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.”

leverage technology as part of these efforts (collectively, ‘Disclosure
Effectiveness Initiative’).”223
The aim was to improve the SEC’s disclosure
regime not only for registrants but for investors as well.224
The SEC then
solicited public comments on Regulation S-K in a concept release issued on
April 13, 2016.225
As part of its review, the SEC reviewed the history of
every provision in Regulation S-K to provide the appropriate context for
“simplifications, modernizations, revisions or eliminations that would be
suitable for all issuers.”226
The SEC recognized that “[t]he disclosure
requirements in Regulation S-K have an impact on the costs and burdens of
conducting registered offerings, including IPOs by emerging growth
companies, but also have an impact on the ongoing compliance burden
associated with public company status.”227
Pursuant to the Fixing America’s
Surface Transportation Act (“FAST Act”), the SEC is conducting a study
“to determine how best to modernize and simplify the disclosure
requirements in Regulation S–K and to propose revisions to those
requirements.”228
The SEC is also required to revise Regulation S-K under
the terms of the FAST Act “to further scale or eliminate requirements to
reduce the burden on [emerging growth companies], accelerated filers,
smaller reporting companies, and other smaller issuers, while still providing
all material information to investors, and to eliminate duplicative,
overlapping, outdated or superseded provisions.”229
B. Materiality
In order to determine what information a public company should
disclose about CVCs, it is also important to address the concept of
materiality.230
Under the Securities Act, Section 17(a)(2) of the Securities
Act provides that with respect to the offer or sale of any securities, it is
unlawful for any person “to obtain money or property by means of any
untrue statement of a material fact or any omission to state a material fact
223
23,917.
224
Id.
225
Business and Financial Disclosure Required by Regulation S-K, 81 Fed. Reg.
23,915 (proposed Apr. 22, 2016).
226
See id. for the full details of the history of Regulation S-K.
227
S-K Study, supra note 222, at 3.
228
“The SEC must consult with Investor Advisory Committee and the Advisory
Committee on Small and Emerging Companies and to issue a report of findings and
recommendations to Congress.” Business and Financial Disclosure Required by Regulation
S-K, 81 Fed. Reg. at 23,921.
229
Id.
230
See George S. Georgiev, Too Big to Disclose: Firm Size and Materiality Blindspots
in Securities Regulation, 64 UCLA L. REV. (forthcoming 2016) (on file with author).

necessary in order to make the statements, in light of the circumstances
under which they were made, not misleading.”231
Material is the term “used
to qualify a requirement for the furnishing of information as to any subject,
limits the information required to those matters to which there is a
substantial likelihood that a reasonable investor would attach importance in
determining whether to purchase the security registered.”232
Put another
way, information is material if it would have been important to a reasonable
investor when deciding whether to purchase the registered security (i.e.,
common stock of a public company).
The concept of materiality is also included in the Securities
Exchange Act of 1934 (the “Exchange Act”). Under Section 18(a) of the
Exchange Act, a person is liable for making, or causing to make any
statement “in any application, report, or document . . . which statement was
at the time and in light of the circumstances under which it was made false
or misleading with respect to any material fact.”233
Under the SEC Staff Accounting Bulletin: No. 99 – Materiality,234
“Materiality concerns the significance of an item to users of a registrant’s
financial statements. A matter is ‘material’ if there is a substantial
likelihood that a reasonable person would consider it important.”235
The
popular belief, but one which is not proven fact, is that individual investors
rely only on information from intermediaries such as analysts, media and
data providers.236
However, “evidence exists that individuals read and use
companies’ financial disclosures to make investment decisions.”237
The
Task Force to Modernize Securities Legislation, commissioned a survey of
retail investors and it found that “fifty-six percent of stockholders . . . read
and use financial statements to make investment decisions . . . Moreover,
approximately 50% of stockholders in the survey reported they find annual
financial statements, including management’s discussion and analysis . . . to
be useful.”238
The Financial Accounting Standards Board (“FASB”) explained
materiality as follows in its Statement of Financial Accounting Concepts
231
15 U.S.C. § 77q (2012).
232
17 C.F.R. § 230.405 (2016).
233
15 U.S.C. § 78r (2012).
234
SEC Staff Accounting Bulletin No. 99, 17 C.F.R. part 211 (Aug. 12, 1999).
235
Id.
236
Id.
237
Alastair Lawrence, Individual Investors and Financial Disclosure, 53 J. ACCT. &
ECONOMICS 130, 132 (2013).
238
Id.

No. 2:
The omission or misstatement of an item in a
financial report is material if, in the light of
surrounding circumstances, the magnitude of the
item is such that it is probable that the judgment of
a reasonable person relying upon the report would
have been changed or influenced by the inclusion or
correction of the item.239
Case law explains materiality further.240
Ultimately, the “formulation in the
accounting literature is in substance identical to the formulation used by the
courts in interpreting the federal securities laws.”241
In short, when analyzing corporate venture capital investments in
the context of “surrounding circumstances” or the “total mix” of
information set forth by FASB and the U.S. Supreme Court, respectively, it
239
240
There has been a series of U.S. Supreme Court cases regarding the materiality
standard. See Mills v. Electric Auto-Lite Co., 396 U.S. 375, 384 (1970) (dealing with proxy
voting, “[w]here the misstatement or omission in a proxy statement has been shown to be
‘material,’ . . . that determination itself indubitably embodies a conclusion that the defect
was of such a character that it might have been considered important by a reasonable
shareholder”); TSC Industries, Inc. v. Northway Inc., 426 U.S. 428, 448 (1976) (using
materiality as a filtering mechanism and describing how a low materiality standard could
lead to bad results—“Some information is of such dubious significance that insistence on
its disclosure may accomplish more harm than good.”). The standard for materiality is as
follows:
An omitted fact is material if there is a substantial likelihood that a
reasonable shareholder would consider it important in deciding how to
vote. . . . It does not require proof of a substantial likelihood that
disclosure of the omitted fact would have caused the reasonable
investor to change his vote. What the standard does contemplate is a
showing of a substantial likelihood that, under all the circumstances,
the omitted fact would have assumed actual significance in the
deliberations of the reasonable shareholder. Put another way, there
must be a substantial likelihood that the disclosure of the omitted fact
would have been viewed by the reasonable investor as having
significantly altered the “total mix” of information available.
TSC Industries, Inc., 426 U.S. at 449; see also Basic Inc. v. Levinson, 485 U.S. 224
(1988) (affirming holding of TSC Industries and stating that the materiality of a specific
piece of information is an “inherently fact-specific finding” and a purpose of the analysis is
to prevent management from burying shareholders in an “avalanche of trivial
information.”); Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014)
(reaffirming the materiality standard first set forth in TSC Industries).
241

is not only the quantitative factors that must be considered, but the
qualitative factors as well.242
C. Five Corporate Venture Capital Case Studies
In the subsections that follow, this Article examines five different
CVCs in different industries. More specifically, it analyzes the information
that is available about the CVC investments of the five companies through
their parent company’s respective SEC filings and various media outlets.
Each example illustrates the shortcomings of how CVC investments of
public companies are currently reported in public company filings pursuant
to Regulation S-K and Regulation S-X and under the standard of
materiality.
The examples set forth below will illustrate why increased
disclosure and transparency are necessary, as the information regarding the
corporate venture capital arms of the public companies is not provided in an
accessible or clear manner. Furthermore, the way in which information
about the CVC investments of public companies is reported could either
undermine the materiality of the information presented or the relevance of
the information to an investor’s understanding of a company even if it does
not rise to the level of materiality.
1. GV Case Study
GV is one of the most prolific CVCs—in the seed stage alone, it is
the fourth most active seed investor in all of venture capital.243
GV has a
formidable array of resources to entice startups to work with them,
including that any startup it invests in can have access to anyone at
Google.244
They also have a design team that has been likened to a SWAT
team for startups that can troubleshoot any problem a startup may have.245
GV’s diverse investments are illustrated by its recent exits.246
Under
Chesbrough’s framework, GV would be engaging in emergent investments.
The startups they invest in are outside their core business (Google) and
242
Id.
243
Since 2010, GV has invested in 135 seed-stage deals making it the fourth most
active seed investor among all venture capital investors. The 5 Most Active Seed Investors,
PITCHBOOK (May 2, 2016), http://pitchbook.com/newsletter/the-5-most-active-seed-
investors.
244
Brooker, supra note 35.
245
Id.
246
Google Ventures Teardown: The Most Active Corporate Venture Firm Slows Down,
CB INSIGHTS (July 21, 2015), https://www.cbinsights.com/blog/google-ventures-teardown/.

instead suggest future directions the company is heading.
Alphabet Inc., a Delaware corporation (“Alphabet”), is the public
holding company of Google.247
Alphabet’s Form 10-K for the fiscal year
ended December 31, 2015, states, “Google is not a conventional company.
We do not intend to become one . . . . [We] make smaller bets in areas that
might seem very speculative or even strange when compared to our current
businesses.”248
Prior to creating the Alphabet holding structure, the information on
GV and other business that were not a part of Google’s core advertising
business were nonexistent. Before Ruth Porat joined the company as Chief
Financial Officer, there was little to no information regarding Google’s
moonshots249
or how they would generate revenue.250
Now, under Ms.
Porat’s direction, revenues and earnings are divided into two categories:
247
In August 2015, Google announced plans to create Alphabet, a new public holding
company.
Alphabet is a collection of businesses—the largest of which, of course,
is Google. It also includes businesses that we combine as Other Bets
and generally are pretty far afield of our main Internet products such as
Verily, Calico, X, Nest, GV, Google Capital and Access/Google Fiber.
Our Alphabet structure is about helping businesses within Alphabet
prosper through strong leaders and independence.
Alphabet Inc., Annual Report (Form 10-K) (Feb. 11, 2016), at 24,
http://www.sec.gov/Archives/edgar/data/1288776/000165204416000012/goog10-
k2015.htm [hereinafter Alphabet Form 10-K] (listing businesses like Access/Google Fiber,
Calico, Nest, Verily, GV, Google Capital, X, and other initiatives under Other Bets).
In Alphabet’s Exhibit 21.01 of Form 10-K for the fiscal year ended December 31,
2015, filed on February 11, 2016, it only listed Google Inc. and Google Ireland Holdings as
subsidiaries. Alphabet Inc., Annual Report (Form 10-K): Exhibit 21.01 (Feb. 11, 2016),
http://www.sec.gov/Archives/edgar/data/1288776/000165204416000012/googexhibit2101
q42015.htm. A closer look into Google Inc. filings does not list GV as a subsidiary of
Google Inc. either. Google Inc., Annual Report (Form 10-K): Exhibit 21.01 (Feb. 11,
2016),
http://www.sec.gov/Archives/edgar/data/1288776/000128877615000008/goog20141231ex
hibit2101.htm.
248
Alphabet Form 10-K, supra note 247.
249
Moonshot “refers to a project or venture that is intended to have deep-reaching or
outstanding results after one heavy, consistent, and usually quick push.” Words We’re
Watching: Moonshot, MERRIAM-WEBSTER, http://www.merriam-webster.com/words-at-
play/moonshot-words-were-watching (last visited July 17, 2016).
250
Leena Rao, One Year in, Ruth Porat Remains Google’s Financial Disciplinarian,
FORTUNE (June 3, 2016, 1:15 PM), http://fortune.com/2016/06/03/ruth-porat-google/. Porat
stresses “discipline,” “efficiency,” and “rational” decisionmaking when discussing
investments in moonshots on earnings calls with financial analysts. Id.

