a Delaware corporation (“Alphabet”), is the public

holding company of Google.247

Alphabet’s Form 10-K for the fiscal year

ended December 31, 2015, states, “Google is not a conventional company.

We do not intend to become one . . . . [We] make smaller bets in areas that

might seem very speculative or even strange when compared to our current

businesses.”248

Prior to creating the Alphabet holding structure, the information on

GV and other business that were not a part of Google’s core advertising

business were nonexistent. Before Ruth Porat joined the company as Chief

Financial Officer, there was little to no information regarding Google’s

moonshots249

or how they would generate revenue.250

Now, under Ms.

Porat’s direction, revenues and earnings are divided into two categories:

247

In August 2015, Google announced plans to create Alphabet, a new public holding

company.

Alphabet is a collection of businesses—the largest of which, of course,

is Google. It also includes businesses that we combine as Other Bets

and generally are pretty far afield of our main Internet products such as

Verily, Calico, X, Nest, GV, Google Capital and Access/Google Fiber.

Our Alphabet structure is about helping businesses within Alphabet

prosper through strong leaders and independence.

Alphabet Inc., Annual Report (Form 10-K) (Feb. 11, 2016), at 24,

http://www.sec.gov/Archives/edgar/data/1288776/000165204416000012/goog10-

k2015.htm [hereinafter Alphabet Form 10-K] (listing businesses like Access/Google Fiber,

Calico, Nest, Verily, GV, Google Capital, X, and other initiatives under Other Bets).

In Alphabet’s Exhibit 21.01 of Form 10-K for the fiscal year ended December 31,

2015, filed on February 11, 2016, it only listed Google Inc. and Google Ireland Holdings as

subsidiaries. Alphabet Inc., Annual Report (Form 10-K): Exhibit 21.01 (Feb. 11, 2016),

http://www.sec.gov/Archives/edgar/data/1288776/000165204416000012/googexhibit2101

q42015.htm. A closer look into Google Inc. filings does not list GV as a subsidiary of

Google Inc. either. Google Inc., Annual Report (Form 10-K): Exhibit 21.01 (Feb. 11,

2016),

http://www.sec.gov/Archives/edgar/data/1288776/000128877615000008/goog20141231ex

hibit2101.htm. 248

Alphabet Form 10-K, supra note 247. 249

Moonshot “refers to a project or venture that is intended to have deep-reaching or

outstanding results after one heavy, consistent, and usually quick push.” Words We’re

Watching: Moonshot, MERRIAM-WEBSTER, http://www.merriam-webster.com/words-at-

play/moonshot-words-were-watching (last visited July 17, 2016). 250

Leena Rao, One Year in, Ruth Porat Remains Google’s Financial Disciplinarian,

FORTUNE (June 3, 2016, 1:15 PM), http://fortune.com/2016/06/03/ruth-porat-google/. Porat

stresses “discipline,” “efficiency,” and “rational” decisionmaking when discussing

investments in moonshots on earnings calls with financial analysts. Id.



Google and “Other Bets.”251

By reorganizing under the Alphabet umbrella,

Google separated its “core money-making operations from its research-

oriented and experiential ‘moonshots’ division.” 252

As a result, those

companies, called “Other Bets” need to find a way to become self-sufficient

from a financial perspective.253

Information on GV, along with a few other businesses that are not

part of Google’s core business, is reported under Other Bets—it includes

various operating segments that are characterized as not individually

material.254

Other Bets is mentioned thirty-five times in the Form 10-K,

primarily in the financial section.255

It is also under the heading of

“Moonshots.”256

Other Bets revenue is listed as $12 million in 2013, $327

million in 2014, and $448 million in 2015.257

It had operating losses of $527

million in 2013, $1.942 billion in 2014, and $3.567 billion in 2015.258

This

level of transparency has been transformative in the eyes of Wall Street and

shares of Google are up by more than forty percent by as of mid-September

2016.259

More specifically, in the risk factors section, Alphabet notes,

“Maintaining and enhancing the brands of both Google and Other Bets

251

Erin Griffith, Why Investors Love Alphabet’s New CFO, FORTUNE (Oct. 23, 2013,

11:54 AM), http://fortune.com/2015/10/23/google-alphabet-cfo-ruth-porat/. “For Google,

the restructuring created a more investor-friendly way to separate how the company reports

its financial results. Previously, Google reported its ad revenue, the bulk of its business, in

combination with sales from its riskier bets such as connected thermostat business Nest,

and . . . Google Fiber and self-driving cars.” Rao, supra note 250. “Alphabet now discloses

revenue and profits for two categories: Google and Other Bets. The Google bucket includes

not only the advertising business but also cloud services and Android. In the second quarter

of this year [2016], that bucket accounted for 99.1% of Alphabet’s $21.5 billion in revenue;

all the Other Bets, just 0.9%.” Griffith, supra note 251. 252

Griffith, supra note 251. 253

Id. “When investors see crazy, expensive-looking projects like self-driving cars,

Internet balloons and robots, they question Alphabet’s fiscal responsibility. That’s where

Porat’s Wall Street sensibility comes in.” Id. Ultimately, Ruth Porat’s push towards

increased transparency has helped increase Google's market value. In July 2015, after Ms.

Porat led her first earnings report, Google experienced a market value increase of $60

billion in one day—“the largest such gain ever for a U.S. company.” Id. 254

See id. 255

A search for “Other Bets” in the Form 10-K yielded thirty-five hits. 256

Alphabet Form 10-K, supra note 247, at 3. “The idea of trying new things is

reflected in some of our new, ambitious projects both within Google and Other Bets.” Id. 257

Id. “Revenues from the Other Bets is primarily derived through the sales of Nest

hardware products, internet and TV services through Google Fiber and licensing and R&D

services through Verily.” Id. at 95. 258

Id. at 95. 259

See Rao, supra note 250; Griffith, supra note 251.



increases our ability to enter new categories and launch new and innovative

products that better serve the needs of our users.”260

This statement

indicates the potential influence that GV’s investment in a particular startup

could have for the long-term goals of Alphabet.261

As described in the introduction of this Article, companies are

moving away from traditional R&D. This has certainly long been the case at

Google which uses a combination of acquisitions, corporate venture capital

and moonshots to develop the next great innovation.262

As an example,

Other Bets is included in the R&D analysis that has increased steadily over

the past few years.263

The amount of money allocated for R&D was $7.137

billion in 2013 (or 12.9 percent of R&D expenses as a percentage of

revenues), $9.832 billion in 2014 (or 13.9 percent of R&D expenses as a

percentage of revenues), and $12.282 billion (or 16.3 percent of R&D

expenses as a percentage of revenue) in 2015. Alphabet allocated $416

million to Other Bets in the fourth quarter of 2015.264

The only specific information about GV in Alphabet’s most recent

annual report was under the heading “Investments in Certain Private

Companies,” in Amendment No. 1 to Form 10-K for the fiscal year ended

December 31, 2015 (“2015 Amendment No. 1”). In the 2015 Amendment

No. 1, Alphabet disclosed, “GV directly invested an aggregate of

approximately $39.7 million in certain private companies from the

beginning of 2015 through January 31, 2016, in which Kleiner Perkins

Caufield & Byers was a co-investor or existing investor.”265

260

Alphabet Form 10-K, supra note 247, at 9. 261

GV is mentioned in Alphabet’s filings with the SEC, but it differs from most other

in-house CVC funds. “The firm makes its investments independent of its parent’s corporate

strategy. It can back any company it wants, whether or not it fits with Google’s plans. The

fund also can sell its stakes to whomever it wants, including Google competitors. Facebook

and Yahoo have bought startups funded by [GV].” Brooker, supra note 35. 262

Alphabet's nightmare is that it becomes the next Yahoo or Nokia—past tech

bellwethers that got left behind as their respective industries evolved and they failed to

innovate. Griffith, supra note 251. 263

Alphabet Form 10-K, supra note 247, at 32. 264

Id. at 79. 265

Alphabet Inc., Annual Report (Form 10-K): Amendment No. 1 (Mar. 29, 2016), at

31,

http://www.sec.gov/Archives/edgar/data/1288776/000119312516520367/d133613d10ka.ht

m. It went on to further state:

KPCB Holdings, Inc., as nominee for certain funds of Kleiner Perkins

Caufield & Byers and several of the managers of the fund, holds more

than 10% of the outstanding shares of such private companies. L. John

Doerr, who is a member of our Board of Directors, is a managing

director/member of the managing members of those funds and the



In Exhibit 99.1 of Form 8-K filed on April 21, 2016, for the three

months ended March 31 2016, the revenues (unaudited) for Other Bets was

$166 million and the operating loss (unaudited) was $802 million; for the

three months ended March 31, 2015, the revenues (unaudited) for Other

Bets was $80 million and the operating loss (unaudited) was $633

million.266

Other Bets was mentioned fourteen times in the exhibit.267

Even

though Other Bets is mentioned quite a few times, the information is not

clear and it is difficult to discern the future goals of Alphabet regarding

investments in private companies. Accordingly, employees (who will

become stockholders once they exercise their stock options or receive their

restricted stock units), investors, and potential investors do not have a clear

idea of GV’s role within Alphabet despite the fact that GV is prominent in

so many different deals at different stages of the lifecycle of a company

across many sectors (i.e., not just technology).268

Although Alphabet is a

better model of transparency than the other public companies discussed

below, it could still improve with respect to the information it provides on

GV. Alphabet should give its employees and stockholders more specific

information on GV since the number of investments that GV makes are

only increasing. Furthermore, GV invests in startups not related to the core

business of the parent company (and, in fact, may only be tangentially

related). Finding the cure for cancer or lengthening a human being’s

lifespan may be laudable goals, but they are not central to the mission of

Alphabet. 269

By taking the step of reporting “Other Bets” separately, we

can surmise that Alphabet must have determined that the information rose

to the level of materiality. Although Alphabet specifies that the individual

segments within “Other Bets” are not material, additional disclosure would

be helpful in understanding why GV chooses to make investments in certain

industries and how it fits in with Alphabet’s goals going forward or at least

to have more information about it when presenting such information in the

general partner of the general partners of certain Kleiner Perkins

Caufield & Byers funds. John does not have a material interest in any

of the transactions described above.

