Regulating corporate vc

Electronic copy available at: https://ssrn.com/abstract=2889443
Catching Disruption:
Regulating Corporate Venture Capital
Jennifer S. Fan | jsfan@uw.edu
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 Soup6
—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

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/.

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
86
“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
98
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
105
106
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
111
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
120
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
126
Id. (see “Paths to Growth” chart for further discussion).
127
128
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
172
Id.
173
“[T]he growth of knowledge in internal laboratories . . . [is] painfully slow.”
174
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.”

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