Google and “Other Bets.”251
By reorganizing under the Alphabet umbrella,
Google separated its “core money-making operations from its research-
oriented and experiential ‘moonshots’ division.” 252
As a result, those
companies, called “Other Bets” need to find a way to become self-sufficient
from a financial perspective.253
Information on GV, along with a few other businesses that are not
part of Google’s core business, is reported under Other Bets—it includes
various operating segments that are characterized as not individually
material.254
Other Bets is mentioned thirty-five times in the Form 10-K,
primarily in the financial section.255
It is also under the heading of
“Moonshots.”256
Other Bets revenue is listed as $12 million in 2013, $327
million in 2014, and $448 million in 2015.257
It had operating losses of $527
million in 2013, $1.942 billion in 2014, and $3.567 billion in 2015.258
This
level of transparency has been transformative in the eyes of Wall Street and
shares of Google are up by more than forty percent by as of mid-September
2016.259
More specifically, in the risk factors section, Alphabet notes,
“Maintaining and enhancing the brands of both Google and Other Bets
251
Erin Griffith, Why Investors Love Alphabet’s New CFO, FORTUNE (Oct. 23, 2013,
11:54 AM), http://fortune.com/2015/10/23/google-alphabet-cfo-ruth-porat/. “For Google,
the restructuring created a more investor-friendly way to separate how the company reports
its financial results. Previously, Google reported its ad revenue, the bulk of its business, in
combination with sales from its riskier bets such as connected thermostat business Nest,
and . . . Google Fiber and self-driving cars.” Rao, supra note 250. “Alphabet now discloses
revenue and profits for two categories: Google and Other Bets. The Google bucket includes
not only the advertising business but also cloud services and Android. In the second quarter
of this year [2016], that bucket accounted for 99.1% of Alphabet’s $21.5 billion in revenue;
all the Other Bets, just 0.9%.” Griffith, supra note 251.
252
Griffith, supra note 251.
253
Id. “When investors see crazy, expensive-looking projects like self-driving cars,
Internet balloons and robots, they question Alphabet’s fiscal responsibility. That’s where
Porat’s Wall Street sensibility comes in.” Id. Ultimately, Ruth Porat’s push towards
increased transparency has helped increase Google's market value. In July 2015, after Ms.
Porat led her first earnings report, Google experienced a market value increase of $60
billion in one day—“the largest such gain ever for a U.S. company.” Id.
254
See id.
255
A search for “Other Bets” in the Form 10-K yielded thirty-five hits.
256
Alphabet Form 10-K, supra note 247, at 3. “The idea of trying new things is
reflected in some of our new, ambitious projects both within Google and Other Bets.” Id.
257
Id. “Revenues from the Other Bets is primarily derived through the sales of Nest
hardware products, internet and TV services through Google Fiber and licensing and R&D
services through Verily.” Id. at 95.
258
Id. at 95.
259
See Rao, supra note 250; Griffith, supra note 251.

increases our ability to enter new categories and launch new and innovative
products that better serve the needs of our users.”260
This statement
indicates the potential influence that GV’s investment in a particular startup
could have for the long-term goals of Alphabet.261
As described in the introduction of this Article, companies are
moving away from traditional R&D. This has certainly long been the case at
Google which uses a combination of acquisitions, corporate venture capital
and moonshots to develop the next great innovation.262
As an example,
Other Bets is included in the R&D analysis that has increased steadily over
the past few years.263
The amount of money allocated for R&D was $7.137
billion in 2013 (or 12.9 percent of R&D expenses as a percentage of
revenues), $9.832 billion in 2014 (or 13.9 percent of R&D expenses as a
percentage of revenues), and $12.282 billion (or 16.3 percent of R&D
expenses as a percentage of revenue) in 2015. Alphabet allocated $416
million to Other Bets in the fourth quarter of 2015.264
The only specific information about GV in Alphabet’s most recent
annual report was under the heading “Investments in Certain Private
Companies,” in Amendment No. 1 to Form 10-K for the fiscal year ended
December 31, 2015 (“2015 Amendment No. 1”). In the 2015 Amendment
No. 1, Alphabet disclosed, “GV directly invested an aggregate of
approximately $39.7 million in certain private companies from the
beginning of 2015 through January 31, 2016, in which Kleiner Perkins
Caufield & Byers was a co-investor or existing investor.”265
260
Alphabet Form 10-K, supra note 247, at 9.
261
GV is mentioned in Alphabet’s filings with the SEC, but it differs from most other
in-house CVC funds. “The firm makes its investments independent of its parent’s corporate
strategy. It can back any company it wants, whether or not it fits with Google’s plans. The
fund also can sell its stakes to whomever it wants, including Google competitors. Facebook
and Yahoo have bought startups funded by [GV].” Brooker, supra note 35.
262
Alphabet's nightmare is that it becomes the next Yahoo or Nokia—past tech
bellwethers that got left behind as their respective industries evolved and they failed to
innovate. Griffith, supra note 251.
263
Alphabet Form 10-K, supra note 247, at 32.
264
Id. at 79.
265
Alphabet Inc., Annual Report (Form 10-K): Amendment No. 1 (Mar. 29, 2016), at
31,
http://www.sec.gov/Archives/edgar/data/1288776/000119312516520367/d133613d10ka.ht
m. It went on to further state:
KPCB Holdings, Inc., as nominee for certain funds of Kleiner Perkins
Caufield & Byers and several of the managers of the fund, holds more
than 10% of the outstanding shares of such private companies. L. John
Doerr, who is a member of our Board of Directors, is a managing
director/member of the managing members of those funds and the

In Exhibit 99.1 of Form 8-K filed on April 21, 2016, for the three
months ended March 31 2016, the revenues (unaudited) for Other Bets was
$166 million and the operating loss (unaudited) was $802 million; for the
three months ended March 31, 2015, the revenues (unaudited) for Other
Bets was $80 million and the operating loss (unaudited) was $633
million.266
Other Bets was mentioned fourteen times in the exhibit.267
Even
though Other Bets is mentioned quite a few times, the information is not
clear and it is difficult to discern the future goals of Alphabet regarding
investments in private companies. Accordingly, employees (who will
become stockholders once they exercise their stock options or receive their
restricted stock units), investors, and potential investors do not have a clear
idea of GV’s role within Alphabet despite the fact that GV is prominent in
so many different deals at different stages of the lifecycle of a company
across many sectors (i.e., not just technology).268
Although Alphabet is a
better model of transparency than the other public companies discussed
below, it could still improve with respect to the information it provides on
GV. Alphabet should give its employees and stockholders more specific
information on GV since the number of investments that GV makes are
only increasing. Furthermore, GV invests in startups not related to the core
business of the parent company (and, in fact, may only be tangentially
related). Finding the cure for cancer or lengthening a human being’s
lifespan may be laudable goals, but they are not central to the mission of
Alphabet. 269
By taking the step of reporting “Other Bets” separately, we
can surmise that Alphabet must have determined that the information rose
to the level of materiality. Although Alphabet specifies that the individual
segments within “Other Bets” are not material, additional disclosure would
be helpful in understanding why GV chooses to make investments in certain
industries and how it fits in with Alphabet’s goals going forward or at least
to have more information about it when presenting such information in the
general partner of the general partners of certain Kleiner Perkins
Caufield & Byers funds. John does not have a material interest in any
of the transactions described above.
Id.
266
Alphabet Inc., Current Report (Form 8-K) (Apr. 21, 2016),
http://www.sec.gov/Archives/edgar/data/1652044/000165204416000015/goog8-
kq12016.htm.
267
Google is presented as a separate segment and all other Alphabet businesses,
including Google Ventures, are under “Other Bets.”
268
See generally GV, PITCHBOOK, https://my.pitchbook.com/#page/profile_178611086
[hereinafter GV PitchBook Report] (last visited July 18, 2016).
269
See generally Brooker, supra note 35 (discussing the various types of investments
that GV makes).

financial statements. One way to accomplish this is to present information
in a tabular format which incorporates the information below.
As of November 2016, GV has $660 million in assets under
management of which $163 million is “dry powder.”270
In addition, they
have a total of 520 investments (239 of which are active) and sixty-eight
professionals working for GV.271
According to a PitchBook report, GV’s
investment preferences are as follows: (1) preferred investment amount is
between $0.25 million to $50 million; (2) they prefer a minority stake; (3)
they prefer to originate a deal; (4) they will lead a deal; and (5) they will
syndicate.272
This information, however, was not available in any SEC
filing, but through PitchBook, a comprehensive database that provides
information and analytics about investments.273
However, this database is a
resource that is only available through a paid subscription and is not
available to (or affordable for) everyone. Having this type of information
would be helpful in SEC filings as it more precisely describes the scope of
Alphabet’s corporate venture capital activity and gives investors (current or
potential) and employees better insight into how CVC money is spent.
Although not required by law to report such information for the benefit of
startups, more transparency helps startups that GV invests in or is
considering investing in, a better understanding of how they fit into GV’s
long-term strategy.
In September 2016, GV invested in a number of startups. The
investments included $170 million in the Series A round of Compass
Therapeutics, a therapeutics research and development company; $20
million in the Series B round of Gametime United, a mobile sports ticketing
application developer; and $181 million in the Series C round of Carbon, a
3D printing technology.274
Like the information about the amount of assets
GV has under management for its corporate venture capital activities, the
information about GV’s investments are only available through PitchBook
which institutional investors may have access to, but not individual
270
See GV PitchBook Report, supra note 268. Dry powder is defined as “a slang term
referring to marketable securities that are highly liquid and considered cash-like.” Dry
Powder, INVESTOPEDIA, http://www.investopedia.com/terms/d/drypowder.asp (last visited
May 16, 2016).
271
See GV PitchBook Report, supra note 268.
272
See id.
273
See generally PITCHBOOK, https://pitchbook.com/ (last visited May 16, 2016). The
report generated by PitchBook’s Platform also contains information on the parent and sister
companies of GV, all investments, exits and co-investors, stated investment preferences,
service providers, and related news. See GV PitchBook Report, supra note 268.
274
GV PitchBook Report, supra note 268.