Id. 266

Alphabet Inc., Current Report (Form 8-K) (Apr. 21, 2016),

http://www.sec.gov/Archives/edgar/data/1652044/000165204416000015/goog8-

kq12016.htm. 267

Google is presented as a separate segment and all other Alphabet businesses,

including Google Ventures, are under “Other Bets.” 268

See generally GV, PITCHBOOK, https://my.pitchbook.com/#page/profile_178611086

[hereinafter GV PitchBook Report] (last visited July 18, 2016). 269

See generally Brooker, supra note 35 (discussing the various types of investments

that GV makes).



financial statements. One way to accomplish this is to present information

in a tabular format which incorporates the information below.

As of November 2016, GV has $660 million in assets under

management of which $163 million is “dry powder.”270

In addition, they

have a total of 520 investments (239 of which are active) and sixty-eight

professionals working for GV.271

According to a PitchBook report, GV’s

investment preferences are as follows: (1) preferred investment amount is

between $0.25 million to $50 million; (2) they prefer a minority stake; (3)

they prefer to originate a deal; (4) they will lead a deal; and (5) they will

syndicate.272

This information, however, was not available in any SEC

filing, but through PitchBook, a comprehensive database that provides

information and analytics about investments.273

However, this database is a

resource that is only available through a paid subscription and is not

available to (or affordable for) everyone. Having this type of information

would be helpful in SEC filings as it more precisely describes the scope of

Alphabet’s corporate venture capital activity and gives investors (current or

potential) and employees better insight into how CVC money is spent.

Although not required by law to report such information for the benefit of

startups, more transparency helps startups that GV invests in or is

considering investing in, a better understanding of how they fit into GV’s

long-term strategy.

In September 2016, GV invested in a number of startups. The

investments included $170 million in the Series A round of Compass

Therapeutics, a therapeutics research and development company; $20

million in the Series B round of Gametime United, a mobile sports ticketing

application developer; and $181 million in the Series C round of Carbon, a

3D printing technology.274

Like the information about the amount of assets

GV has under management for its corporate venture capital activities, the

information about GV’s investments are only available through PitchBook

which institutional investors may have access to, but not individual

270

See GV PitchBook Report, supra note 268. Dry powder is defined as “a slang term

referring to marketable securities that are highly liquid and considered cash-like.” Dry

Powder, INVESTOPEDIA, http://www.investopedia.com/terms/d/drypowder.asp (last visited

May 16, 2016). 271

See GV PitchBook Report, supra note 268. 272

See id. 273

See generally PITCHBOOK, https://pitchbook.com/ (last visited May 16, 2016). The

report generated by PitchBook’s Platform also contains information on the parent and sister

companies of GV, all investments, exits and co-investors, stated investment preferences,

service providers, and related news. See GV PitchBook Report, supra note 268. 274

GV PitchBook Report, supra note 268.



investors. Alphabet may consider incorporating this more specific

information into its periodic reports in tabular format as it gives more

context to the information it currently provides on its CVC investments.

2. Intel Capital Corporation Case Study

Intel Capital Corporation, a Delaware corporation (“Intel Capital”)

and wholly-owned subsidiary of Intel Corporation, a Delaware corporation

(“Intel”)275

is one of the most prolific investors in the corporate venture

capital world. Under Chesbrough’s framework, Intel Capital is making

enabling investments. It invests in startups that will expand the ecosystem

of companies that use Intel Corporation’s products. Despite that fact, Intel’s

most recent Form 10-K mentioned Intel Capital just once276

and there is an

oblique reference to investments in the risk factors section.277

Since it began

in 1991, “Intel Capital has invested about $11.6 billion in more than 1,440

companies in 57 countries across a range of sectors including security,

wearable technology and digital media, according to the company’s

website. It is also the leading investor (among institutional venture capital

investors and CVCs) in certain areas, such as the cybersecurity space.278

In

275

Intel Corp., Annual Report (Form 10-K): Exhibit 21.1 (Feb. 12, 2016),

http://www.sec.gov/Archives/edgar/data/50863/000005086316000105/ex21112262015q4.h

tm. 276

Intel Capital is mentioned under the subheading “Acquisitions and Strategic

Investments” in the “Company Strategy” section. Intel Corporation, Annual Report (Form

10-K) at 3, (Feb. 12, 2016),

http://www.sec.gov/Archives/edgar/data/50863/000005086316000105/a10kdocument1226

2015q4.htm [hereinafter Intel Corporation Form 10-K]. 277

In the “Risk Factors” section under the subheading, “We are subject to risks

associated with transactions[,]” Intel states:

We invest in companies for strategic reasons and may not realize a return on our

investments. We make investments in public and private companies around the

world to further our strategic objectives and support key business initiatives.

Many of the instruments in which we invest are non-marketable at the time of our

initial investment. Companies in which we invest range from early-stage

companies still defining their strategic direction to mature companies with

established revenue streams and business models. The success of our investment

in any company is typically dependent on the availability to the company of

additional funding on favorable terms, or a liquidity event, such as a public

offering or acquisition. If any of the companies in which we invest fail, we could

lose all or part of our investment. If we determine that an other-than-temporary

decline in the fair value exists for an investment, we write down the investment to

its fair value and recognize a loss.

Id. at 26. 278

The Most Active Cybersecurity VC Investors and their Investments in One

Infographic, CB INSIGHTS (Aug. 3, 2016), https://www.cbinsights.com/blog/cybersecurity-

most-active-investor-infographic/.



addition, Intel has invested heavily in the drone space and is the top CVC

investor in the robotics realm.279

Last year, the unit invested $514 million in

143 companies, split almost evenly between new ventures and follow-on

investments.”280

The value of Intel Capital’s entire investment portfolio is

worth significantly more than that, however, as only a portion of it is

rumored to be worth over $1 billion.281

Intel’s R&D as a percentage of net

revenue was 21.9 percent or $12.128 billion.282

Intel Capital has been at the forefront of venture capital investments

in newer areas, such as the Internet of Things (“IoT”); it has invested in

seventeen IoT deals since 2010.283

It has been quite active in the drone

space as well.284

Intel’s corporate venture capital investments are discussed

in three sections in its Form 10-K: Risk Factors; Management’s Discussion

and Analysis of Financial Conditions and Results of Operations; and

Consolidated Financial Statements, but it doesn’t tie in those investments to

Intel Capital.285

It states in part, “We regularly invest in non-marketable

equity instruments of private companies, which range from early-stage

companies that are often still defining their strategic direction to more

279

See E-mail Newsletter from Anand Sanwal, CEO & Co-Founder, CB Insights, to

CB Insights subscribers (Oct. 6, 2016, 4:05 PM) (on file with author). 280

Porter, supra note 150. Intel Capital is also the second most active VC investor for

the time period of 2011–June 15, 2016 in artificial intelligence startups. GV follows close

behind in fourth place. E-mail Newsletter from Anand Sanwal, Chief Executive Officer &

Co-Founder, CB Insights, to CB Insights subscribers (June 25, 2016, 7:31 AM) (on file

with author). 281

Porter, supra note 150. 282

Intel Corporation Form 10-K, supra note 276, at 40. 283

Internet of Things refers to the “concept of . . . connecting any device with an on

and off switch to the Internet (and/or to each other).” Jacob Morgan, A Simple Explanation

of “The Internet of Things”, FORBES: LEADERSHIP (May 13, 2014, 12:05 AM),

http://www.forbes.com/sites/jacobmorgan/2014/05/13/simple-explanation-internet-things-

that-anyone-can-understand/. Since 2010, 844 investors have participated in at least one

IoT deal; $1.22 billion was invested in 199 deals. Bowden, supra note 190. Two other

CVCs were in the top five for IoT investments: Cisco Investments was tied with Kleiner

Perkins Caufield & Byers for second place and Qualcomm Ventures was tied for fifth place

with Kima Ventures. See id. 284

Intel Capital, Airware’s Commercial Drone Fund (a venture arm for Airware, a

drone startup), and GV were tied for second most active CVCs. See Qualcomm, Intel, and

Google Ventures Among the Top Corporates Betting on Drones, CB INSIGHTS (May 10,

2016), https://www.cbinsights.com/blog/drone-startups-corporate-investment/. Qualcomm

Ventures was also noted as another corporate venture arm increasingly active in the drone

space; it was ranked the top CVC in this space. See id. In 2012, only one CVC participated

in a drone-related startup; by 2015 the number of deals had dramatically increased. See id.

Most of the more recent deals were focused on seed or Series A stages (partially because

there were no later stage deals since it is a relatively new area of investment). See id. 285

Intel Corporation Form 10-K, supra note 276, at 26, 34–35, 61–122.



mature companies with established revenue streams and business

models.”286

Intel reported that the carrying value of its non-marketable

equity investment portfolio amounted to $4.5 billion as of December 26,

2015287

and specified that such investments were “classified within other

long-term assets on the consolidated balance sheets.”288

A number of items

falls under long-term assets and after reviewing the Form 10-K several

times, the author discovered that the information about CVC investments

was buried in the equity method investments289

line item under “Other

Long-Term Assets” and grouped with equity investments.290

Other than the

mention of Intel Capital’s investment in Cloudera, a private company, there

was no discussion of any other investments in private companies.

