Washington and Lee Law Review, Aug 2018

This Article on “intrapreneurship” has several goals. First, it points out that while much of the legal literature on innovation is concerned with startups (entrepreneurship), the innovation that takes place inside our largest corporations (intrapreneurship) is substantial, important, and understudied. Second, the Article observes that while large technology corporations that used to be startups may remain intrapreneurial in culture, intrapreneurship is less common in the aggregate than we might expect. Reasons include organizational bureaucracy, laws favoring entrepreneurship, and what Clayton Christensen (Harvard Business School) calls “the innovator’s dilemma.” The innovator’s dilemma is, put simply, that good management causes large corporations to please existing customers with new and improved products at the expense of cultivating disruptive innovations that could replace those products altogether. Third, the Article detours to corporate law, which might, as a descriptive matter, play at the margins of the innovator’s dilemma and the entrepreneurial/intrapreneurial balance. Finally, the Article explores a hybrid approach—corporate venture capital—that combines entrepreneurial and intrapreneurial advantages. In corporate venture capital, a large corporation’s venture arm can invest in promising startups, and thus share in disruptive gains, without having to overcome obstacles to developing those projects internally. This Article on “intrapreneurship” has several goals. First, it points out that while much of the legal literature on innovation is concerned with startups (entrepreneurship), the innovation that takes place inside our largest corporations (intrapreneurship) is substantial, important, and understudied. Second, the Article observes that while large technology corporations that used to be startups may remain intrapreneurial in culture, intrapreneurship is less common in the aggregate than we might expect. Reasons include organizational bureaucracy, laws favoring entrepreneurship, and what Clayton Christensen (Harvard Business School) calls “the innovator’s dilemma.” The innovator’s dilemma is, put simply, that good management causes large corporations to please existing customers with new and improved products at the expense of cultivating disruptive innovations that could replace those products altogether. Third, the Article detours to corporate law, which might, as a descriptive matter, play at the margins of the innovator’s dilemma and the entrepreneurial/intrapreneurial balance. Finally, the Article explores a hybrid approach—corporate venture capital—that combines entrepreneurial and intrapreneurial advantages. In corporate venture capital, a large corporation’s venture arm can invest in promising startups, and thus share in disruptive gains, without having to overcome obstacles to developing those projects internally.

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Intrapreneurship Darian M. Ibrahim 0 1 0 Thi s Article is brought to you for free and open access by the Washington and Lee Law Review at Washington & Lee University School of Law Scholarly Commons. It has been accepted for inclusion in Washington and Lee Law Review by an authorized editor of Washington & Lee University School of Law Scholarly Commons. For more information , please contact , USA 1 William & Mary Law School - Intrapreneurship Darian M. Ibrahim This Article on “intrapreneurship” has several goals. First, it points out that while much of the legal literature on innovation is concerned with startups (entrepreneurship), the innovation that takes place inside our largest corporations (intrapreneurship) is substantial, important, and understudied. Second, the Article observes that while large technology corporations that used to be startups may remain intrapreneurial in culture, intrapreneurship is less common in the aggregate than we might expect. Reasons include organizational bureaucracy, laws favoring entrepreneurship, and what Clayton Christensen (Harvard Business School) calls “the innovator’s dilemma.” The innovator’s dilemma is, put simply, that good management causes large corporations to please existing customers with new and improved products at the expense of cultivating disruptive innovations that could replace those products altogether. Third, the Article detours to corporate law, which might, as a descriptive matter, play at the margins of the innovator’s dilemma and the entrepreneurial/intrapreneurial balance. Finally, the Article explores a hybrid approach—corporate venture capital—that combines entrepreneurial and intrapreneurial advantages. In corporate venture capital, a large corporation’s venture arm can invest in promising startups, and thus share in disruptive gains, without having to overcome obstacles to developing those projects internally.  