investors. Alphabet may consider incorporating this more specific
information into its periodic reports in tabular format as it gives more
context to the information it currently provides on its CVC investments.
2. Intel Capital Corporation Case Study
Intel Capital Corporation, a Delaware corporation (“Intel Capital”)
and wholly-owned subsidiary of Intel Corporation, a Delaware corporation
(“Intel”)275
is one of the most prolific investors in the corporate venture
capital world. Under Chesbrough’s framework, Intel Capital is making
enabling investments. It invests in startups that will expand the ecosystem
of companies that use Intel Corporation’s products. Despite that fact, Intel’s
most recent Form 10-K mentioned Intel Capital just once276
and there is an
oblique reference to investments in the risk factors section.277
Since it began
in 1991, “Intel Capital has invested about $11.6 billion in more than 1,440
companies in 57 countries across a range of sectors including security,
wearable technology and digital media, according to the company’s
website. It is also the leading investor (among institutional venture capital
investors and CVCs) in certain areas, such as the cybersecurity space.278
In
275
Intel Corp., Annual Report (Form 10-K): Exhibit 21.1 (Feb. 12, 2016),
http://www.sec.gov/Archives/edgar/data/50863/000005086316000105/ex21112262015q4.h
tm.
276
Intel Capital is mentioned under the subheading “Acquisitions and Strategic
Investments” in the “Company Strategy” section. Intel Corporation, Annual Report (Form
10-K) at 3, (Feb. 12, 2016),
http://www.sec.gov/Archives/edgar/data/50863/000005086316000105/a10kdocument1226
2015q4.htm [hereinafter Intel Corporation Form 10-K].
277
In the “Risk Factors” section under the subheading, “We are subject to risks
associated with transactions[,]” Intel states:
We invest in companies for strategic reasons and may not realize a return on our
investments. We make investments in public and private companies around the
world to further our strategic objectives and support key business initiatives.
Many of the instruments in which we invest are non-marketable at the time of our
initial investment. Companies in which we invest range from early-stage
companies still defining their strategic direction to mature companies with
established revenue streams and business models. The success of our investment
in any company is typically dependent on the availability to the company of
additional funding on favorable terms, or a liquidity event, such as a public
offering or acquisition. If any of the companies in which we invest fail, we could
lose all or part of our investment. If we determine that an other-than-temporary
decline in the fair value exists for an investment, we write down the investment to
its fair value and recognize a loss.
Id. at 26.
278
The Most Active Cybersecurity VC Investors and their Investments in One
Infographic, CB INSIGHTS (Aug. 3, 2016), https://www.cbinsights.com/blog/cybersecurity-
most-active-investor-infographic/.

addition, Intel has invested heavily in the drone space and is the top CVC
investor in the robotics realm.279
Last year, the unit invested $514 million in
143 companies, split almost evenly between new ventures and follow-on
investments.”280
The value of Intel Capital’s entire investment portfolio is
worth significantly more than that, however, as only a portion of it is
rumored to be worth over $1 billion.281
Intel’s R&D as a percentage of net
revenue was 21.9 percent or $12.128 billion.282
Intel Capital has been at the forefront of venture capital investments
in newer areas, such as the Internet of Things (“IoT”); it has invested in
seventeen IoT deals since 2010.283
It has been quite active in the drone
space as well.284
Intel’s corporate venture capital investments are discussed
in three sections in its Form 10-K: Risk Factors; Management’s Discussion
and Analysis of Financial Conditions and Results of Operations; and
Consolidated Financial Statements, but it doesn’t tie in those investments to
Intel Capital.285
It states in part, “We regularly invest in non-marketable
equity instruments of private companies, which range from early-stage
companies that are often still defining their strategic direction to more
279
See E-mail Newsletter from Anand Sanwal, CEO & Co-Founder, CB Insights, to
CB Insights subscribers (Oct. 6, 2016, 4:05 PM) (on file with author).
280
Porter, supra note 150. Intel Capital is also the second most active VC investor for
the time period of 2011–June 15, 2016 in artificial intelligence startups. GV follows close
behind in fourth place. E-mail Newsletter from Anand Sanwal, Chief Executive Officer &
Co-Founder, CB Insights, to CB Insights subscribers (June 25, 2016, 7:31 AM) (on file
with author).
281
Porter, supra note 150.
282
Intel Corporation Form 10-K, supra note 276, at 40.
283
Internet of Things refers to the “concept of . . . connecting any device with an on
and off switch to the Internet (and/or to each other).” Jacob Morgan, A Simple Explanation
of “The Internet of Things”, FORBES: LEADERSHIP (May 13, 2014, 12:05 AM),
http://www.forbes.com/sites/jacobmorgan/2014/05/13/simple-explanation-internet-things-
that-anyone-can-understand/. Since 2010, 844 investors have participated in at least one
IoT deal; $1.22 billion was invested in 199 deals. Bowden, supra note 190. Two other
CVCs were in the top five for IoT investments: Cisco Investments was tied with Kleiner
Perkins Caufield & Byers for second place and Qualcomm Ventures was tied for fifth place
with Kima Ventures. See id.
284
Intel Capital, Airware’s Commercial Drone Fund (a venture arm for Airware, a
drone startup), and GV were tied for second most active CVCs. See Qualcomm, Intel, and
Google Ventures Among the Top Corporates Betting on Drones, CB INSIGHTS (May 10,
2016), https://www.cbinsights.com/blog/drone-startups-corporate-investment/. Qualcomm
Ventures was also noted as another corporate venture arm increasingly active in the drone
space; it was ranked the top CVC in this space. See id. In 2012, only one CVC participated
in a drone-related startup; by 2015 the number of deals had dramatically increased. See id.
Most of the more recent deals were focused on seed or Series A stages (partially because
there were no later stage deals since it is a relatively new area of investment). See id.
285
Intel Corporation Form 10-K, supra note 276, at 26, 34–35, 61–122.

mature companies with established revenue streams and business
models.”286
Intel reported that the carrying value of its non-marketable
equity investment portfolio amounted to $4.5 billion as of December 26,
2015287
and specified that such investments were “classified within other
long-term assets on the consolidated balance sheets.”288
A number of items
falls under long-term assets and after reviewing the Form 10-K several
times, the author discovered that the information about CVC investments
was buried in the equity method investments289
line item under “Other
Long-Term Assets” and grouped with equity investments.290
Other than the
mention of Intel Capital’s investment in Cloudera, a private company, there
was no discussion of any other investments in private companies.
Although Intel did provide some information about its investments
in private companies, it is somewhat opaque and obscure. In order for the
information about corporate venture capital investments to be helpful to its
investors, Intel should specify the amount of money allocated to Intel
Capital in a given year, the amount of assets under management Intel
Capital has in total, losses and profits on an annual and quarterly basis, and
the types of industries and companies Intel Capital invested in during those
time periods. Including the aforementioned information in a tabular format
would be helpful as Intel Capital’s CVC investments appear to play a
significant role in Intel’s strategic direction based on the research conducted
for purposes of this Article.
Intel Capital has $1.30 billion in assets under management and a
total of 1,530 investments (636 of which are active).291
There are eighty-
nine professionals who work at Intel Capital, and a management team that
oversees it.292
As was the case with GV, the most pertinent information
came from a non-publicly available source. A snapshot of what may be
included in annual or quarterly reports could also include the types of deals
286
Intel Corporation Form 10-K, supra note 276, at 34.
287
This number excludes equity derivatives. Id.
288
Id.
289
The equity method “is an accounting technique used by firms to assess the profits
earned by their investments in other companies.” Equity Method, INVESTOPEDIA,
http://www.investopedia.com/terms/e/equitymethod.asp (last visited Dec. 18, 2016). It is
commonly used “when one company has significant influence over another. When a
company holds approximately 20 to 25 percent or more of another company's stock, it is
considered to have significant control, which signifies the power one company can exert
over another company. This power includes representation on the board of directors.” Id.
290
Id. at 91.
291
Intel Capital, PITCHBOOK, https://my-pitchbook-com /#page/profile_402709779
[hereinafter Intel Capital PitchBook Report] (last visited July 18, 2016).
292
See id.

that GV entered into. This is not confidential information as the media
reports on it. As an example, in October 2016, Intel Capital invested at least
$160 million in fourteen different ventures, including $9 million in the later
stage Series A round of Kinduct Technologies, a health and fitness software
company, and $15.2 million in the later stage Series E round of InContext
Solutions, an 3D virtual simulation company.293
3. Campbell Soup Company Case Study
The food industry is undergoing tremendous change right now—
some even say a revolution.294
Every year, an increasing number of new
products proliferate the marketplace.295
The dollar amount corporate
venture capital invested in the consumer packaged goods (“CPG”) space
increased by a multiple of eight from 2011 to 2015 and the largest corporate
players are playing a large role.296
More than $6 billion in funding has been
invested in 400 food startups since 2010.297
Unsurprisingly, the top
acquirers of these startups are large corporations.298
293
See id.
294
“‘The food industry is in a time of revolution,’ said Campbell Soup President and
CEO Denise Morrison.” Brian Sozzi, Amid Food Revolution, Campbell Starts $125 Million
Venture Fund, THESTREET (Feb. 17, 2016, 1:08 PM),
http://www.thestreet.com/story/13461909/1/amid-food-revolution-campbell-soup-starts-
125-million-venture-fund.html. “Referring to the packaged-food industry as being in the
middle of a ‘period of revolutionary change,’ Chief Executive Officer Denise Morrison . . .
cited major cultural changes, changes in the size of American households, and a
growing movement toward simpler foods and organics.” Brian Sozzi, Campbell’s Soup
CEO: “I Have Never Seen Industry Conditions Like Today,” THESTREET, (July 22, 2015,
7:36 PM), http://www.thestreet.com/story/13227872/1/campbells-soup-ceo-i-have-never-
seen-industry-conditions-like-today.html.
295
See CB INSIGHTS WEBINAR: THE CHANGING LANDSCAPE OF CONSUMER PACKAGED
GOODS: WHAT’S CHANGING TODAY, WHO’S DOING IT, AND WHAT THE FUTURE HOLDS
(May 3, 2016), slide 40, http://www.slideshare.net/CBInsights/the-changing-landscape-of-
consumer-packaged-goods/ [hereinafter CB INSIGHTS WEBINAR] (graph showing increase
in new food and non-food products in the consumer packaged goods space).
296
Big CPG Corporates: Where They’re Investing in Food, Personal Care, Tech, and
More, CB INSIGHTS (Apr. 26, 2016), https://www.cbinsights.com/blog/consumer-
packaged-goods-startup-bets/ (mentioning Coca-Cola Company, Unilever, General Mills,
and Anheuser-Busch as active investors in and acquirers of private companies with a
quarter of the investments in private companies by these players to seed, angel, or Series A
rounds and 60 mergers and acquisition transactions from 2011 to 2015).
297
Annie Gasparro, Campbell Invests $125 Million in Project to Fund Food Startups,
WALL ST. J. (Feb. 17, 2016, 9:09 PM), http://www.wsj.com/articles/campbell-invests-125-
million-in-project-to-fund-food-startups-1455750400.
298
CB INSIGHTS WEBINAR, supra note 295, at slide 19. Note that innovation in the
CPG space does not come from R&D; compared to advertising costs, R&D is a small
expenditure. Id., at slide 28. Interestingly, CPG corporates (not necessarily CVCs)