Although Intel did provide some information about its investments

in private companies, it is somewhat opaque and obscure. In order for the

information about corporate venture capital investments to be helpful to its

investors, Intel should specify the amount of money allocated to Intel

Capital in a given year, the amount of assets under management Intel

Capital has in total, losses and profits on an annual and quarterly basis, and

the types of industries and companies Intel Capital invested in during those

time periods. Including the aforementioned information in a tabular format

would be helpful as Intel Capital’s CVC investments appear to play a

significant role in Intel’s strategic direction based on the research conducted

for purposes of this Article.

Intel Capital has $1.30 billion in assets under management and a

total of 1,530 investments (636 of which are active).291

There are eighty-

nine professionals who work at Intel Capital, and a management team that

oversees it.292

As was the case with GV, the most pertinent information

came from a non-publicly available source. A snapshot of what may be

included in annual or quarterly reports could also include the types of deals

286

Intel Corporation Form 10-K, supra note 276, at 34. 287

This number excludes equity derivatives. Id. 288

Id. 289

The equity method “is an accounting technique used by firms to assess the profits

earned by their investments in other companies.” Equity Method, INVESTOPEDIA,

http://www.investopedia.com/terms/e/equitymethod.asp (last visited Dec. 18, 2016). It is

commonly used “when one company has significant influence over another. When a

company holds approximately 20 to 25 percent or more of another company's stock, it is

considered to have significant control, which signifies the power one company can exert

over another company. This power includes representation on the board of directors.” Id. 290

Id. at 91. 291

Intel Capital, PITCHBOOK, https://my-pitchbook-com /#page/profile_402709779

[hereinafter Intel Capital PitchBook Report] (last visited July 18, 2016). 292

See id.



that GV entered into. This is not confidential information as the media

reports on it. As an example, in October 2016, Intel Capital invested at least

$160 million in fourteen different ventures, including $9 million in the later

stage Series A round of Kinduct Technologies, a health and fitness software

company, and $15.2 million in the later stage Series E round of InContext

Solutions, an 3D virtual simulation company.293

3. Campbell Soup Company Case Study

The food industry is undergoing tremendous change right now—

some even say a revolution.294

Every year, an increasing number of new

products proliferate the marketplace.295

The dollar amount corporate

venture capital invested in the consumer packaged goods (“CPG”) space

increased by a multiple of eight from 2011 to 2015 and the largest corporate

players are playing a large role.296

More than $6 billion in funding has been

invested in 400 food startups since 2010.297

Unsurprisingly, the top

acquirers of these startups are large corporations.298

293

See id. 294

“‘The food industry is in a time of revolution,’ said Campbell Soup President and

CEO Denise Morrison.” Brian Sozzi, Amid Food Revolution, Campbell Starts $125 Million

Venture Fund, THESTREET (Feb. 17, 2016, 1:08 PM),

http://www.thestreet.com/story/13461909/1/amid-food-revolution-campbell-soup-starts-

125-million-venture-fund.html. “Referring to the packaged-food industry as being in the

middle of a ‘period of revolutionary change,’ Chief Executive Officer Denise Morrison . . .

cited major cultural changes, changes in the size of American households, and a

growing movement toward simpler foods and organics.” Brian Sozzi, Campbell’s Soup

CEO: “I Have Never Seen Industry Conditions Like Today,” THESTREET, (July 22, 2015,

7:36 PM), http://www.thestreet.com/story/13227872/1/campbells-soup-ceo-i-have-never-

seen-industry-conditions-like-today.html. 295

See CB INSIGHTS WEBINAR: THE CHANGING LANDSCAPE OF CONSUMER PACKAGED

GOODS: WHAT’S CHANGING TODAY, WHO’S DOING IT, AND WHAT THE FUTURE HOLDS

(May 3, 2016), slide 40, http://www.slideshare.net/CBInsights/the-changing-landscape-of-

consumer-packaged-goods/ [hereinafter CB INSIGHTS WEBINAR] (graph showing increase

in new food and non-food products in the consumer packaged goods space). 296

Big CPG Corporates: Where They’re Investing in Food, Personal Care, Tech, and

More, CB INSIGHTS (Apr. 26, 2016), https://www.cbinsights.com/blog/consumer-

packaged-goods-startup-bets/ (mentioning Coca-Cola Company, Unilever, General Mills,

and Anheuser-Busch as active investors in and acquirers of private companies with a

quarter of the investments in private companies by these players to seed, angel, or Series A

rounds and 60 mergers and acquisition transactions from 2011 to 2015). 297

Annie Gasparro, Campbell Invests $125 Million in Project to Fund Food Startups,

WALL ST. J. (Feb. 17, 2016, 9:09 PM), http://www.wsj.com/articles/campbell-invests-125-

million-in-project-to-fund-food-startups-1455750400. 298

CB INSIGHTS WEBINAR, supra note 295, at slide 19. Note that innovation in the

CPG space does not come from R&D; compared to advertising costs, R&D is a small

expenditure. Id., at slide 28. Interestingly, CPG corporates (not necessarily CVCs)

http://www.statista.com/statistics/183648/average-size-of-households-in-the-us/



To cite one example of this change, this Article will discuss how

Campbell Soup Company, a New Jersey corporation (“Campbell Soup”),

became involved in corporate venture capital. In an attempt to innovate in

the ever-competitive CPG space, in the spring of 2015, under its Bolthouse

Farms brand, Campbell Soup launched fourteen new products (both

beverages and dressings) and also announced plans to expand its 1915

organic fresh pressed juice brand.299

Prior to that, in August 2015, Campbell

Soup launched three new organic, non-genetically modified chicken noodle

varieties aimed at kids.300

Despite these efforts to make themselves relevant,

Campbell Soup decided that it needed to innovate in a different way.

In February 2016, Campbell Soup announced the formation of Acre

Venture Partners, a Delaware limited partnership (“Acre Venture Partners”)

that was formed to make venture capital investments in innovative new

companies in food and food-related industries. Campbell Finance 2 Corp.,

an indirect wholly-owned subsidiary of Campbell, is the sole limited partner

of Acre Venture Partners.301

Under Chesbrough’s framework, Campbell

Soup makes driving investments meaning that its investments in CPG

startups are tightly linked to its strategic and operational goals.

The fund is managed by its general partner, Acre Ventures GP,

limited liability company (“LLC”), which is independent of Campbell

Soup.302

Jeff Dunn, president of the company’s Campbell Fresh division, is

the Campbell Soup representative on the investment committee of Acre.303

Campbell Soup agreed to make a $125 million capital commitment to Acre

Venture Partners, which was formed to make venture capital investments in

innovative new companies in food and food-related industries.304

increasingly invested in CPG startups in 2014, 2015 and Q1 ’16 once non-CPG corporates

such as GV and Comcast Ventures did so. CPG is Still Hot: 100+ Deals in Q1’16,

Corporates Participate More, CB INSIGHTS (May 15, 2016),

https://www.cbinsights.com/blog/cpg-startup-financing-q1-2016/. 299

Sozzi, Amid Food Revolution, supra note 294. 300

Sozzi, Campbell’s Soup CEO, supra note 294. 301

Sozzi, Amid Food Revolution, supra note 294. 302

Id. 303

Id. 304

Id.; see also Campbell Soup Company, Quarterly Report (Form 10-Q) (June 7,

2016), at 20, https://www.sec.gov/Archives/edgar/data/16732/000001673216000124/cpb-

512016x10q.htm (noting that through May 1, 2016, Campbell Soup funded $26 million of

the $125 million capital commitment and that the company has no further financial

obligations to Acre Venture Partners except for the remaining $99 million).



As an example of some recent investments of Acre Venture

Partners, in July and August 2016, it invested $12.7 million in the later

stage Series C round of Sample6, a biotechnology company developing

synthetic bacteria to discover food contamination; $20 million in the early

stage round of Farmers Business Network, an analytic and data

management company for farms; and $10 million in the Series A round of

Back to the Roots, a specialty home growing kits company.305

By creating a corporate venture capital arm, Campbell Soup is

positioning itself to be a part of the food revolution for healthier foods.

General Mills, Inc., a Delaware corporation306

and a competitor of

Campbell Soup, had started developing newer products through one of its

business units, 301 Inc., to address consumers’ desire for healthy foods.

Ultimately, however, 301 Inc. shifted its focus away from internal R&D to

investments in regional startups.307

Kellogg Company also recently

launched a “food tech-focused venture fund” called Eighteen94 Capital.308

Interestingly, Campbell, Kellogg and General Mills each have

corporate venture capital arms set up in different ways; each company

largely focuses on making investments in traditional food startups. In

October 2016, Campbell Soup became the sole investor in Habit, a

nutrition-focused startup that tailors personal nutrition recommendations

305

Acre Venture Partners, PITCHBOOK, https://my.pitchbook.com/#page

/profile_1981226419 (last visited Nov. 7, 2016). 306

See generally General Mills, Annual Report (Form 10-K) (July 6, 2015),

http://www.sec.gov/Archives/edgar/data/40704/000119312515245476/d947722d10k.htm

(highlighting material information regarding General Mills). 307

In July 2015, General Mills implemented a new strategy for one of its business

units, 301 Inc. See John Kell, General Mills is Starting a VC for Food Startups, FORTUNE

(Oct. 22, 2015, 8:34 AM), http://fortune.com/2015/10/22/general-mills-vc-small-food/. 301

Inc. had existed for three years and was originally intended to develop small, disruptive

brands internally—now, the plan is for 301 Inc. to invest in small regional startups that

seek capital to grow. See id. John Haugen, vice president and general manager of 301 Inc.

stated, “We have found that more and more innovation was coming from small companies .

. . . There were ways for us to partner and provide growth capital.” Id. (internal quotations

omitted). There are three factors that will be considered by 301 Inc. when it considers

whether to invest in a startup: (1) gives General Mills an opportunity to compete in new

categories; (2) allows certain deals to be structured in a way that would allow General

Mills to acquire the startup in the future; and (3) meets certain financial metrics and goals.

