In the paper “Intrapreneurship,” recently made available on SSRN, I turn my focus from startups/entrepreneurship to innovation inside large corporations, or intrapreneurship. I examine both traditional intrapreneurship, or innovation taking place inside large corporations, and corporate venture capital, where a corporation pursues innovations by funding startups and potentially acquiring them later.

The Article first explores traditional intrapreneurship. Intrapreneurial corporations have long existed, from 3M (Post-It Note) to Lockheed Martin (U-2 Spy Plane) to Google (Gmail). However, given that large corporations have tax, information, and scope advantages over startups, it is perhaps surprising that we do not observe overwhelming levels of intrapreneurship vs. entrepreneurship.

Despite the corporation’s many advantages, intrapreneurship does not seem to be all roses. Intrapreneurial projects fail and startups form at a rapid rate. There are many explanations; the one I explore most is a business school theory of much buzz – Clayton Christensen’s “the innovator’s dilemma.”[1] Christensen shows that well-managed large corporations cater to existing customers and improve upon existing products rather than pursue disruptive innovations that create new products and new demand. Eventually, however, experience has shown that entrepreneurial disruptive innovations reduce or invade the large corporation’s space. This is the innovator’s dilemma: stick with a successful strategy and eventually be disrupted by a startup.

Christensen says that to solve the innovator’s dilemma and have a large corporation pursue a concurrent sustaining/disruptive innovation approach, we must reduce the asymmetries that exist within large corporations. This includes both asymmetric motivation (only caring about upstream movements to higher-end products and customers) and asymmetric information (organizational hurdles that prevent disruptive threats and potential responses to them from filtering up from employees to senior management).

Much like corporate law could tip the scales toward forming a startup by offering the founders limited liability, corporate law can also speak to the innovator’s dilemma inside large firms. First, the business judgment rule – as central a principle to corporate law as limited liability – prompts senior management (the CEO and board of directors) to pursue a disruptive innovation even if it might fail. Locating intrapreneurial ventures in new organizational units within the corporation, or even corporate subsidiaries, is a way to pursue disruptive innovation while still catering to the corporation’s core business. Thus, corporate law reduces the asymmetric motivation problem, albeit on the margins, as market pressures will ultimately drive business strategy.

Second—and less intuitive/more controversial—corporate law might also reduce the asymmetric information problem. Christensen says that skilled employees do sometimes see disruption coming, and develop a response to it, but those ideas do not reach the senior management level. Delaware law recognizes a duty to monitor, part of the duty of loyalty, which mandates that the board of directors install a compliance system to monitor for employee illegal activity. The duty to monitor does not reach business risks, whether from overexposure to subprime mortgages or threats from disruptive innovation. However, it can so work indirectly when coupled with market pressures. Consequently, the duty to monitor may help reduce the asymmetric information problem.

Finally, the Article pivots to perhaps the best of both worlds: corporate venture capital. Large corporations can and do form venture arms to fund startups, which allow the corporations to continue pursuing sustaining innovations while also sharing in disruptive activity gains through startup ownership. I will argue that corporate venture capital is even theoretically equipped to outperform private venture capital in funding startups, although corporate venture capital’s actual success is varied.

This is largely a descriptive, not normative, piece. I do not argue for a change in corporate law to make corporations even more intrapreneurial. From a social welfare perspective, it should not matter who is innovating – startups or large corporations. Nor should it matter who funds innovation, private or corporate venture capitalists. This Article is simply an inquiry into the distributive, or the relative balance between where innovation happens, who funds it, and why.

ENDNOTES

[1] Clayton M. Christensen, The Innovator’s Dilemma: The Revolutionary Book That Will Change the Way You Do Business (1997).

This post comes to us from Darian M. Ibrahim, Professor of Law at the William & Mary Law School.  It is based on his article entitled “Intrapreneurship”, which is available here.