Professor of Law, William & Mary Law School. My thanks to Bill Bratton and participants in a Cardozo Faculty Workshop for helpful suggestions. Special thanks to research assistants Kristin Adams, Lauren Bridenbaugh, Elizabeth Plowman, Brian Reagan, and Hayley Steffen, as well as law librarian Fred Dingledy for their excellent research support. I. Introduction ...................................................................1742 I. Introduction Entrepreneurship is sexy. Our business lore includes Steve Jobs creating Apple Computer in his garage1 and Mark Zuckerberg creating Facebook in his Harvard dorm room.2 1. See WALTER ISAACON, STEVE JOBS 67 (2011) (pointing out that the Jobs’s house became the assembly point for Apple I boards). 2. See BEN MEZRICH, THE ACCIDENTAL BILLIONAIRES: THE FOUNDING OF FACEBOOK: A TALE OF SEX, MONEY, GENIUS AND BETRAYAL 153 (2010) (“In the incorporation documents, they’d laid out the ownership of [Facebook] as they’d Innovation takes flight when these entrepreneurs bravely forego the safety of a traditional job and create a new firm (a “startup”) to pursue an exciting new idea.3 Everyone, including politicians4 and law professors (especially this one5), likes entrepreneurship. What receives less attention is innovation that takes place inside our largest corporations, referred to as intrapreneurship. This Article explores the world of intrapreneurship. It is also the first systematic academic effort to study how the law, and in particular corporate law, might affect the intrapreneurial/entrepreneurial balance.6 I note at the outset that many of these effects, to the extent they are having an influence, are likely at the margins. They are also probably unintended effects, as Delaware judges are not deciding fiduciary duty cases brought against corporate management with innovation ramifications in mind.7 Still, much like a prior agreed upon in Mark’s dorm room.”). interesting essay explores how tort law’s deference to custom might unintentionally hinder innovation,8 this Article explores how corporate law might be playing an unanticipated role in the optimal intrapreneurial/entrepreneurial balance we observe.9 This Article also explores a hybrid approach—corporate venture capital—that may be the best of both worlds.10 Corporate venture capital programs allow large corporations to keep abreast of, and participate in, exciting new technologies without having to spend internal R&D dollars or overcome bureaucratic obstacles ever present in large organizations.11 Before discussing these original contributions, this Article explores intrapreneurship as a descriptive phenomenon.12 Intrapreneurial corporations have long existed, from 3M (whose employees developed the Post-It Note) to Lockheed Martin (whose “skunkworks” group developed the U-2 Spy Plane).13 Now much intrapreneurship occurs in the technology stalwarts that began as startups (e.g., Google and Amazon).14 However, given that large corporations have advantages over startups in terms of (showcasing thirty-six cases supporting the proposition that “the purpose of the duty of loyalty is in large measure to prevent the exploitation by a fiduciary of his self-interest to the disadvantage of the minority”). 8. See Gideon Parchomovsky & Alex Stein, Torts and Innovation, 107 MICH. L. REV. 285, 286 (2008) (“Academic discussions are typically confined to the domains of patent and trade secret law.”). The authors note that their “[a]rticle highlights a previously underappreciated connection between innovation and tort law.” Id. at 286. 9. See infra Part IV.A (arguing that “the business judgment rule and the duty to monitor” encourage intrapreneurship). 10. See infra Part IV (describing corporate venture capital, detailing “competitive advantages of corporate venture capital,” and showing evidence of the varied success of corporate venture capital). 11. See Rami Rahal, Will Corporate Venture Capital Disrupt the Traditional Investment Ecosystem?, ENTREPRENEUR (Dec. 16, 2014), (last visited Dec. 15, 2016) (discussing the advantages a corporate venture fund has for large corporations) (on file with the Washington and Lee Law Review). 12. See infra Part II (breaking down the difference between “intrapreneurship” and entrepreneurship, laying out the practical importance of “intrapreneurship,” and expounding the innovator’s dilemma). 13. See infra notes 74–83 and accompanying text (presenting examples of numerous corporations founded throughout the twentieth century that have successfully implemented “intrapreneurship”). 