See id. (author noted that being an early investor and nurturing the brand of a startup is

much cheaper than having to pay hefty price tags on acquisitions such as General Mills’

acquisition of the natural food company, Annie’s, for $820 million in 2014). 308

E-mail Newsletter from Marcelo Ballve, Research Director, CB Insights, to CB

Insights subscribers (June 24, 2016, 11:26 AM) (on file with author).



based on a person’s body biology.309

This new investment deviates from

how Campbell Soup’s competitors are investing. In addition, Campbell

Soup invested right off of its balance sheet instead of its CVC arm.310

This

indicates a shift away from a driving investment model to one that may be

more appropriately characterized as emergent because Campbell Soup is

trying to predict where future trends may be headed so that it can position

itself to pivot accordingly.

The structure of Campbell’s corporate venture capital arm is distinctly

different than the other CVCs mentioned so far. First, although Acre

Venture Partners is funded by Campbell Soup, the fund is being managed

by a general partner outside of the parent company, Acre Ventures GP.311

Second, the sole limited partner of Acre Venture Partners is a wholly-

owned subsidiary of Campbell Soup.312

The structure suggests that

Campbell Soup313

may want to operate in stealth mode as it makes

investments in private companies—at least not until it strategically makes

sense for the parent company to do so. Note 15 to the Consolidated

Financial Statements in Campbell Soup’s Form 10-K provides details on its

$125 million capital commitment to Acre. It states that Campbell Soup’s

“share of earnings (loss) is calculated according to the terms of the

partnership agreement. Acre is a [variable interest entity].”314

Campbell

Soup characterizes the third party ownership as a noncontrolling interest.315

As is the case with the previous examples, the parent company reports very

basic information about its corporate venture capital investment activity, but

not enough for the investor to get an understanding of what its purpose is.

The only way one may glean that information is to read information from

309

John Kell, Campbell Soup Invests in Nutrition Tech Startup, FORTUNE (Oct. 26,

2016, 2:23 PM), http://fortune.com/2016/10/26/campbell-soup-invests-habit/. Habit “uses

data from an at-home test kit to make personalized food recommendations tailored to an

individual’s unique DNA.” Id. Denise Morrison, Campbell CEO and President said,

“Campbell’s investment is part of our broader efforts to define the future of food, which

requires fresh thinking, new models of innovation, smart external development, and

venture investing to create an ecosystem of innovative partners.” Id. 310

In doing CVC research, it was never made clear why certain companies invested off

their balance sheets versus a stand-alone corporate venture capital arm. 311

Campbell Soup Company, Annual Report (Form 10-K) (Sept. 20, 2016), at 62,

https://www.sec.gov/Archives/edgar/data/16732/000001673216000146/cpb-

7312016x10xk.htm [hereinafter Campbell Soup Co. Form 10-K]. 312

Id. 313

As of December 18, 2016, Campbell Soup Company had a market cap of $18.28

billion. Campbell Soup Company (CPB), YAHOO! FINANCE,

http://finance.yahoo.com/q?s=CPB (last visited Dec. 18, 2016). 314

See Campbell Soup Co. Form 10-K, supra note 311, at 62. 315

See id.



non-publicly available sources or scouring media websites.

4. Well Ventures, LLC Case Study

Well Ventures, a Delaware LLC (“Well Ventures”), is a subsidiary

of Walgreens Boots Alliance, Inc. (“Walgreens”),316

“a global pharmacy-led

wellbeing enterprise.”317

Well Ventures either has board or observer seats in

its portfolio companies and typically invests up to $5 million in such

companies.318

Under Chesbrough’s framework, Walgreens engages in

driving investments because its investments are tightly linked to its

operations and strategies. They prefer to exit within four to eight years.319

While there are vague references to strategic investments, Well Ventures320

is not mentioned in Walgreen’s Form 10-K or Form 10-Q.321

Instead, the

only information Walgreens provides regarding its growth strategy that

could be interpreted as disclosure related to Well Ventures is that it invests

in businesses that are complementary to their own businesses or that can

further their growth strategies.322

The Form 10-K then states that these

316

Walgreens Boots Alliance, Annual Report (Form 10-K): Exhibit 21 (Oct. 28, 2015),

https://www.sec.gov/Archives/edgar/data/1618921/000114036115038791/ex21.htm. 317

Walgreens Boots Alliance, Annual Report (Form 10-K) (Oct. 28, 2015),

https://www.sec.gov/Archives/edgar/data/1618921/000114036115038791/form10k.htm

[hereinafter Walgreens Form 10-K]. There are three different segments of its operations:

Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale. See

Section 19, Segment Reporting, for additional discussion. By way of background, “[o]n

December 31, 2014, Walgreens Boots Alliance became the successor of Walgreen Co.

(‘Walgreens’) pursuant to a merger designed to effect a reorganization of Walgreens into a

holding company structure (the ‘Reorganization’).” Walgreens Form 10-K, supra note 317,

at 54. As a result, “Walgreens became a wholly-owned subsidiary of Walgreens Boots

Alliance, a newly-formed Delaware corporation, and each issued and outstanding share of

Walgreens common stock, par value $0.078125, converted on a one-to-one basis into

Walgreens Boots Alliance common stock, par value $0.01.” Id. 318

Company Overview of Well Ventures, BLOOMBERG,

http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=266098258

(last visited May 15, 2016). 319

See id. 320

See supra note 3 and accompanying text (discussing Well Ventures generally). 321

See generally Walgreens Boots Alliance, Inc., Quarterly Report (Form 10-Q) (July

6, 2016),

https://www.sec.gov/Archives/edgar/data/1618921/000114036116071838/form10q.htm;

Walgreens Form 10-K, supra note 317. 322

The full text of the relevant section reads:

Our growth strategy is partially dependent upon acquisitions, joint ventures

and other strategic investments, some of which may not prove to be successful.

We have grown, in part, through acquisitions in recent years and expect to

continue to acquire or invest in businesses that build on or are deemed

complementary to our existing businesses or further our growth strategies. . .



strategic investments involve risk and may materially adversely affect

Walgreens business operations, financial condition or results of

operations.323

In short, the disclosure in the Form 10-K does not give the

investor or potential investor any idea about the role that Well Ventures

plays in the parent company. Walgreens acknowledges that its strategic

investments may materially adversely affect Walgreens. Therefore,

disclosure about how much Walgreens is investing as well as what it is

investing in would be prudent and material.

As is the case with the other public companies discussed, Walgreens

has a significant market cap—$92.89 billion.324

Well Ventures has not

publicly disclosed the amount allocated to it from Walgreens.325

In addition,

one cannot merely look at the dollar amount to determine what type of

influence or impact the CVC is having on the parent company as a whole.

Well Ventures differs from GV and Acre Venture Partners in that it is a

subsidiary of Walgreens (like Intel Capital). The venture capital portfolio of

Well Ventures has over a dozen companies across its focus areas; however,

for “strategic reasons,” Well Ventures does not publicize all of them.326

If a

deal is admittedly strategic to (presumably) the parent company, then it

Acquisitions, joint ventures and strategic investments involve numerous other

risks, including potential exposure to unknown liabilities, as well as undetected

internal control, regulatory or other issues, or additional costs not anticipated at

the time the transaction was completed. No assurance can be given that our

acquisitions, joint ventures and other strategic investments will be successful and

will not materially adversely affect our business operations, financial condition or

results of operations.

Walgreens Form 10-K, supra note 317, at 16 (emphasis omitted). 323

See id. 324

Walgreens Boots Alliance, Inc., YAHOO! FINANCE,

http://finance.yahoo.com/q?s=WBA (last visited Dec. 18, 2016). 325

Despite thorough research into the amount allocated to Well Ventures, the author

was unable to locate this information. 326

See Portfolio Companies, WALGREENS: WELL VENTURES,

http://www.walgreens.com/topic/well-ventures/portfolio-companies.jsp (last visited May

10, 2016). Well Ventures lists some of the startups it has invested in, along with a

description of what the startup does, on this page of its website. It also notes which of the

startups have been acquired and by whom they were acquired. The web page does not,

however, list the amount of Well Ventures’ investment. “[Well Ventures’] portfolio

companies include such ventures as the creator of a consumer sleep apnea device, and a

solar energy company that specializes in the energy needs of multi-site retailers.” Quittner,

supra note 4. Well Ventures can be the lead for a financing or part of a syndicate; they

prefer co-investing with institutional investors that they collaborate with. Evaluation

Criteria, WALGREENS: WELL VENTURES,

https://web.archive.org/web/20151026172717/http://www.walgreens.com/topic/well-

ventures/evaluation-criteria.jsp (archived Oct. 26, 2015). For each portfolio company, Well

Ventures requests board observer seats. Id.



logically follows that the investments Well Ventures makes could

potentially play a critical role for Walgreens and are therefore material.

Accordingly, Well Ventures should—at a minimum—be mentioned in the

SEC filings as appropriate. Even a brief paragraph flagging its existence

would be helpful so that investors know what function the CVC serves in

the larger vision for Walgreens.327

It could be the case that CVCs fall under

“equity method investments” or “noncontrolling interests.”328

It is difficult

to tell since the information is not broken out. In addition, in Walgreens’

Form 10-K for the fiscal year ended August 31, 2016, there is a reference to

equity investments in other companies in its “Risk Factors” section. “From

time to time, we make debt or equity investments in other companies that

we may not control or over which we may not have sole control.”329

It also

acknowledges the risks of operating in businesses which differ from their

primary lines of business or which operate in different geographic

markets.330

Furthermore, Walgreens states that it relies on the internal

controls and financial reporting controls of these companies in which they

have noncontrolling interests and that such entities “failure to maintain

effectiveness or comply with applicable standards may materially and

adversely affect [them].”331

Since Walgreens agrees that the companies in

which it has noncontrolling interests (i.e., CVC investments) may materially

and adversely affect it, from a legal standpoint it follows that Walgreens

should provide more disclosure on these companies as they may meet the

level of materiality. As specified in earlier examples, Walgreens could

specify the industries in which it invests in and the total amount it has

invested. For strategic reasons, the company may not want to specify which

companies its investing in, but to the extent that that information is already

available in the media or otherwise it would be prudent to disclose that

information in the relevant periodic report so that all investors have access

to that information not only the investors that have the resources to compile

such information on their own.