To cite one example of this change, this Article will discuss how
Campbell Soup Company, a New Jersey corporation (“Campbell Soup”),
became involved in corporate venture capital. In an attempt to innovate in
the ever-competitive CPG space, in the spring of 2015, under its Bolthouse
Farms brand, Campbell Soup launched fourteen new products (both
beverages and dressings) and also announced plans to expand its 1915
organic fresh pressed juice brand.299
Prior to that, in August 2015, Campbell
Soup launched three new organic, non-genetically modified chicken noodle
varieties aimed at kids.300
Despite these efforts to make themselves relevant,
Campbell Soup decided that it needed to innovate in a different way.
In February 2016, Campbell Soup announced the formation of Acre
Venture Partners, a Delaware limited partnership (“Acre Venture Partners”)
that was formed to make venture capital investments in innovative new
companies in food and food-related industries. Campbell Finance 2 Corp.,
an indirect wholly-owned subsidiary of Campbell, is the sole limited partner
of Acre Venture Partners.301
Under Chesbrough’s framework, Campbell
Soup makes driving investments meaning that its investments in CPG
startups are tightly linked to its strategic and operational goals.
The fund is managed by its general partner, Acre Ventures GP,
limited liability company (“LLC”), which is independent of Campbell
Soup.302
Jeff Dunn, president of the company’s Campbell Fresh division, is
the Campbell Soup representative on the investment committee of Acre.303
Campbell Soup agreed to make a $125 million capital commitment to Acre
Venture Partners, which was formed to make venture capital investments in
innovative new companies in food and food-related industries.304
increasingly invested in CPG startups in 2014, 2015 and Q1 ’16 once non-CPG corporates
such as GV and Comcast Ventures did so. CPG is Still Hot: 100+ Deals in Q1’16,
Corporates Participate More, CB INSIGHTS (May 15, 2016),
https://www.cbinsights.com/blog/cpg-startup-financing-q1-2016/.
299
Sozzi, Amid Food Revolution, supra note 294.
300
Sozzi, Campbell’s Soup CEO, supra note 294.
301
Sozzi, Amid Food Revolution, supra note 294.
302
Id.
303
Id.
304
Id.; see also Campbell Soup Company, Quarterly Report (Form 10-Q) (June 7,
2016), at 20, https://www.sec.gov/Archives/edgar/data/16732/000001673216000124/cpb-
512016x10q.htm (noting that through May 1, 2016, Campbell Soup funded $26 million of
the $125 million capital commitment and that the company has no further financial
obligations to Acre Venture Partners except for the remaining $99 million).

As an example of some recent investments of Acre Venture
Partners, in July and August 2016, it invested $12.7 million in the later
stage Series C round of Sample6, a biotechnology company developing
synthetic bacteria to discover food contamination; $20 million in the early
stage round of Farmers Business Network, an analytic and data
management company for farms; and $10 million in the Series A round of
Back to the Roots, a specialty home growing kits company.305
By creating a corporate venture capital arm, Campbell Soup is
positioning itself to be a part of the food revolution for healthier foods.
General Mills, Inc., a Delaware corporation306
and a competitor of
Campbell Soup, had started developing newer products through one of its
business units, 301 Inc., to address consumers’ desire for healthy foods.
Ultimately, however, 301 Inc. shifted its focus away from internal R&D to
investments in regional startups.307
Kellogg Company also recently
launched a “food tech-focused venture fund” called Eighteen94 Capital.308
Interestingly, Campbell, Kellogg and General Mills each have
corporate venture capital arms set up in different ways; each company
largely focuses on making investments in traditional food startups. In
October 2016, Campbell Soup became the sole investor in Habit, a
nutrition-focused startup that tailors personal nutrition recommendations
305
Acre Venture Partners, PITCHBOOK, https://my.pitchbook.com/#page
/profile_1981226419 (last visited Nov. 7, 2016).
306
See generally General Mills, Annual Report (Form 10-K) (July 6, 2015),
http://www.sec.gov/Archives/edgar/data/40704/000119312515245476/d947722d10k.htm
(highlighting material information regarding General Mills).
307
In July 2015, General Mills implemented a new strategy for one of its business
units, 301 Inc. See John Kell, General Mills is Starting a VC for Food Startups, FORTUNE
(Oct. 22, 2015, 8:34 AM), http://fortune.com/2015/10/22/general-mills-vc-small-food/. 301
Inc. had existed for three years and was originally intended to develop small, disruptive
brands internally—now, the plan is for 301 Inc. to invest in small regional startups that
seek capital to grow. See id. John Haugen, vice president and general manager of 301 Inc.
stated, “We have found that more and more innovation was coming from small companies .
. . . There were ways for us to partner and provide growth capital.” Id. (internal quotations
omitted). There are three factors that will be considered by 301 Inc. when it considers
whether to invest in a startup: (1) gives General Mills an opportunity to compete in new
categories; (2) allows certain deals to be structured in a way that would allow General
Mills to acquire the startup in the future; and (3) meets certain financial metrics and goals.
See id. (author noted that being an early investor and nurturing the brand of a startup is
much cheaper than having to pay hefty price tags on acquisitions such as General Mills’
acquisition of the natural food company, Annie’s, for $820 million in 2014).
308
E-mail Newsletter from Marcelo Ballve, Research Director, CB Insights, to CB
Insights subscribers (June 24, 2016, 11:26 AM) (on file with author).

based on a person’s body biology.309
This new investment deviates from
how Campbell Soup’s competitors are investing. In addition, Campbell
Soup invested right off of its balance sheet instead of its CVC arm.310
This
indicates a shift away from a driving investment model to one that may be
more appropriately characterized as emergent because Campbell Soup is
trying to predict where future trends may be headed so that it can position
itself to pivot accordingly.
The structure of Campbell’s corporate venture capital arm is distinctly
different than the other CVCs mentioned so far. First, although Acre
Venture Partners is funded by Campbell Soup, the fund is being managed
by a general partner outside of the parent company, Acre Ventures GP.311
Second, the sole limited partner of Acre Venture Partners is a wholly-
owned subsidiary of Campbell Soup.312
The structure suggests that
Campbell Soup313
may want to operate in stealth mode as it makes
investments in private companies—at least not until it strategically makes
sense for the parent company to do so. Note 15 to the Consolidated
Financial Statements in Campbell Soup’s Form 10-K provides details on its
$125 million capital commitment to Acre. It states that Campbell Soup’s
“share of earnings (loss) is calculated according to the terms of the
partnership agreement. Acre is a [variable interest entity].”314
Campbell
Soup characterizes the third party ownership as a noncontrolling interest.315
As is the case with the previous examples, the parent company reports very
basic information about its corporate venture capital investment activity, but
not enough for the investor to get an understanding of what its purpose is.
The only way one may glean that information is to read information from
309
John Kell, Campbell Soup Invests in Nutrition Tech Startup, FORTUNE (Oct. 26,
2016, 2:23 PM), http://fortune.com/2016/10/26/campbell-soup-invests-habit/. Habit “uses
data from an at-home test kit to make personalized food recommendations tailored to an
individual’s unique DNA.” Id. Denise Morrison, Campbell CEO and President said,
“Campbell’s investment is part of our broader efforts to define the future of food, which
requires fresh thinking, new models of innovation, smart external development, and
venture investing to create an ecosystem of innovative partners.” Id.
310
In doing CVC research, it was never made clear why certain companies invested off
their balance sheets versus a stand-alone corporate venture capital arm.
311
Campbell Soup Company, Annual Report (Form 10-K) (Sept. 20, 2016), at 62,
https://www.sec.gov/Archives/edgar/data/16732/000001673216000146/cpb-
7312016x10xk.htm [hereinafter Campbell Soup Co. Form 10-K].
312
Id.
313
As of December 18, 2016, Campbell Soup Company had a market cap of $18.28
billion. Campbell Soup Company (CPB), YAHOO! FINANCE,
http://finance.yahoo.com/q?s=CPB (last visited Dec. 18, 2016).
314
See Campbell Soup Co. Form 10-K, supra note 311, at 62.
315
See id.

non-publicly available sources or scouring media websites.
4. Well Ventures, LLC Case Study
Well Ventures, a Delaware LLC (“Well Ventures”), is a subsidiary
of Walgreens Boots Alliance, Inc. (“Walgreens”),316
“a global pharmacy-led
wellbeing enterprise.”317
Well Ventures either has board or observer seats in
its portfolio companies and typically invests up to $5 million in such
companies.318
Under Chesbrough’s framework, Walgreens engages in
driving investments because its investments are tightly linked to its
operations and strategies. They prefer to exit within four to eight years.319
While there are vague references to strategic investments, Well Ventures320
is not mentioned in Walgreen’s Form 10-K or Form 10-Q.321
Instead, the
only information Walgreens provides regarding its growth strategy that
could be interpreted as disclosure related to Well Ventures is that it invests
in businesses that are complementary to their own businesses or that can
further their growth strategies.322
The Form 10-K then states that these
316
Walgreens Boots Alliance, Annual Report (Form 10-K): Exhibit 21 (Oct. 28, 2015),
https://www.sec.gov/Archives/edgar/data/1618921/000114036115038791/ex21.htm.
317
Walgreens Boots Alliance, Annual Report (Form 10-K) (Oct. 28, 2015),
https://www.sec.gov/Archives/edgar/data/1618921/000114036115038791/form10k.htm
[hereinafter Walgreens Form 10-K]. There are three different segments of its operations:
Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale. See
Section 19, Segment Reporting, for additional discussion. By way of background, “[o]n
December 31, 2014, Walgreens Boots Alliance became the successor of Walgreen Co.
(‘Walgreens’) pursuant to a merger designed to effect a reorganization of Walgreens into a
holding company structure (the ‘Reorganization’).” Walgreens Form 10-K, supra note 317,
at 54. As a result, “Walgreens became a wholly-owned subsidiary of Walgreens Boots
Alliance, a newly-formed Delaware corporation, and each issued and outstanding share of
Walgreens common stock, par value $0.078125, converted on a one-to-one basis into
Walgreens Boots Alliance common stock, par value $0.01.” Id.
318
Company Overview of Well Ventures, BLOOMBERG,
http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=266098258
(last visited May 15, 2016).
319
See id.
320
See supra note 3 and accompanying text (discussing Well Ventures generally).
321
See generally Walgreens Boots Alliance, Inc., Quarterly Report (Form 10-Q) (July
6, 2016),
https://www.sec.gov/Archives/edgar/data/1618921/000114036116071838/form10q.htm;
Walgreens Form 10-K, supra note 317.
322
The full text of the relevant section reads:
Our growth strategy is partially dependent upon acquisitions, joint ventures
and other strategic investments, some of which may not prove to be successful.
We have grown, in part, through acquisitions in recent years and expect to
continue to acquire or invest in businesses that build on or are deemed
complementary to our existing businesses or further our growth strategies. . .