14. See infra notes 74–78 and accompanying text (revealing that various Silicon Valley tech giants have programs that encourage intrapreneurship). resources, employee talent, and production economies of scale, it is surprising to not find even more intrapreneurship relative to entrepreneurship.15 Entrepreneurship is always going to be more attractive to some individuals.16 There are psychic rewards for being one’s own boss17 and financial payoffs upon success that a large corporation has difficulty matching.18 Corporate law’s limited liability, meaning the founder’s personal wealth is not at stake should the venture fail, also drives entrepreneurial risk-taking.19 But on balance, why don’t the large corporation’s competitive advantages in terms of attracting and retaining innovators result in less startups and more intrapreneurship? The existing legal literature identifies one possible reason— ownership rights to intellectual property developed while working for a large corporation.20 I will discuss that briefly, recognizing that it is not my domain and leaving it to the IP scholars.21 I also briefly discuss other possible explanations.22 The Article then 15. See Michael Livingston, Risky Business: Economics, Culture and the Taxation of High-Risk Activities, 48 TAX L. REV. 163, 214 (1993) (“[L]arge companies had significant advantages in R&D, including superior diversification and marketing . . . , effectively unlimited lives . . . , superior laboratories and research teams, and greater financial resources.”). 17. See id. at 825 (“[E]vidence supports the notion that self-employment offers substantial nonpecuniary benefits, such as being your own boss.” (internal citations omitted)). 18. See Barton H. Hamilton, Does Entrepreneurship Pay? An Empirical Analysis of the Returns of Self-Employment, 108 J. POL. ECON. 604, 629 (2000) (affirming that there is “some support for the superstar model [of entrepreneurship] since a handful of entrepreneurs earn substantial returns in self-employment”). turns to a business school theory of much buzz—Clayton Christensen’s The Innovator’s Dilemma.23 Christensen argues that well-managed large corporations cater to existing customers and improve upon existing products (i.e., sustaining innovations) rather than pursue disruptive innovations that create new products and new demand.24 Eventually, however, experience shows that entrepreneurial disruptive innovations invade or occupy the large corporation’s space.25 This is the innovator’s dilemma: stick with a successful strategy and eventually be disrupted by a startup.26 Christensen claims that solving the innovator’s dilemma— and having a large corporation pursue a concurrent companies losing employees to startups and “an employee gets a psychic reward from ‘going it alone’ and becoming a successful entrepreneur”). 23. See generally CLAYTON M. CHRISTENSEN, THE INNOVATOR’S DILEMMA: THE REVOLUTIONARY BOOK THAT WILL CHANGE THE WAY YOU DO BUSINESS (1997) [hereinafter THE INNOVATOR’S DILEMMA] (considering the difficulties that established companies have when dealing with disruptive technology). Christensen’s novel has garnered top business industry accolades since its publication in 1997. See Dan Ackman, The 20 Most Influential Business Books, FORBES (Sept. 30, 2002), (last visited Dec. 15, 2016) (praising distinguished business books that have come out within the past 20 years) (on file with the Washington and Lee Law Review); see also Aiming High: We Launch a Quarterly Review of Business Books by Naming Six of the Best, ECONOMIST (June 30, 2011), (last visited Dec. 15, 2016) (examining six books from the past fifty years which “shape[d] the business world”) (on file with the Washington and Lee Law Review); Global Business Book Awards, J. M. MCELLIGOTT, financial_times.htm (last visited Dec. 15, 2016) (naming Christensen’s book the “Best Business Book” of 1998, as determined by the Financial Times and Booz-Allen & Hamilton) (on file with the Washington and Lee Law Review). 24. See THE INNOVATOR’S DILEMMA, supra note 23, at xxii (“If good management practice drives the failure of successful firms faced with disruptive technology change, then the usual answers to companies, problems—planning better, working harder, becoming more customer-driven, and taking a longerterm perspective—all exacerbate the problem.”). 25. See id. at 48 (“Because the experience was so archetypical, the struggle of Seagate Technology, the industry’s dominant maker of 5.25-inch drives, to successfully commercialize the disruptive 3.5-inch drive is recounted in detail . . . .”). 