327

Walgreens partnered with Theranos, a high-flying unicorn which was valued at

over $9 billion in 2014. The blood-testing company now faces several lawsuits from

patients and investors, and the SEC is investigating Theranos. See Brian Gormley,

Investors Revisit Due Diligence in Wake of Theranos, WALL ST. J. (July 20, 2016). The

extent of Walgreen’s participation in Theranos is unclear, but Walgreens has filed a civil

lawsuit against Theranos to recoup its investment. Christopher Weaver, et al., Walgreen

Sues Theranos, Seeks $140 Million in Damages, WALL ST. J. (Nov. 8, 2016, 5:47 PM),

http://www.wsj.com/articles/walgreens-seeks-to-recover-140-million-investment-from-

theranos-1478642410. 328

Walgreens Form 10-K, supra note 317 at 54. 329

Id. at 15. 330

Id. 331

Id.



5. General Motors Ventures Case Study

The year 2015 was a record year for financing deals for automotive-

related startups.332

Funding increased by 154% and deals saw a jump of

58%.333

The amount of investments into private companies in the auto tech

space has already surpassed the total amount of funding in 2015 and is on

track to reach the $1 billion mark.334

In order to secure their own futures

while simultaneously addressing challenges such as the rise of electric

vehicles and driverless cars, major auto manufacturers have become active

investors in venture capital deals.335

General Motors Company, a Delaware

corporation (“General Motors”), along with the rest of the auto industry, is

in a transformative time, moving from manufacturing and selling cars to the

business of mobility.336

In 2010, General Motors established a Delaware subsidiary, General

Motors Ventures LLC (“GM Ventures”)337

for the purpose of pursuing

332

Big Auto’s Startup Bets: Where They’re Investing Across AI, Mapping, Automation,

and Materials, CB INSIGHTS (May 11, 2016), https://www.cbinsights.com/blog/auto-

corporates-investing-startups/. Major automakers are playing defense as startups encroach

on their territory. See E-mail Newsletter from Kerry Wu, Auto Tech Industry Analyst, CB

Insights, to Auto Tech Insights by CB Insights subscribers (July 14, 2016, 7:29 PM) (on file

with author). Companies are fighting back by actively investing in autotech startups

through CVCs or the parent companies themselves to the tune of $450 million as of June

2016. See id. A record-breaking year in investments is a strong possibility if the current

pace of investment continues. 333

Foot on the Gas: 2015 Sets Record for Deals in Auto Tech, CB INSIGHTS (Apr. 1,

2016), https://www.cbinsights.com/blog/auto-tech-startups-funding-2015/. Autotech

startups are on a record-breaking pace for funding. For the first half of the year, $450

million was invested in this area. Recently, one of General Motors’ rivals, Ford, invested

$6.6 million in a startup. Gina Hall, Autotech Startups Set a Record Pace for Funding in

2016, SILICON VALLEY BUS. J.: SILICON VALLEY TECHFLASH (July 18, 2016, 12:01 PM),

http://www.bizjournals.com/sanjose/blog/techflash/2016/07/autotech-startups-set-a-record-

pace-for-funding.html. 334

E-Mail Newsletter from Kerry Wu, Auto Tech Industry Analyst, CB Insights, to

Auto Tech Insights by CB Insights subscribers (Oct. 20, 2016, 7:11 PM) (on file with

author). 335

See Foot on the Gas, supra note 333. 336

Erin Griffith, Driven in the Valley: The Startup Founders Fueling GM’s Future,

FORTUNE (Sept. 22, 2016, 6:30 AM), http://fortune.com/cruise-automation-general-motors-

driverless-cars/?iid=leftrail. Startups don’t “adapt well to the politics of slow-moving, risk-

averse corporations. Once their life’s work begins to feel like a job, a switch goes off in

their brains. Some leave to start their next company. Others ‘vest in peace.’ Whatever

innovative thing they built gets lost inside a giant corporate overlord.” Id. 337

General Motors Co., Annual Report (Form 10-K): Exhibit 21 (Feb. 3, 2016),

https://www.sec.gov/Archives/edgar/data/1467858/000146785816000255/ex-



venture capital investments in the automotive cleantech, infotainment,

advanced materials, and other automotive-related technologies space.338

As

of July 2016, GM Ventures made twenty-seven investments and used

almost ninety percent of their $200 million fund.339

Under Chesbrough’s

framework, General Motors would be making both enabling and emergent

investments. General Motors is making strategic investments as well as

innovating in what it anticipates the future direction of the automotive

industry may lie. General Motors and its corporate venture capital arm, GM

Ventures, have been the most active of the automotive manufacturers.340

Their investments range from early stage to late stage, and the fund has

eight professionals.341

General Motors, like Campbell Soup, also makes

investments directly.342

In January 2016, it invested $500 million in Lyft in

a Series F financing where it was the sole investor.343

In describing its

venture capital investments, General Motors has a line item for private

equity and debt investments344

in its Form 10-K for the year ended

December 31, 2015, which notes $529 million in this category for the year

ended December 31, 2015, compared to $509 million for the year ended

December 31, 2014345

—an increase of $20 million. It is difficult to

ascertain whether GM Ventures is included as part of that number since

there are no specific references to it. In the “Notes to Consolidated

Financial Statements” of the Form 10-K, there is also a brief reference to

venture capital: “Private equity and debt investments primarily consist of

investments in private equity and debt funds. These investments provide

21x12312015.htm [hereinafter General Motors Form 10-K].

338 See About Us, GM VENTURES LLC, http://www.gmventures.com/about/index.jsp

(last visited May 10, 2016). 339

There is $23.90 million in dry powder as of July 18, 2016. General Motors

Ventures, PITCHBOOK, https://my-pitchbook-com /#page/profile_1820009183 [hereinafter

General Motors PitchBook Report] (last visited July 18, 2016). 340

Big Auto’s Startup Bets, supra note 332. 341

See id.; but cf. About Us, GM VENTURES LLC,

http://www.gmventures.com/about/index.jsp (last visited May 10, 2016) (listing only five

investment professionals). 342

See General Motors Company, Quarterly Report (Form 10-Q) (Apr. 21, 2016), at

19, 21, 32, 33.

http://www.sec.gov/Archives/edgar/data/1467858/000146785816000317/gm2016q1.htm

(noting General Motor’s $500 million investment in Lyft). 343

General Motors PitchBook Report, supra note 339. 344

“Private equity and debt investments consist of investments in private equity and

debt funds. These investments provide exposure to and benefit from long-term equity

investments in private companies, including leveraged buy-outs, venture capital and

distressed debt strategies.” General Motors Co., Annual Report (Form 10-K) (Feb. 3,

2016),

https://www.sec.gov/Archives/edgar/data/1467858/000146785816000255/gm201510k.htm. 345

See id.



exposure to and benefit from long-term equity investments in private

companies, including leveraged buy-outs, venture capital and distressed

debt strategies.”346

It does not appear that there are any other references to

GM Ventures or venture capital anywhere in the most recent annual or

quarterly reports of General Motors. No references are made to General

Motors’ venture capital activities in its proxy statement either.347

As was the

case with Campbell Soup and Walgreens, information about General

Motors’ CVC activity is available in the media and paid resources.

However, in the SEC filings of General Motors itself, very little is reported.

General Motors differs from the other examples in that it makes CVC

investments through the parent company and GM Ventures. Even if the

CVC investments do not rise to the level of materiality, however, it is still

reported in GM’s financial statements. In describing its equity investments

in the notes to the financial statements, General Motors could provide more

detailed information as the information that is provided is not helpful from

an investor’s perspective.

D. The Need for More Disclosure

Disclosure is a hotly contested topic.348

There is an ongoing debate

about the appropriateness or utility of disclosure generally.349

This Article

takes the position that disclosure in the public company context with respect

to its investments in startups is critical for two reasons: to better understand

the role of CVC investments in a particular public company (which

potentially has long-term implications for the future direction of the

company) and to ameliorate their harm to startups, investors and the

economy. If the information is material it would then be placed in the

346

General Motors Form 10-K, supra note 337, at 82. 347

See General Motors Co., Definitive Proxy Statement (Schedule 14A) (Apr. 22,

2016),

http://www.sec.gov/Archives/edgar/data/1467858/000130817916000367/lgm2016_def14a.

htm. 348

The purpose of mandated disclosure is “to give [a person] information for analyzing

[her] choices critically and to choose optimally.” Omri Ben-Shahar & Carl E. Schneider,

The Failure of Mandated Disclosure, 159 U. PA. L. REV. 647, 649 (2011). 349

See id. at 651 (arguing “that mandated disclosure regularly fails in practice [and] its

failure is inevitable”). But see M. Ryan Calo, Against Notice Skepticism in Privacy (and

Elsewhere), 87 NOTRE DAME L. REV. 1027, 1030 (2013) (“[arguing] against an extreme

skepticism of mandatory notice . . . by questioning whether critics or proponents of notice

have identified and tested all of the available notice strategies” using online privacy as a

case study), and Richard Craswell, Static Versus Dynamic Disclosures, and How Not to

Judge Their Success or Failure, 88 WASH. L. REV. 333, 380 (2013) (arguing that

“understanding the different possible goals of disclosure is essential to any decision about

which disclosures ‘work’”).



financial statements under equity investments. Whether information about

CVC falls under the definition of “materiality” from a numerical or

quantitative perspective, as detailed in Part III.B above, is a fact specific

determination for the public company. However, it may still be able to meet

the materiality threshold because registrants (the public companies) and

auditors must also consider qualitative factors and how a user of the

financial statements would view the information.350

CVCs have invested an impressive $125.57 billion in various

venture capital investment rounds since the beginning of 2010 to the first

quarter of 2016.351

The ten most active CVC investors from January 2010 to

April 2016 were: Intel Capital (395 investments), GV (314 investments),

Qualcomm Ventures (189 investments), Salesforce Ventures (141

investments), SoftBank Capital (115 investments), Caixa Capital Risc (109

investments), GE Ventures (95 investments), Comcast Ventures (95

investments), Cisco Investments (94 investments), and Samsung Venture

Investment (93 investments).352

IT startups accounted for 42 percent of the

capital invested with business to consumer and healthcare following at 21.2

percent and 20.2 percent, respectively.353

Despite increasing investments

through corporate venture capital, there is very little disclosure in the

corporate venture capital arena even though public companies fund such

investment activities. One only needs to peruse the SEC filings to see that

there is either very little information on public companies’ CVCs or the

information is provided in a way that makes it very difficult to ascertain the

amount of money public companies are spending on CVCs or what they are

investing in.