strategic investments involve risk and may materially adversely affect
Walgreens business operations, financial condition or results of
operations.323
In short, the disclosure in the Form 10-K does not give the
investor or potential investor any idea about the role that Well Ventures
plays in the parent company. Walgreens acknowledges that its strategic
investments may materially adversely affect Walgreens. Therefore,
disclosure about how much Walgreens is investing as well as what it is
investing in would be prudent and material.
As is the case with the other public companies discussed, Walgreens
has a significant market cap—$92.89 billion.324
Well Ventures has not
publicly disclosed the amount allocated to it from Walgreens.325
In addition,
one cannot merely look at the dollar amount to determine what type of
influence or impact the CVC is having on the parent company as a whole.
Well Ventures differs from GV and Acre Venture Partners in that it is a
subsidiary of Walgreens (like Intel Capital). The venture capital portfolio of
Well Ventures has over a dozen companies across its focus areas; however,
for “strategic reasons,” Well Ventures does not publicize all of them.326
If a
deal is admittedly strategic to (presumably) the parent company, then it
Acquisitions, joint ventures and strategic investments involve numerous other
risks, including potential exposure to unknown liabilities, as well as undetected
internal control, regulatory or other issues, or additional costs not anticipated at
the time the transaction was completed. No assurance can be given that our
acquisitions, joint ventures and other strategic investments will be successful and
will not materially adversely affect our business operations, financial condition or
results of operations.
Walgreens Form 10-K, supra note 317, at 16 (emphasis omitted).
323
See id.
324
Walgreens Boots Alliance, Inc., YAHOO! FINANCE,
http://finance.yahoo.com/q?s=WBA (last visited Dec. 18, 2016).
325
Despite thorough research into the amount allocated to Well Ventures, the author
was unable to locate this information.
326
See Portfolio Companies, WALGREENS: WELL VENTURES,
http://www.walgreens.com/topic/well-ventures/portfolio-companies.jsp (last visited May
10, 2016). Well Ventures lists some of the startups it has invested in, along with a
description of what the startup does, on this page of its website. It also notes which of the
startups have been acquired and by whom they were acquired. The web page does not,
however, list the amount of Well Ventures’ investment. “[Well Ventures’] portfolio
companies include such ventures as the creator of a consumer sleep apnea device, and a
solar energy company that specializes in the energy needs of multi-site retailers.” Quittner,
supra note 4. Well Ventures can be the lead for a financing or part of a syndicate; they
prefer co-investing with institutional investors that they collaborate with. Evaluation
Criteria, WALGREENS: WELL VENTURES,
https://web.archive.org/web/20151026172717/http://www.walgreens.com/topic/well-
ventures/evaluation-criteria.jsp (archived Oct. 26, 2015). For each portfolio company, Well
Ventures requests board observer seats. Id.

logically follows that the investments Well Ventures makes could
potentially play a critical role for Walgreens and are therefore material.
Accordingly, Well Ventures should—at a minimum—be mentioned in the
SEC filings as appropriate. Even a brief paragraph flagging its existence
would be helpful so that investors know what function the CVC serves in
the larger vision for Walgreens.327
It could be the case that CVCs fall under
“equity method investments” or “noncontrolling interests.”328
It is difficult
to tell since the information is not broken out. In addition, in Walgreens’
Form 10-K for the fiscal year ended August 31, 2016, there is a reference to
equity investments in other companies in its “Risk Factors” section. “From
time to time, we make debt or equity investments in other companies that
we may not control or over which we may not have sole control.”329
It also
acknowledges the risks of operating in businesses which differ from their
primary lines of business or which operate in different geographic
markets.330
Furthermore, Walgreens states that it relies on the internal
controls and financial reporting controls of these companies in which they
have noncontrolling interests and that such entities “failure to maintain
effectiveness or comply with applicable standards may materially and
adversely affect [them].”331
Since Walgreens agrees that the companies in
which it has noncontrolling interests (i.e., CVC investments) may materially
and adversely affect it, from a legal standpoint it follows that Walgreens
should provide more disclosure on these companies as they may meet the
level of materiality. As specified in earlier examples, Walgreens could
specify the industries in which it invests in and the total amount it has
invested. For strategic reasons, the company may not want to specify which
companies its investing in, but to the extent that that information is already
available in the media or otherwise it would be prudent to disclose that
information in the relevant periodic report so that all investors have access
to that information not only the investors that have the resources to compile
such information on their own.
327
Walgreens partnered with Theranos, a high-flying unicorn which was valued at
over $9 billion in 2014. The blood-testing company now faces several lawsuits from
patients and investors, and the SEC is investigating Theranos. See Brian Gormley,
Investors Revisit Due Diligence in Wake of Theranos, WALL ST. J. (July 20, 2016). The
extent of Walgreen’s participation in Theranos is unclear, but Walgreens has filed a civil
lawsuit against Theranos to recoup its investment. Christopher Weaver, et al., Walgreen
Sues Theranos, Seeks $140 Million in Damages, WALL ST. J. (Nov. 8, 2016, 5:47 PM),
http://www.wsj.com/articles/walgreens-seeks-to-recover-140-million-investment-from-
theranos-1478642410.
328
Walgreens Form 10-K, supra note 317 at 54.
329
Id. at 15.
330
Id.
331
Id.

5. General Motors Ventures Case Study
The year 2015 was a record year for financing deals for automotive-
related startups.332
Funding increased by 154% and deals saw a jump of
58%.333
The amount of investments into private companies in the auto tech
space has already surpassed the total amount of funding in 2015 and is on
track to reach the $1 billion mark.334
In order to secure their own futures
while simultaneously addressing challenges such as the rise of electric
vehicles and driverless cars, major auto manufacturers have become active
investors in venture capital deals.335
General Motors Company, a Delaware
corporation (“General Motors”), along with the rest of the auto industry, is
in a transformative time, moving from manufacturing and selling cars to the
business of mobility.336
In 2010, General Motors established a Delaware subsidiary, General
Motors Ventures LLC (“GM Ventures”)337
for the purpose of pursuing
332
Big Auto’s Startup Bets: Where They’re Investing Across AI, Mapping, Automation,
and Materials, CB INSIGHTS (May 11, 2016), https://www.cbinsights.com/blog/auto-
corporates-investing-startups/. Major automakers are playing defense as startups encroach
on their territory. See E-mail Newsletter from Kerry Wu, Auto Tech Industry Analyst, CB
Insights, to Auto Tech Insights by CB Insights subscribers (July 14, 2016, 7:29 PM) (on file
with author). Companies are fighting back by actively investing in autotech startups
through CVCs or the parent companies themselves to the tune of $450 million as of June
2016. See id. A record-breaking year in investments is a strong possibility if the current
pace of investment continues.
333
Foot on the Gas: 2015 Sets Record for Deals in Auto Tech, CB INSIGHTS (Apr. 1,
2016), https://www.cbinsights.com/blog/auto-tech-startups-funding-2015/. Autotech
startups are on a record-breaking pace for funding. For the first half of the year, $450
million was invested in this area. Recently, one of General Motors’ rivals, Ford, invested
$6.6 million in a startup. Gina Hall, Autotech Startups Set a Record Pace for Funding in
2016, SILICON VALLEY BUS. J.: SILICON VALLEY TECHFLASH (July 18, 2016, 12:01 PM),
http://www.bizjournals.com/sanjose/blog/techflash/2016/07/autotech-startups-set-a-record-
pace-for-funding.html.
334
E-Mail Newsletter from Kerry Wu, Auto Tech Industry Analyst, CB Insights, to
Auto Tech Insights by CB Insights subscribers (Oct. 20, 2016, 7:11 PM) (on file with
author).
335
See Foot on the Gas, supra note 333.
336
Erin Griffith, Driven in the Valley: The Startup Founders Fueling GM’s Future,
FORTUNE (Sept. 22, 2016, 6:30 AM), http://fortune.com/cruise-automation-general-motors-
driverless-cars/?iid=leftrail. Startups don’t “adapt well to the politics of slow-moving, risk-
averse corporations. Once their life’s work begins to feel like a job, a switch goes off in
their brains. Some leave to start their next company. Others ‘vest in peace.’ Whatever
innovative thing they built gets lost inside a giant corporate overlord.” Id.
337
General Motors Co., Annual Report (Form 10-K): Exhibit 21 (Feb. 3, 2016),
https://www.sec.gov/Archives/edgar/data/1467858/000146785816000255/ex-

venture capital investments in the automotive cleantech, infotainment,
advanced materials, and other automotive-related technologies space.338
As
of July 2016, GM Ventures made twenty-seven investments and used
almost ninety percent of their $200 million fund.339
Under Chesbrough’s
framework, General Motors would be making both enabling and emergent
investments. General Motors is making strategic investments as well as
innovating in what it anticipates the future direction of the automotive
industry may lie. General Motors and its corporate venture capital arm, GM
Ventures, have been the most active of the automotive manufacturers.340
Their investments range from early stage to late stage, and the fund has
eight professionals.341
General Motors, like Campbell Soup, also makes
investments directly.342
In January 2016, it invested $500 million in Lyft in
a Series F financing where it was the sole investor.343
In describing its
venture capital investments, General Motors has a line item for private
equity and debt investments344
in its Form 10-K for the year ended
December 31, 2015, which notes $529 million in this category for the year
ended December 31, 2015, compared to $509 million for the year ended
December 31, 2014345
—an increase of $20 million. It is difficult to
ascertain whether GM Ventures is included as part of that number since
there are no specific references to it. In the “Notes to Consolidated
Financial Statements” of the Form 10-K, there is also a brief reference to
venture capital: “Private equity and debt investments primarily consist of
investments in private equity and debt funds. These investments provide
21x12312015.htm [hereinafter General Motors Form 10-K].
338
See About Us, GM VENTURES LLC, http://www.gmventures.com/about/index.jsp
(last visited May 10, 2016).
339
There is $23.90 million in dry powder as of July 18, 2016. General Motors
Ventures, PITCHBOOK, https://my-pitchbook-com /#page/profile_1820009183 [hereinafter
General Motors PitchBook Report] (last visited July 18, 2016).
340
Big Auto’s Startup Bets, supra note 332.
341
See id.; but cf. About Us, GM VENTURES LLC,
http://www.gmventures.com/about/index.jsp (last visited May 10, 2016) (listing only five
investment professionals).
342
See General Motors Company, Quarterly Report (Form 10-Q) (Apr. 21, 2016), at
19, 21, 32, 33.
http://www.sec.gov/Archives/edgar/data/1467858/000146785816000317/gm2016q1.htm
(noting General Motor’s $500 million investment in Lyft).
343
General Motors PitchBook Report, supra note 339.
344
“Private equity and debt investments consist of investments in private equity and
debt funds. These investments provide exposure to and benefit from long-term equity
investments in private companies, including leveraged buy-outs, venture capital and
distressed debt strategies.” General Motors Co., Annual Report (Form 10-K) (Feb. 3,
2016),
https://www.sec.gov/Archives/edgar/data/1467858/000146785816000255/gm201510k.htm.
345
See id.