If the information on CVCs is material or is required to be in the

financial statements, the manner in which such information is currently

presented and what is currently disclosed is insufficient.354

Under the

current requirements of Regulation S-K and Regulation S-X, public

companies who make CVC investments disclose the information in ways

that are not transparent to an investor. For example, the information about

corporate venture capital is referenced in a footnote or obliquely referenced

in the MD&A or risk factors section.

350

See discussion supra Section III.B and accompanying notes. 351

Tom, supra note 149. 352

Id. 353

Id. 354

See generally discussion supra Section II (discussing CVCs’ impact on the private

companies and innovation and on the economy).



In addition to the legal reasons for disclosing the information about

CVC investments, there are also policy reasons. As this Article points out in

earlier sections, the participation of CVCs—particularly in the later rounds

of financings—contributed to the unicorn phenomenon. Many experts have

pointed out that this has affected both the private and public markets

because private companies are staying private longer and there are very few

companies going public.355

Some private companies are now larger and

have a greater impact on the economy than public companies and the

existing legal regulatory structure is ill-equipped to adequately address all

the attendant legal issues that have arisen in the context of the explosion of

private companies, especially unicorns.356

Instead of relying on information

from the parent (public) company about CVCs—because there is very little

to none—investors will rely on the media’s interpretation of the limited

information that is available. For example, in the case of Campbell Soup

Company, one of the five case studies discussed in Part III.C above, its

CVC activity through Acre Venture Partners largely originated from media

reports.357

There is a way to remedy how information about CVC investments

are currently disclosed: revise Regulation S-K and Regulation S-X.

Regulation S-K should be revised to require a section on CVCs with

information ranging from the amount allocated to the CVC to which

companies they are investing in to how many board seats or board observer

roles each investment professional has. Specifically, in Forms 10-K358

and

10-Q,359

the information about a public company’s CVC activities—

whether forming a CVC or investing in private companies or serving on the

board of a private company—can be made in Items I. Business and IA. Risk

Factors. Under Item 8.01 Other Events of the Form 8-K, the public

company may disclose “information…not otherwise called for by this form,

that the [public company] deems of importance to security holders.”360

In

355

See Gurley, supra note 187. 356

See Fan, supra note 19; see, e.g., discussion supra Section III.A.1 (discussing how

Alphabet’s disclosures under Other Bets—which includes GV—increased Alphabet’s stock

price). 357

See discussion supra Section III.C.3 and accompanying notes. 358

See Form 10-K, Annual Report Pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934, SEC. & EXCH. COMM’N, http://www.sec.gov/about/forms/form10-

k.pdf. 359

See Form 10-Q, SEC. & EXCH. COMM’N, http://www.sec.gov/about/forms/form10-

q.pdf. 360

See Form 8-K, Current Report Pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934, SEC. & EXCH. COMM’N, https://www.sec.gov/about/forms/form8-

k.pdf.



this way, potential and current investors as well as employees can get a

better grasp on what CVCs do and how big a role they play in their parent

company. This information has the added benefit of being helpful to

startups who may be considering investments from the public companies

who are making CVC investments.

Regulation S-X can be revised to specify that the notes to financial

statements need to break down equity investments in private companies in a

way that is clear and understandable. For example, if equity investments are

grouped under “Other Long-Term Assets,” which include both debt and

equity investments then that information needs to be broken out to describe

what portion constitutes debt as compared to equity. Without this level of

specificity, important information can be obscured. Alternatively, instead of

using a variety of terms to refer to CVC investments, one common term

should be agreed upon.

The CVCs of each public company should have the following

information in its SEC filings, at a minimum: (1) the amount of assets under

management; (2) the amount of money that the CVCs have left to invest

(i.e., dry powder); (3) the total number of investments (while also noting

which ones are active); (4) the names and number of investment

professionals as well as how many board positions (either on the board or as

a board observer) each one of them holds; (5) the investment preferences of

the CVC fund; and (6) recent investments under the period covered by the

quarterly or annual report. The information the Article advocates for is

already available—just not to everyone or in any consistent manner.

IV. HOW CVC IMPACTS THE BOARDS OF PRIVATE COMPANIES

The expanding role of CVC in private companies also impacts such

companies’ board of directors. As CVCs move from board observers to

serving as members of the board, their responsibilities and access to

information shifts. The section below begins by discussing the CVC role as

board observer. Then, the discussion centers on the legal implications of

becoming a board member and the inherent challenges a CVC

representative faces as a board member when he or she also represents the

interests of the parent company.

This Article argues for more vigilance regarding the board

arrangements in startups and sets forth a best practices framework. The

suggested best practices for the boards of startups were made to address

potential conflicts of interest for CVC representatives who serve on boards



and the need for appropriate financial and industry expertise given the

increasing complexities of startups which are starting to look more like

public companies that are operating in the private sphere. As discussed in

Part II above, with private companies staying private longer as a result of

increased CVC investments, getting the correct board mix is more critical

than ever to help ensure that the internal controls and governance keep pace

with the growth of the private company.

A. CVC as Board Observer

When a representative of a CVC serves as a board observer, it

differs from serving as a board member in three fundamental ways: (1) there

are no board voting rights as an observer; (2) observers can be excluded

during certain discussions; and (3) information rights are contractual. Put

simply, the rights of an observer are limited by the investors’ rights

agreement361

and they do not have fiduciary duties like board members do

unless they agree otherwise.362

The CVC is required to have a certain

threshold level of shares for the particular series of stock it invested in to

maintain its observer rights.363

As an observer, it will receive notices,

minutes, consent, and other materials that it provides to the company’s

directors.364

From a contractual standpoint, the representative of the CVC

may, but typically does not, agree to act as a board member would

(essentially agreeing to be bound to the same fiduciary duties as board

members), and the company maintains the right to decide whether to

exclude such board observer from certain meetings for reasons related to

attorney-client privilege, disclosure of trade secrets, or conflict of

interest.365

Additionally, the company could choose to exclude the CVC

361

See NAT’L VENTURE CAPITAL ASS’N, MODEL LEGAL DOCUMENTS, INVESTOR

RIGHTS AGREEMENT 22–23, http://nvca.org/resources/model-legal-documents/. 362

Sometimes companies choose to include such provisions in a management rights

letter signed between the company and the particular investor receiving such rights. See id.

at 23 n.35. A company may also request that board observers execute confidentiality

agreements since they are not subject to the same fiduciary duties as directors. See id. 363

See id. at 22. 364

See id. 365

The relevant language in the investors’ rights agreement states:

[S]uch representative shall agree to hold in confidence and trust and to act in a

fiduciary manner with respect to all information so provided; and provided

further, that the Company reserves the right to withhold any information and to

exclude such representative from any meeting or portion thereof if access to such

information or attendance at such meeting could adversely affect the attorney-

client privilege between the Company and its counsel or result in disclosure of

trade secrets or a conflict of interest, or if such Investor or its representative is a

competitor of the Company.



representative if it is a competitor of the company.366

From a best practices standpoint, it would behoove the CVC to have

a board observer from a corporate venture capital arm that is a subsidiary

instead of a corporate venture unit which is part of the parent company, but

if the latter were the case, then it should implement appropriate

confidentiality procedures. CVCs should disclose any potential conflicts

early to ensure that proper board procedure can be followed—i.e., they

leave the board discussion for a certain portion of the meeting—to prevent

any hint of impropriety. However, CVCs should resist attempts to impose

fiduciary obligations on them as board observers and should be wary if the

startup offers only limited information or attendance rights, or they are

excluded from board meetings.

Although CVCs took more board observer roles in the past, the

current trend is for many of them to take board seats.367

Ultimately,

however, the role the CVC representative undertakes depends on the

philosophy of the corporate venture capital arm of the public company and

the amount of money it invests in the startup. To cite some examples, when

American Express Ventures participates on a board, it is typically in the

capacity of a board observer.368

Intel Capital, in contrast, is much more

likely to take a seat on the board.369

B. CVC as Board Member

As a board member, CVC representatives are bound to certain

fiduciary duties by statute:370

the duty of loyalty;371

and duty of care.372

Id. at 22–23.