exposure to and benefit from long-term equity investments in private
companies, including leveraged buy-outs, venture capital and distressed
debt strategies.”346
It does not appear that there are any other references to
GM Ventures or venture capital anywhere in the most recent annual or
quarterly reports of General Motors. No references are made to General
Motors’ venture capital activities in its proxy statement either.347
As was the
case with Campbell Soup and Walgreens, information about General
Motors’ CVC activity is available in the media and paid resources.
However, in the SEC filings of General Motors itself, very little is reported.
General Motors differs from the other examples in that it makes CVC
investments through the parent company and GM Ventures. Even if the
CVC investments do not rise to the level of materiality, however, it is still
reported in GM’s financial statements. In describing its equity investments
in the notes to the financial statements, General Motors could provide more
detailed information as the information that is provided is not helpful from
an investor’s perspective.
D. The Need for More Disclosure
Disclosure is a hotly contested topic.348
There is an ongoing debate
about the appropriateness or utility of disclosure generally.349
This Article
takes the position that disclosure in the public company context with respect
to its investments in startups is critical for two reasons: to better understand
the role of CVC investments in a particular public company (which
potentially has long-term implications for the future direction of the
company) and to ameliorate their harm to startups, investors and the
economy. If the information is material it would then be placed in the
346
General Motors Form 10-K, supra note 337, at 82.
347
See General Motors Co., Definitive Proxy Statement (Schedule 14A) (Apr. 22,
2016),
http://www.sec.gov/Archives/edgar/data/1467858/000130817916000367/lgm2016_def14a.
htm.
348
The purpose of mandated disclosure is “to give [a person] information for analyzing
[her] choices critically and to choose optimally.” Omri Ben-Shahar & Carl E. Schneider,
The Failure of Mandated Disclosure, 159 U. PA. L. REV. 647, 649 (2011).
349
See id. at 651 (arguing “that mandated disclosure regularly fails in practice [and] its
failure is inevitable”). But see M. Ryan Calo, Against Notice Skepticism in Privacy (and
Elsewhere), 87 NOTRE DAME L. REV. 1027, 1030 (2013) (“[arguing] against an extreme
skepticism of mandatory notice . . . by questioning whether critics or proponents of notice
have identified and tested all of the available notice strategies” using online privacy as a
case study), and Richard Craswell, Static Versus Dynamic Disclosures, and How Not to
Judge Their Success or Failure, 88 WASH. L. REV. 333, 380 (2013) (arguing that
“understanding the different possible goals of disclosure is essential to any decision about
which disclosures ‘work’”).

financial statements under equity investments. Whether information about
CVC falls under the definition of “materiality” from a numerical or
quantitative perspective, as detailed in Part III.B above, is a fact specific
determination for the public company. However, it may still be able to meet
the materiality threshold because registrants (the public companies) and
auditors must also consider qualitative factors and how a user of the
financial statements would view the information.350
CVCs have invested an impressive $125.57 billion in various
venture capital investment rounds since the beginning of 2010 to the first
quarter of 2016.351
The ten most active CVC investors from January 2010 to
April 2016 were: Intel Capital (395 investments), GV (314 investments),
Qualcomm Ventures (189 investments), Salesforce Ventures (141
investments), SoftBank Capital (115 investments), Caixa Capital Risc (109
investments), GE Ventures (95 investments), Comcast Ventures (95
investments), Cisco Investments (94 investments), and Samsung Venture
Investment (93 investments).352
IT startups accounted for 42 percent of the
capital invested with business to consumer and healthcare following at 21.2
percent and 20.2 percent, respectively.353
Despite increasing investments
through corporate venture capital, there is very little disclosure in the
corporate venture capital arena even though public companies fund such
investment activities. One only needs to peruse the SEC filings to see that
there is either very little information on public companies’ CVCs or the
information is provided in a way that makes it very difficult to ascertain the
amount of money public companies are spending on CVCs or what they are
investing in.
If the information on CVCs is material or is required to be in the
financial statements, the manner in which such information is currently
presented and what is currently disclosed is insufficient.354
Under the
current requirements of Regulation S-K and Regulation S-X, public
companies who make CVC investments disclose the information in ways
that are not transparent to an investor. For example, the information about
corporate venture capital is referenced in a footnote or obliquely referenced
in the MD&A or risk factors section.
350
See discussion supra Section III.B and accompanying notes.
351
Tom, supra note 149.
352
Id.
353
Id.
354
See generally discussion supra Section II (discussing CVCs’ impact on the private
companies and innovation and on the economy).

In addition to the legal reasons for disclosing the information about
CVC investments, there are also policy reasons. As this Article points out in
earlier sections, the participation of CVCs—particularly in the later rounds
of financings—contributed to the unicorn phenomenon. Many experts have
pointed out that this has affected both the private and public markets
because private companies are staying private longer and there are very few
companies going public.355
Some private companies are now larger and
have a greater impact on the economy than public companies and the
existing legal regulatory structure is ill-equipped to adequately address all
the attendant legal issues that have arisen in the context of the explosion of
private companies, especially unicorns.356
Instead of relying on information
from the parent (public) company about CVCs—because there is very little
to none—investors will rely on the media’s interpretation of the limited
information that is available. For example, in the case of Campbell Soup
Company, one of the five case studies discussed in Part III.C above, its
CVC activity through Acre Venture Partners largely originated from media
reports.357
There is a way to remedy how information about CVC investments
are currently disclosed: revise Regulation S-K and Regulation S-X.
Regulation S-K should be revised to require a section on CVCs with
information ranging from the amount allocated to the CVC to which
companies they are investing in to how many board seats or board observer
roles each investment professional has. Specifically, in Forms 10-K358
and
10-Q,359
the information about a public company’s CVC activities—
whether forming a CVC or investing in private companies or serving on the
board of a private company—can be made in Items I. Business and IA. Risk
Factors. Under Item 8.01 Other Events of the Form 8-K, the public
company may disclose “information…not otherwise called for by this form,
that the [public company] deems of importance to security holders.”360
In
355
See Gurley, supra note 187.
356
See Fan, supra note 19; see, e.g., discussion supra Section III.A.1 (discussing how
Alphabet’s disclosures under Other Bets—which includes GV—increased Alphabet’s stock
price).
357
See discussion supra Section III.C.3 and accompanying notes.
358
See Form 10-K, Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, SEC. & EXCH. COMM’N, http://www.sec.gov/about/forms/form10-
k.pdf.
359
See Form 10-Q, SEC. & EXCH. COMM’N, http://www.sec.gov/about/forms/form10-
q.pdf.
360
See Form 8-K, Current Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, SEC. & EXCH. COMM’N, https://www.sec.gov/about/forms/form8-
k.pdf.

this way, potential and current investors as well as employees can get a
better grasp on what CVCs do and how big a role they play in their parent
company. This information has the added benefit of being helpful to
startups who may be considering investments from the public companies
who are making CVC investments.
Regulation S-X can be revised to specify that the notes to financial
statements need to break down equity investments in private companies in a
way that is clear and understandable. For example, if equity investments are
grouped under “Other Long-Term Assets,” which include both debt and
equity investments then that information needs to be broken out to describe
what portion constitutes debt as compared to equity. Without this level of
specificity, important information can be obscured. Alternatively, instead of
using a variety of terms to refer to CVC investments, one common term
should be agreed upon.
The CVCs of each public company should have the following
information in its SEC filings, at a minimum: (1) the amount of assets under
management; (2) the amount of money that the CVCs have left to invest
(i.e., dry powder); (3) the total number of investments (while also noting
which ones are active); (4) the names and number of investment
professionals as well as how many board positions (either on the board or as
a board observer) each one of them holds; (5) the investment preferences of
the CVC fund; and (6) recent investments under the period covered by the
quarterly or annual report. The information the Article advocates for is
already available—just not to everyone or in any consistent manner.
IV. HOW CVC IMPACTS THE BOARDS OF PRIVATE COMPANIES
The expanding role of CVC in private companies also impacts such
companies’ board of directors. As CVCs move from board observers to
serving as members of the board, their responsibilities and access to
information shifts. The section below begins by discussing the CVC role as
board observer. Then, the discussion centers on the legal implications of
becoming a board member and the inherent challenges a CVC
representative faces as a board member when he or she also represents the
interests of the parent company.
This Article argues for more vigilance regarding the board
arrangements in startups and sets forth a best practices framework. The
suggested best practices for the boards of startups were made to address
potential conflicts of interest for CVC representatives who serve on boards

and the need for appropriate financial and industry expertise given the
increasing complexities of startups which are starting to look more like
public companies that are operating in the private sphere. As discussed in
Part II above, with private companies staying private longer as a result of
increased CVC investments, getting the correct board mix is more critical
than ever to help ensure that the internal controls and governance keep pace
with the growth of the private company.
A. CVC as Board Observer
When a representative of a CVC serves as a board observer, it
differs from serving as a board member in three fundamental ways: (1) there
are no board voting rights as an observer; (2) observers can be excluded
during certain discussions; and (3) information rights are contractual. Put
simply, the rights of an observer are limited by the investors’ rights
agreement361
and they do not have fiduciary duties like board members do
unless they agree otherwise.362
The CVC is required to have a certain
threshold level of shares for the particular series of stock it invested in to
maintain its observer rights.363
As an observer, it will receive notices,
minutes, consent, and other materials that it provides to the company’s
directors.364
From a contractual standpoint, the representative of the CVC
may, but typically does not, agree to act as a board member would
(essentially agreeing to be bound to the same fiduciary duties as board
members), and the company maintains the right to decide whether to
exclude such board observer from certain meetings for reasons related to
attorney-client privilege, disclosure of trade secrets, or conflict of
interest.365
Additionally, the company could choose to exclude the CVC
361
See NAT’L VENTURE CAPITAL ASS’N, MODEL LEGAL DOCUMENTS, INVESTOR
RIGHTS AGREEMENT 22–23, http://nvca.org/resources/model-legal-documents/.
362
Sometimes companies choose to include such provisions in a management rights
letter signed between the company and the particular investor receiving such rights. See id.
at 23 n.35. A company may also request that board observers execute confidentiality
agreements since they are not subject to the same fiduciary duties as directors. See id.
363
See id. at 22.
364
See id.
365
The relevant language in the investors’ rights agreement states:
[S]uch representative shall agree to hold in confidence and trust and to act in a
fiduciary manner with respect to all information so provided; and provided
further, that the Company reserves the right to withhold any information and to
exclude such representative from any meeting or portion thereof if access to such
information or attendance at such meeting could adversely affect the attorney-
client privilege between the Company and its counsel or result in disclosure of
trade secrets or a conflict of interest, or if such Investor or its representative is a
competitor of the Company.

representative if it is a competitor of the company.366
From a best practices standpoint, it would behoove the CVC to have
a board observer from a corporate venture capital arm that is a subsidiary
instead of a corporate venture unit which is part of the parent company, but
if the latter were the case, then it should implement appropriate
confidentiality procedures. CVCs should disclose any potential conflicts
early to ensure that proper board procedure can be followed—i.e., they
leave the board discussion for a certain portion of the meeting—to prevent
any hint of impropriety. However, CVCs should resist attempts to impose
fiduciary obligations on them as board observers and should be wary if the
startup offers only limited information or attendance rights, or they are
excluded from board meetings.
Although CVCs took more board observer roles in the past, the
current trend is for many of them to take board seats.367
Ultimately,
however, the role the CVC representative undertakes depends on the
philosophy of the corporate venture capital arm of the public company and
the amount of money it invests in the startup. To cite some examples, when
American Express Ventures participates on a board, it is typically in the
capacity of a board observer.368
Intel Capital, in contrast, is much more
likely to take a seat on the board.369
B. CVC as Board Member
As a board member, CVC representatives are bound to certain
fiduciary duties by statute:370
the duty of loyalty;371
and duty of care.372
Id. at 22–23.
366
See id.
367
The top 10 CVCs—the top 10 being denoted by a CB Insights article—often take
an active board position in the private companies they invest in (versus a more passive
board position, such as “board observer”). For example, Intel Capital has sixty-four board
member seats out of 154 total current board positions. Intel Capital PitchBook Report,
supra note 291. GV has seventy-five board member seats out of eighty-two current board
positions. GV PitchBook Report, supra note 268.
368
See American Express Ventures, PITCHBOOK, https://my-pitchbook-
com/#page/profile_567803052 (last visited July 18, 2016).
369
Under the section titled “Top 25 Board Seats” in the PitchBook report, Intel Capital
had board observer status only in seven of the twenty-five seats; the other eighteen were all
board seats. See Intel Capital PitchBook Report, supra note 291.
370
Specifically, this refers to the statutory law of the state of incorporation of the
company that the CVCs are investing in. For example, if the company is incorporated in
Delaware, board powers are codified in Section 141 of the Delaware General Corporation
Law.

There are also other duties, such as good faith,373
disclosure,374
and
confidentiality,375
which CVCs should also bear in mind.
1. Duty of Care
By reviewing board materials carefully, advocating for deliberate
review of board actions, voicing support for ongoing review of financial
controls, seeking the advice and counsel of other experts as needed,376
and
371
See Cede & Co. v. Technicolor, Inc. 634 A.2d 345, 361 (Del. 1993) (“Essentially,
the duty of loyalty mandates that the best interest of the corporation and its shareholders
takes precedence over any interest possessed by a director, officer or controlling
shareholder and not shared by the stockholders generally.”); Guth v. Loft, 5 A.2d 503, 510
(Del. 1939) (“Corporate officers and directors are not permitted to use their position of
trust and confidence to further their private interests.…The rule that requires an undivided
and unselfish loyalty to the corporation demands that there shall be no conflict between
duty and self-interest.”).
372
In Delaware, the duty of care is not codified, but has been developed in case law,
and is separate from the duty of loyalty. See Smith v. Van Gorkom, 488 A.2d 858, 872-73
(Del. 1985) (“[A] director's duty to exercise an informed business judgment is in the nature
of a duty of care, as distinguished from a duty of loyalty.”). Under the duty of care,
directors have a responsibility to “inform themselves, prior to making a business decision,
of all material information reasonably available to them. Having become so informed, they
must then act with requisite care in the discharge of their duties.” Aronson v. Lewis, 473
A.2d 805, 812 (Del. 1984) (holding that the duty of care is integral to application of the
business judgment rule), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244
(Del. 2000).
373
The key difference between good faith in the fiduciary duty context and the implied
covenant of good faith and fair dealing in the Uniform Commercial Code context is
temporal—the courts analyze the parties’ actions at the time of the alleged wrongdoing and
review what happened in the past to determine the parties’ relationship when the breach
occurred in the case of the former. With respect to an implied covenant claim, the courts
examine the time the contract was made and whether the parties would have made the
decisions they did if the issue discussed arose at that time. Gerber v. Enter. Prods.
Holdings, LLC, 57 A.3d 400, 418 (Del. 2013); see also In re Walt Disney Co. Derivative
Litig., 906 A.2d 27, 67 (Del. 2006).
374
See Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985).
375
See generally United States v. O’Hagan, 521 U.S. 642, 652 (1997) (holding that
under the misappropriation theory of insider trading, “a fiduciary’s undisclosed, self-
serving use of a principal’s information to purchase or sell securities, in breach of a duty of
loyalty and confidentiality, defrauds the principal of the exclusive use of that
information”); S.E.C. v. Lyon, 605 F. Supp. 2d 531, 542 (S.D.N.Y. 2009) (citing United
States v. Falcone, 257 F.3d 226, 234 (2d Cir. 2001) (reaffirming that the duty of
confidentiality, in the context of securities laws, exists “where there is explicit acceptance
of a duty of confidentiality or where such acceptance may be implied from a similar
relationship of trust and confidence between the parties”).
376
DEL. CODE tit. 8, § 141(e) (2016), http://delcode.delaware.gov/title8/title8.pdf. Note
that the standard of gross negligence is applied if a board is alleged to breach this particular
duty. Citigroup Inc. S’holder Derivative Litig., 964, A.2d 106, 124 (Del. Ch. 2009). In

ensuring the accuracy of board minutes and written board actions, a CVC
board member can discharge his or her duty of care.377
Recent court cases
out of the Delaware Court of Chancery highlight the need to abide by the
duty of care.378
For example, in In re Rural Metro Corp.,379
the opinion
illustrates the need for active and engaged directors in any sale process,
which includes taking steps to ensure that all conflicts are identified,
disclosed, and discussed.380
Directors must be proactive in asking questions
about any existing potential conflicts, the implications of such conflicts, and
how they will be addressed.381
Put simply, directors must focus on the
order to succeed on a claim of breach of duty of care against an individual, the plaintiff
must rebut the presumption of the business judgment rule as to the majority of the
directors. Hamilton Partners, L.P. v. Highland Capital Mgmt., L.P., C.A. No. 6547-VCN,
2014 WL 1813340 (Del. Ch. May 7, 2014). The court will apply the more stringent
standard of entire fairness (where the burden shifts to the board of directors to prove the
principles of fair dealing and fair price) in certain circumstances. See Weinberger v. UOP,
Inc., 457 A.3d 701, 710 (Del. 1983).
377
If there is a good faith effort to discharge the duty of care, then the business
judgment rule applies. Aronson v. Lewis, 473 A.2d at 812. If there is not a good faith effort
then a more stringent standard applies, such as the entire fairness standard. Cede & Co. v.
Technicolor, Inc. 634 A.2d at 371. The duty of care focuses more on process than
substance. See, e.g., In re Trados, 73 A.3d 17 (Del. Ch. 2013) (in which the court
scrutinized the actions of the board of directors in a merger action). Note that even if
directors breach the duty of care, there is a statutory limitation of liability for directors
under Section 102(b)(7) of the Delaware General Corporation Law (which only exculpates
directors not anyone else). DEL. CODE tit. 8, § 102(b)(7) (2016),
http://delcode.delaware.gov/title8/title8.pdf. Furthermore, there are indemnification
statutes, such as the one codified in Delaware’s General Corporation Law Section 145,
which allows corporations to
indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of
the fact that the person is or was a director, officer, employee or agent
of the corporation
and permits corporations to insure their directors in the event of a breach of duty of care. §
145.
378
As alluded to in note 377, supra, even though directors are exculpated pursuant to
the Section 102(b)(7) of the Delaware General Corporation Law, financial advisors can still
be liable for aiding and abetting a breach of the duty of care by the directors. See In re
Rural Metro Corp. (Rural Metro), 88 A.3d 54, 85–86 (Del. Ch. 2014).
379
In Rural Metro, the court found that if a “third party knows that the board is
breaching its duty of care and participates in the breach by misleading the board or creating
the informational vacuum, then the third party can be liable for aiding and abetting.” Rural
Metro, 88 A.3d at 97.
380
Id. at 105-106.
381
See id.

process of making a decision.382
In the case of CVCs, one example of a potential conflict of interest
occurs when the startup directly competes with the parent company of the
CVC. If that is the case, then the CVC board representative needs to
identify the conflict, disclose the nature of the conflict, and discuss
appropriate next steps. If the startup is contemplating the parent company as
a potential acquirer, the CVC board representative must recuse herself from
the decisionmaking process. The board minutes of the startup should reflect
a clear record of the discussions that transpired, including a careful review
of the facts, steps it took to make the decision, and the decision that the
board made as a result of that deliberation. By taking these steps, the board
demonstrates a good faith effort to discharge its duty of care, as defined
above. As a result, should stockholders decide to sue the company, the
company will be subject to the standard of the business judgment rule
(where the onus is on the stockholder to prove wrongdoing) instead of the
more stringent standard of entire fairness.383
CVCs also need to tread carefully when determining the appropriate
number of boards that they can serve on and what type of decisions they
may need to recuse themselves from. This can help address concerns that
governance procedures are being ignored in the startup context. In the 2009
survey “A Seat at the Table Study” conducted by the National Venture
Capital Association and venture capital research firm, Dow Jones
VentureSource, the two organizations reported that venture capitalists serve
on an average of 4.4 boards (in 2006 it was 4), but venture capitalists
believe that 4.6 board seats for early-stage companies and 5.4 for later-stage
companies is ideal; chief executive officers, in contrast, believe that the
ideal number of board seats for VCs were 3.8 seats for early-stage
382
By focusing on the process of making decisions, directors exercise their fiduciary
duty of care. “Directors should:
 be active and engaged;
 obtain access to relevant information;
 obtain input from relevant board committees and board advisors;
 actively deliberate decisions, asking relevant questions and discussing the
information provided;
 examine available alternatives; and
 resist the pressure for a quick decision.”
WILSON SONSINI GOODRICH & ROSATI, WSGR ALERT: CRITICAL ISSUES FOR BOARDS OF
DIRECTORS: A PERSPECTIVE FROM WILSON SONSINI GOODRICH & ROSATI 1 (2011),
https://www.wsgr.com/publications/PDFSearch/wsgralert-board-of-directors-critical-
issues.pdf
383
See discussion supra note 376.