366 See id.

367 The top 10 CVCs—the top 10 being denoted by a CB Insights article—often take

an active board position in the private companies they invest in (versus a more passive

board position, such as “board observer”). For example, Intel Capital has sixty-four board

member seats out of 154 total current board positions. Intel Capital PitchBook Report,

supra note 291. GV has seventy-five board member seats out of eighty-two current board

positions. GV PitchBook Report, supra note 268. 368

See American Express Ventures, PITCHBOOK, https://my-pitchbook-

com/#page/profile_567803052 (last visited July 18, 2016). 369

Under the section titled “Top 25 Board Seats” in the PitchBook report, Intel Capital

had board observer status only in seven of the twenty-five seats; the other eighteen were all

board seats. See Intel Capital PitchBook Report, supra note 291. 370

Specifically, this refers to the statutory law of the state of incorporation of the

company that the CVCs are investing in. For example, if the company is incorporated in

Delaware, board powers are codified in Section 141 of the Delaware General Corporation

Law.



There are also other duties, such as good faith,373

disclosure,374

and

confidentiality,375

which CVCs should also bear in mind.

1. Duty of Care

By reviewing board materials carefully, advocating for deliberate

review of board actions, voicing support for ongoing review of financial

controls, seeking the advice and counsel of other experts as needed,376

and

371

See Cede & Co. v. Technicolor, Inc. 634 A.2d 345, 361 (Del. 1993) (“Essentially,

the duty of loyalty mandates that the best interest of the corporation and its shareholders

takes precedence over any interest possessed by a director, officer or controlling

shareholder and not shared by the stockholders generally.”); Guth v. Loft, 5 A.2d 503, 510

(Del. 1939) (“Corporate officers and directors are not permitted to use their position of

trust and confidence to further their private interests.…The rule that requires an undivided

and unselfish loyalty to the corporation demands that there shall be no conflict between

duty and self-interest.”). 372

In Delaware, the duty of care is not codified, but has been developed in case law,

and is separate from the duty of loyalty. See Smith v. Van Gorkom, 488 A.2d 858, 872-73

(Del. 1985) (“[A] director's duty to exercise an informed business judgment is in the nature

of a duty of care, as distinguished from a duty of loyalty.”). Under the duty of care,

directors have a responsibility to “inform themselves, prior to making a business decision,

of all material information reasonably available to them. Having become so informed, they

must then act with requisite care in the discharge of their duties.” Aronson v. Lewis, 473

A.2d 805, 812 (Del. 1984) (holding that the duty of care is integral to application of the

business judgment rule), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244

(Del. 2000). 373

The key difference between good faith in the fiduciary duty context and the implied

covenant of good faith and fair dealing in the Uniform Commercial Code context is

temporal—the courts analyze the parties’ actions at the time of the alleged wrongdoing and

review what happened in the past to determine the parties’ relationship when the breach

occurred in the case of the former. With respect to an implied covenant claim, the courts

examine the time the contract was made and whether the parties would have made the

decisions they did if the issue discussed arose at that time. Gerber v. Enter. Prods.

Holdings, LLC, 57 A.3d 400, 418 (Del. 2013); see also In re Walt Disney Co. Derivative

Litig., 906 A.2d 27, 67 (Del. 2006). 374

See Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985). 375

See generally United States v. O’Hagan, 521 U.S. 642, 652 (1997) (holding that

under the misappropriation theory of insider trading, “a fiduciary’s undisclosed, self-

serving use of a principal’s information to purchase or sell securities, in breach of a duty of

loyalty and confidentiality, defrauds the principal of the exclusive use of that

information”); S.E.C. v. Lyon, 605 F. Supp. 2d 531, 542 (S.D.N.Y. 2009) (citing United

States v. Falcone, 257 F.3d 226, 234 (2d Cir. 2001) (reaffirming that the duty of

confidentiality, in the context of securities laws, exists “where there is explicit acceptance

of a duty of confidentiality or where such acceptance may be implied from a similar

relationship of trust and confidence between the parties”). 376

DEL. CODE tit. 8, § 141(e) (2016), http://delcode.delaware.gov/title8/title8.pdf. Note

that the standard of gross negligence is applied if a board is alleged to breach this particular

duty. Citigroup Inc. S’holder Derivative Litig., 964, A.2d 106, 124 (Del. Ch. 2009). In



ensuring the accuracy of board minutes and written board actions, a CVC

board member can discharge his or her duty of care.377

Recent court cases

out of the Delaware Court of Chancery highlight the need to abide by the

duty of care.378

For example, in In re Rural Metro Corp.,379

the opinion

illustrates the need for active and engaged directors in any sale process,

which includes taking steps to ensure that all conflicts are identified,

disclosed, and discussed.380

Directors must be proactive in asking questions

about any existing potential conflicts, the implications of such conflicts, and

how they will be addressed.381

Put simply, directors must focus on the

order to succeed on a claim of breach of duty of care against an individual, the plaintiff

must rebut the presumption of the business judgment rule as to the majority of the

directors. Hamilton Partners, L.P. v. Highland Capital Mgmt., L.P., C.A. No. 6547-VCN,

2014 WL 1813340 (Del. Ch. May 7, 2014). The court will apply the more stringent

standard of entire fairness (where the burden shifts to the board of directors to prove the

principles of fair dealing and fair price) in certain circumstances. See Weinberger v. UOP,

Inc., 457 A.3d 701, 710 (Del. 1983). 377

If there is a good faith effort to discharge the duty of care, then the business

judgment rule applies. Aronson v. Lewis, 473 A.2d at 812. If there is not a good faith effort

then a more stringent standard applies, such as the entire fairness standard. Cede & Co. v.

Technicolor, Inc. 634 A.2d at 371. The duty of care focuses more on process than

substance. See, e.g., In re Trados, 73 A.3d 17 (Del. Ch. 2013) (in which the court

scrutinized the actions of the board of directors in a merger action). Note that even if

directors breach the duty of care, there is a statutory limitation of liability for directors

under Section 102(b)(7) of the Delaware General Corporation Law (which only exculpates

directors not anyone else). DEL. CODE tit. 8, § 102(b)(7) (2016),

http://delcode.delaware.gov/title8/title8.pdf. Furthermore, there are indemnification

statutes, such as the one codified in Delaware’s General Corporation Law Section 145,

which allows corporations to

indemnify any person who was or is a party or is threatened to be made

a party to any threatened, pending or completed action, suit or

proceeding, whether civil, criminal, administrative or investigative

(other than an action by or in the right of the corporation) by reason of

the fact that the person is or was a director, officer, employee or agent

of the corporation

and permits corporations to insure their directors in the event of a breach of duty of care. §

145. 378

As alluded to in note 377, supra, even though directors are exculpated pursuant to

the Section 102(b)(7) of the Delaware General Corporation Law, financial advisors can still

be liable for aiding and abetting a breach of the duty of care by the directors. See In re

Rural Metro Corp. (Rural Metro), 88 A.3d 54, 85–86 (Del. Ch. 2014). 379

In Rural Metro, the court found that if a “third party knows that the board is

breaching its duty of care and participates in the breach by misleading the board or creating

the informational vacuum, then the third party can be liable for aiding and abetting.” Rural

Metro, 88 A.3d at 97. 380

Id. at 105-106. 381

See id.



process of making a decision.382

In the case of CVCs, one example of a potential conflict of interest

occurs when the startup directly competes with the parent company of the

CVC. If that is the case, then the CVC board representative needs to

identify the conflict, disclose the nature of the conflict, and discuss

appropriate next steps. If the startup is contemplating the parent company as

a potential acquirer, the CVC board representative must recuse herself from

the decisionmaking process. The board minutes of the startup should reflect

a clear record of the discussions that transpired, including a careful review

of the facts, steps it took to make the decision, and the decision that the

board made as a result of that deliberation. By taking these steps, the board

demonstrates a good faith effort to discharge its duty of care, as defined

above. As a result, should stockholders decide to sue the company, the

company will be subject to the standard of the business judgment rule

(where the onus is on the stockholder to prove wrongdoing) instead of the

more stringent standard of entire fairness.383

CVCs also need to tread carefully when determining the appropriate

number of boards that they can serve on and what type of decisions they

may need to recuse themselves from. This can help address concerns that

governance procedures are being ignored in the startup context. In the 2009

survey “A Seat at the Table Study” conducted by the National Venture

Capital Association and venture capital research firm, Dow Jones

VentureSource, the two organizations reported that venture capitalists serve

on an average of 4.4 boards (in 2006 it was 4), but venture capitalists

believe that 4.6 board seats for early-stage companies and 5.4 for later-stage

companies is ideal; chief executive officers, in contrast, believe that the

ideal number of board seats for VCs were 3.8 seats for early-stage

382

By focusing on the process of making decisions, directors exercise their fiduciary

duty of care. “Directors should:

be active and engaged;

obtain access to relevant information;

obtain input from relevant board committees and board advisors;

actively deliberate decisions, asking relevant questions and discussing the

information provided;

examine available alternatives; and

resist the pressure for a quick decision.”