companies and 4.2 for later-stage companies.384
In an extreme case, Forest
Baskett, a partner at New Enterprise Associates, a traditional venture capital
firm, said that he serves on twenty boards.385
Corporate venture capitalists,
like their venture capital firm counterparts, also serve on a number of
boards. GV typically gets a seat on the board as an investor in a private
company. Out of the “Top 25 Board Seats” in the PitchBook report GV,
only three were board observers; the remaining twenty-two were board
seats (which means that they have voting rights). One of the general
partners of GV, Andrew Wheeler is on seven of the “Top 25 Board Seats”
representing GV’s interests;386
Mr. Wheeler serves on the boards of thirteen
companies in the aggregate.387
Most top tier VCs serve on eight to twelve
boards.388
In light of the increasing complexity of private companies (e.g.,
Uber and other unicorns) and startups staying private longer, the question is
whether service on eight or twelve boards remains manageable. A director
may be unable to fulfill his or her duty of care in any meaningful way
depending on the number of boards he or she serves on since serving on a
board of a private company typically means that board members meet at
least once a quarter if not monthly. Therefore, setting a limit on the number
of boards a person can serve on would be prudent, especially if a CVC arm
of a public company is big and active like GV is. As the corporate venture
capital arm of a public company continues to grow, it may entail hiring
384
Scott Austin, New Study Peers into Venture-Backed Company Boardroom, WALL
ST. J.: VENTURE CAPITAL DISPATCH (Nov. 10, 2009),
http://blogs.wsj.com/venturecapital/2009/11/10/new-study-peers-into-venture-backed-
company-boardroom/.
385
In response to a question on whether entrepreneurs should pay attention to the
number of boards a venture capitalist serves on Mr. Baskett replied, “I think the most
important thing that entrepreneurs should do is not look at numerical counts but to do
reference checks . . . . I don’t think the number of boards is a big deal.”
He continued, “I’ve always been on a lot of boards. It’s more than I anticipated . . .
but I think that’s partly because we’ve been through a pretty long dry spell of IPOs and
exits. So I’ve been continuing to invest on a regular basis and my existing portfolio has . . .
stacked up.” Scott Austin, VC Forest Baskett Reflects on Managing His 20 Board Seats,
WALL ST. J.: VENTURE CAPITAL DISPATCH (July 30, 2010),
http://blogs.wsj.com/venturecapital/2010/07/30/vc-forest-baskett-reflects-on-managing-his-
20-board-seats/.
386
See GV PitchBook Report, supra note 268 (note that the report only covers the top
25 board seats—he could be on more since GV has 501 total investments). Richard Miner,
another General Partner of GV, sits on four of the top 25 boards and Krishna Yeshwant, yet
another General Partner of GV, sits on two. See id.
387
See Andrew Wheeler, PITCHBOOK, https://my-pitchbook-
com/#page/profile_793205757 (last visited July 18, 2016).
388
In private conversations with attorneys from prominent law firms specializing in
the venture capital practice area, the author was informed that venture capitalists from top-
tier firms typically serve on eight to twelve Boards.

more investment professionals.
2. Duty of Loyalty
The duty of loyalty involves protecting confidential information and
communications by establishing clear procedures, being aware of potential
conflicts of interests389
for the CVC representative or other directors or their
affiliates, and ensuring the disclosure of all material facts regarding a
particular transaction. Furthermore, interested directors (whether the CVC
representative or others) should limit their participation in deliberations or
voting regarding a transaction. The applicable Delaware statute390
does not
necessitate the recusal of an interested director provided that certain
conditions are met, including disclosure of the material facts by the director
regarding his or her relationship or interest to the board of directors or
committee and the stockholders entitled to vote on the matter.391
In addition,
the contract must be fair to the corporation at the time it is approved by the
board, committee, or stockholders.392
To cite one example, in 2014,
Alphabet (then Google) wanted to buy Nest Labs (“Nest”).393
GV did not
participate in the negotiations since it had recused itself. Ultimately, the
other VC firms which invested in Nest and had board representatives,
agreed to a purchase price of $3.2 billion—the fourth largest venture exit
that year.394
Kleiner Perkins Caufield & Byers and Shasta Ventures did
extremely well as early investors of Nest—Kleiner Perkins Caufield &
Byers achieved a twenty times return of $400 million from a $20 million
investment, and Shasta Ventures received $200 million.395
However, since
389
If there is a conflict of interest in the context of a board decision or transaction,
directors are not protected by the business judgment rule and liability would not be limited
by statute. See DEL. CODE tit. 8, § 102(b)(7) (2016),
http://delcode.delaware.gov/title8/title8.pdf. Note that conflicts of interest can arise
whether the individual director has a personal interest or not, such as in the case of a
representative from the CVC serving on the board who is not serving the interest of the
parent company on the board but rather owes a duty to all stockholders of the company.
390
See § 144.
391
See § 144(a)(1) and (2).
392
See § 144(a)(3).
393
Brooker, supra note 35. Nest Labs creates a network between its in-home devices.
Ryan W. Neal, Why Google, Not Apple, Purchased Nest: 7 Facts You May Not Know
About Google’s $3.2 Billion Acquisition, INT’L BUS. TIMES (Jan. 14, 2014, 12:57 PM),
http://www.ibtimes.com/why-google-not-apple-purchased-nest-7-facts-you-may-not-know-
about-googles-32-billion-acquisition.
394
Brooker, supra note 35.
395
See Josh Constine, Who Gets Rich From Google Buying Nest? Kleiner Returns 20x
on $20M, Shasta Nets ~$200M, TECHCRUNCH (Jan. 13, 2014),
http://techcrunch.com/2014/01/13/nest-investors-strike-it-rich/.

one of Kleiner Perkins Caufield & Byers’s partners, John Doerr, is on the
board of Google, Kleiner should have recused itself and not participated in
significant portions of the negotiations in order to safeguard the duty of
loyalty.396
Another conflict arises in the area of self-driving cars. As Alphabet
continues to invest in ride-sharing and Uber does the same in self-driving,
the conflicts of interest between the two companies will only intensify.397
Interestingly, David Krane, a managing director and new CEO of GV, sits
on Uber’s board.398
Although Mr. Krane has very close ties to Alphabet—
he was one of Google’s first 100 employees and has been involved with a
number of Google’s $1 billion plus exits—he is not conflicted out.399
The CVC world is especially rife with conflict because, in many
cases, the parent companies of the CVCs are very involved in the venture
capital dealings of CVCs. The board representatives from CVCs must make
decisions in the best interest of all stockholders in the company and not
solely in the interests of the parent companies of the CVCs. This can be a
difficult line to toe especially given the various legal ways in which CVCs
are structured. For example, if CVCs are part of a business unit, as is the
case with General Mills,400
the board representatives of such CVCs are
employed by the parent companies. In contrast, in the case of CVCs which
are wholly-owned subsidiaries of parent companies but with some level of
independent decision-making, there may be a layer of autonomy that does
not exist when a CVC directly reports to the parent company in some way.
Therefore, although in theory board representatives of CVCs should
represent the interests of all stockholders of the private companies that they
invest in, CVCs may only be considering the one that pays the bills—the
parent companies of the CVCs.
396
Unless there is a lawsuit, only those participants in the decisionmaking process are
privy to what type of process was followed.
397
See E-mail Newsletter from Kerry Wu, Auto Tech Industry Analyst, CB Insights, to
Auto Tech Insights by CB Insights subscribers (Sept. 1, 2016, 8:33 PM) (on file with
author); Mikey Tom, Alphabet, Uber Set to Go Head-to-Head, PITCHBOOK (Aug. 30,
2016), http://pitchbook.com/news/articles/alphabet-and-uber-set-to-go-head-to-head; Mark
Bergen, Google Ventures’ New Chief, David Krane, is the Überconnector, RECODE (Aug.
12, 2016, 2:10 PM), http://www.recode.net/2016/8/12/12445218/google-ventures-david-
krane-connector.
398
See Uber Technologies, PITCHBOOK,
https://my.pitchbook.com/#page/profile_1141265663 (last visited Sept. 22, 2016).
399
See Bergen, supra note 397.
400
See discussion supra Section III.C.3 (briefly describing the structure of General
Mills’ corporate venture capital arm).

CONCLUSION
Having CVCs within the confines of multinational public
corporations may lull regulators into a false sense of security that CVCs do
not need to be scrutinized because they already reside within a framework
subject to increased legal rules and regulations. However, as this Article
illustrates, there are sound reasons why additional disclosures should be
made about CVC investments of public companies.
The CVCs discussed in Part III above each came from different
industries and had various levels of involvement in the innovation
ecosystem. In many instances, the information (when available) about the
CVC activities reported by public companies in their periodic reports were
difficult to find or described in a variety of ways. CVC investments were
referred to as “noncontrolling interests,” “non-marketable equity
investments,” “private equity,” and “long-term equity investments.” In most
cases, CVC activities were only one part of the line item in the
Consolidated Financial Statements. This made it difficult to ascertain to
what extent CVC activities were fueling the next generation of technology.
Given how dispersed the information about CVCs is, Regulation S-K and
Regulation S-X, this Article recommends that these regulations be revised
to require that periodic reports should reflect information about CVCs
(when it is material to the registrant) in a cohesive, consistent manner. In
light of the increasing prominence of CVCs across myriad economic sectors
and their impact on the innovation ecosystem and private companies more
specifically, the SEC should also mandate a high-level overview of a
company’s equity investments in the MD&A section as that is likely of
more utility to an investor.
In order to ameliorate the harm to startups, at the board level CVC
representatives need to ensure that they adhere to their fiduciary duties. In
order to accomplish this, CVCs should take the following actions: set a limit
on the number of boards that CVC representatives may serve on; emphasize
that CVC representatives should be mindful of the interests of all
stockholders when making decisions (rather than just what benefits the
parent company of the CVC arm); and avoid conflicts of interests in
decisionmaking by having CVC representatives recuse themselves as
appropriate. Furthermore, as some CVCs take a more active role on the
boards of directors, instituting a set of best practices will be key to
combatting the lack of internal controls and governance in startups that are
ramping up quickly.

As CVCs become commonplace in public companies, they are often
used as tools for innovation. To this end, CVCs and their parent companies
must strive to institute a set of best practices that will better serve not only
the private companies they invest in, but the investors in the parent
company and the innovation ecosystem overall. In this way, investors can
get a better grasp on what CVCs do and how big a role they play in the
future goals of their parent companies.

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