WILSON SONSINI GOODRICH & ROSATI, WSGR ALERT: CRITICAL ISSUES FOR BOARDS OF

DIRECTORS: A PERSPECTIVE FROM WILSON SONSINI GOODRICH & ROSATI 1 (2011),

https://www.wsgr.com/publications/PDFSearch/wsgralert-board-of-directors-critical-

issues.pdf 383

See discussion supra note 376.



companies and 4.2 for later-stage companies.384

In an extreme case, Forest

Baskett, a partner at New Enterprise Associates, a traditional venture capital

firm, said that he serves on twenty boards.385

Corporate venture capitalists,

like their venture capital firm counterparts, also serve on a number of

boards. GV typically gets a seat on the board as an investor in a private

company. Out of the “Top 25 Board Seats” in the PitchBook report GV,

only three were board observers; the remaining twenty-two were board

seats (which means that they have voting rights). One of the general

partners of GV, Andrew Wheeler is on seven of the “Top 25 Board Seats”

representing GV’s interests;386

Mr. Wheeler serves on the boards of thirteen

companies in the aggregate.387

Most top tier VCs serve on eight to twelve

boards.388

In light of the increasing complexity of private companies (e.g.,

Uber and other unicorns) and startups staying private longer, the question is

whether service on eight or twelve boards remains manageable. A director

may be unable to fulfill his or her duty of care in any meaningful way

depending on the number of boards he or she serves on since serving on a

board of a private company typically means that board members meet at

least once a quarter if not monthly. Therefore, setting a limit on the number

of boards a person can serve on would be prudent, especially if a CVC arm

of a public company is big and active like GV is. As the corporate venture

capital arm of a public company continues to grow, it may entail hiring

384

Scott Austin, New Study Peers into Venture-Backed Company Boardroom, WALL

ST. J.: VENTURE CAPITAL DISPATCH (Nov. 10, 2009),

http://blogs.wsj.com/venturecapital/2009/11/10/new-study-peers-into-venture-backed-

company-boardroom/. 385

In response to a question on whether entrepreneurs should pay attention to the

number of boards a venture capitalist serves on Mr. Baskett replied, “I think the most

important thing that entrepreneurs should do is not look at numerical counts but to do

reference checks . . . . I don’t think the number of boards is a big deal.”

He continued, “I’ve always been on a lot of boards. It’s more than I anticipated . . .

but I think that’s partly because we’ve been through a pretty long dry spell of IPOs and

exits. So I’ve been continuing to invest on a regular basis and my existing portfolio has . . .

stacked up.” Scott Austin, VC Forest Baskett Reflects on Managing His 20 Board Seats,

WALL ST. J.: VENTURE CAPITAL DISPATCH (July 30, 2010),

http://blogs.wsj.com/venturecapital/2010/07/30/vc-forest-baskett-reflects-on-managing-his-

20-board-seats/. 386

See GV PitchBook Report, supra note 268 (note that the report only covers the top

25 board seats—he could be on more since GV has 501 total investments). Richard Miner,

another General Partner of GV, sits on four of the top 25 boards and Krishna Yeshwant, yet

another General Partner of GV, sits on two. See id. 387

See Andrew Wheeler, PITCHBOOK, https://my-pitchbook-

com/#page/profile_793205757 (last visited July 18, 2016). 388

In private conversations with attorneys from prominent law firms specializing in

the venture capital practice area, the author was informed that venture capitalists from top-

tier firms typically serve on eight to twelve Boards.



more investment professionals.

2. Duty of Loyalty

The duty of loyalty involves protecting confidential information and

communications by establishing clear procedures, being aware of potential

conflicts of interests389

for the CVC representative or other directors or their

affiliates, and ensuring the disclosure of all material facts regarding a

particular transaction. Furthermore, interested directors (whether the CVC

representative or others) should limit their participation in deliberations or

voting regarding a transaction. The applicable Delaware statute390

does not

necessitate the recusal of an interested director provided that certain

conditions are met, including disclosure of the material facts by the director

regarding his or her relationship or interest to the board of directors or

committee and the stockholders entitled to vote on the matter.391

In addition,

the contract must be fair to the corporation at the time it is approved by the

board, committee, or stockholders.392

To cite one example, in 2014,

Alphabet (then Google) wanted to buy Nest Labs (“Nest”).393

GV did not

participate in the negotiations since it had recused itself. Ultimately, the

other VC firms which invested in Nest and had board representatives,

agreed to a purchase price of $3.2 billion—the fourth largest venture exit

that year.394

Kleiner Perkins Caufield & Byers and Shasta Ventures did

extremely well as early investors of Nest—Kleiner Perkins Caufield &

Byers achieved a twenty times return of $400 million from a $20 million

investment, and Shasta Ventures received $200 million.395

However, since

389

If there is a conflict of interest in the context of a board decision or transaction,

directors are not protected by the business judgment rule and liability would not be limited

by statute. See DEL. CODE tit. 8, § 102(b)(7) (2016),

http://delcode.delaware.gov/title8/title8.pdf. Note that conflicts of interest can arise

whether the individual director has a personal interest or not, such as in the case of a

representative from the CVC serving on the board who is not serving the interest of the

parent company on the board but rather owes a duty to all stockholders of the company. 390

See § 144. 391

See § 144(a)(1) and (2). 392

See § 144(a)(3). 393

Brooker, supra note 35. Nest Labs creates a network between its in-home devices.

Ryan W. Neal, Why Google, Not Apple, Purchased Nest: 7 Facts You May Not Know

About Google’s $3.2 Billion Acquisition, INT’L BUS. TIMES (Jan. 14, 2014, 12:57 PM),

http://www.ibtimes.com/why-google-not-apple-purchased-nest-7-facts-you-may-not-know-

about-googles-32-billion-acquisition. 394

Brooker, supra note 35. 395

See Josh Constine, Who Gets Rich From Google Buying Nest? Kleiner Returns 20x

on $20M, Shasta Nets ~$200M, TECHCRUNCH (Jan. 13, 2014),

http://techcrunch.com/2014/01/13/nest-investors-strike-it-rich/.



one of Kleiner Perkins Caufield & Byers’s partners, John Doerr, is on the

board of Google, Kleiner should have recused itself and not participated in

significant portions of the negotiations in order to safeguard the duty of

loyalty.396

Another conflict arises in the area of self-driving cars. As Alphabet

continues to invest in ride-sharing and Uber does the same in self-driving,

the conflicts of interest between the two companies will only intensify.397

Interestingly, David Krane, a managing director and new CEO of GV, sits

on Uber’s board.398

Although Mr. Krane has very close ties to Alphabet—

he was one of Google’s first 100 employees and has been involved with a

number of Google’s $1 billion plus exits—he is not conflicted out.399

The CVC world is especially rife with conflict because, in many

cases, the parent companies of the CVCs are very involved in the venture

capital dealings of CVCs. The board representatives from CVCs must make

decisions in the best interest of all stockholders in the company and not

solely in the interests of the parent companies of the CVCs. This can be a

difficult line to toe especially given the various legal ways in which CVCs

are structured. For example, if CVCs are part of a business unit, as is the

case with General Mills,400

the board representatives of such CVCs are

employed by the parent companies. In contrast, in the case of CVCs which

are wholly-owned subsidiaries of parent companies but with some level of

independent decision-making, there may be a layer of autonomy that does

not exist when a CVC directly reports to the parent company in some way.

Therefore, although in theory board representatives of CVCs should

represent the interests of all stockholders of the private companies that they

invest in, CVCs may only be considering the one that pays the bills—the

parent companies of the CVCs.

396

Unless there is a lawsuit, only those participants in the decisionmaking process are

privy to what type of process was followed. 397

See E-mail Newsletter from Kerry Wu, Auto Tech Industry Analyst, CB Insights, to

Auto Tech Insights by CB Insights subscribers (Sept. 1, 2016, 8:33 PM) (on file with

author); Mikey Tom, Alphabet, Uber Set to Go Head-to-Head, PITCHBOOK (Aug. 30,

2016), http://pitchbook.com/news/articles/alphabet-and-uber-set-to-go-head-to-head; Mark

Bergen, Google Ventures’ New Chief, David Krane, is the Überconnector, RECODE (Aug.

12, 2016, 2:10 PM), http://www.recode.net/2016/8/12/12445218/google-ventures-david-

krane-connector. 398

See Uber Technologies, PITCHBOOK,

https://my.pitchbook.com/#page/profile_1141265663 (last visited Sept. 22, 2016). 399

See Bergen, supra note 397. 400

See discussion supra Section III.C.3 (briefly describing the structure of General

Mills’ corporate venture capital arm).



CONCLUSION

Having CVCs within the confines of multinational public

corporations may lull regulators into a false sense of security that CVCs do

not need to be scrutinized because they already reside within a framework

subject to increased legal rules and regulations. However, as this Article

illustrates, there are sound reasons why additional disclosures should be

made about CVC investments of public companies.

The CVCs discussed in Part III above each came from different

industries and had various levels of involvement in the innovation

ecosystem. In many instances, the information (when available) about the

CVC activities reported by public companies in their periodic reports were

difficult to find or described in a variety of ways. CVC investments were

referred to as “noncontrolling interests,” “non-marketable equity

investments,” “private equity,” and “long-term equity investments.” In most

cases, CVC activities were only one part of the line item in the

Consolidated Financial Statements. This made it difficult to ascertain to

what extent CVC activities were fueling the next generation of technology.

Given how dispersed the information about CVCs is, Regulation S-K and

Regulation S-X, this Article recommends that these regulations be revised

to require that periodic reports should reflect information about CVCs

(when it is material to the registrant) in a cohesive, consistent manner. In

light of the increasing prominence of CVCs across myriad economic sectors

and their impact on the innovation ecosystem and private companies more

specifically, the SEC should also mandate a high-level overview of a

company’s equity investments in the MD&A section as that is likely of

more utility to an investor.

In order to ameliorate the harm to startups, at the board level CVC

representatives need to ensure that they adhere to their fiduciary duties. In

order to accomplish this, CVCs should take the following actions: set a limit

on the number of boards that CVC representatives may serve on; emphasize

that CVC representatives should be mindful of the interests of all

stockholders when making decisions (rather than just what benefits the

parent company of the CVC arm); and avoid conflicts of interests in

decisionmaking by having CVC representatives recuse themselves as

appropriate. Furthermore, as some CVCs take a more active role on the

boards of directors, instituting a set of best practices will be key to

combatting the lack of internal controls and governance in startups that are

ramping up quickly.



As CVCs become commonplace in public companies, they are often

used as tools for innovation. To this end, CVCs and their parent companies

must strive to institute a set of best practices that will better serve not only

the private companies they invest in, but the investors in the parent

company and the innovation ecosystem overall. In this way, investors can

get a better grasp on what CVCs do and how big a role they play in the

future goals of their parent companies.