26. See id. at xxvi (“In many instances, leadership in sustaining innovations—above which information is known and for which plans can be made—is not competitively important. It is in disruptive innovations, where we know least about the market, that there are such strong first-mover advantages. This is the innovator’s dilemma.”). sustaining/disruptive innovation approach—requires reducing two important asymmetries that exist within large corporations.27 These are asymmetric motivation (only caring about upstream movements to higher-end products and customers)28 and asymmetric information (organizational hurdles that prevent disruptive threats and potential responses to them from filtering up from employees to senior management).29 Much like corporate law could tip the scales toward forming a startup by offering the founders limited liability,30 corporate law can also speak to the innovator’s dilemma.31 First, the business judgment rule—as central a principle to corporate law as limited liability32—prompts senior management (the CEO and board of directors) to pursue a disruptive innovation even if it might fail.33 Locating intrapreneurial ventures in new organizational units or corporate subsidiaries is a way to pursue disruptive innovation while still catering to the corporation’s core business.34 Market 27. See id. at 33–68, 89–110 (advancing that the resolution to the innovator’s dilemma lies within solving asymmetric motivation and asymmetric information). 28. See id. at 89–110 (observing that “the prospects for growth and improved profitability in upmarket value networks” is attractive and “that it is not unusual to see well-managed companies leaving . . . their original customers as they search for customers at higher price points”). 29. See id. at 33–68 (explaining that “[m]ost proposals to innovate are generated from deep within the organization not the top” and as a result “middle managers play a critical . . . role in screening these projects” however “[t]hese managers can’t package and throw their weight behind every idea”). 30. See Smith & Ibrahim, supra note 19 (positing that limited liability encourages entrepreneurs to “engage in transactions because they no longer have to take an ‘all or nothing’ approach to starting a business”). 31. See infra Part IV (arguing that the business judgement rule and the duty to monitor reduce the information asymmetry problems in large corporations). 32. See Stephen M. Bainbridge, The Business Judgment Rule as Abstention Doctrine, 57 VAND. L. REV. 81, 81 (2004) (describing the business judgment rule as “corporate law’s central doctrine, pervasively affecting the roles of directors, officers, and controlling shareholders”). 33. See infra note 166 and accompanying text (asserting that the business judgment rule drives risk taking within corporations). 34. See, e.g., Nathan Furr & Daniel Snow, The Prius Approach, HARV. BUS. REV. (Nov. 2015), (last visited Dec. 15, 2016) (tackling how large corporations should react to the threat of disruption based on whether such disruption is already underway, has just begun, or is in the distant future) (on file with the Washington and Lee Law pressures will ultimately drive business decisions, but corporate law can also reduce the asymmetric motivation problem and encourage corporations to pursue disruptive innovation.35 Second—and less intuitively—corporate law might also reduce the asymmetric information problem.36 Christensen contends that skilled employees do sometimes see disruption coming, and develop a response to it, but those ideas do not reach the senior management level.37 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.38 The duty to monitor does not reach business risks,39 whether from overexposure to subprime mortgages40 or threats from disruptive innovation.41 However, it can work in that way indirectly, when coupled with market pressures, in ways this Article will explore.42 Consequently, the duty to monitor, albeit indirectly and unintentionally, may help innovation-related information reach senior management who can then act on it.43 Review). 35. See infra notes 163–179 and accompanying text (analyzing the relationship between the business judgment rule, intrapreneurship, and risk taking). 36. See infra Part IV.B (asserting that the duty to monitor can help solve part of the innovator’s dilemma). 37. See THE INNOVATOR’S DILEMMA, supra note 23, at 33–34, 94–97 (specifying the organizational hurdles that get in the way of creating disruptive technologies within a large corporation). Finally, the Article pivots to perhaps the best of both worlds: corporate venture capital.44 Large corporations can and do form venture arms to fund startups, which allow the corporations to pursue sustaining innovations in-house while also sharing in disruptive activity through startup ownership.45 I will argue that corporate venture capital is theoretically equipped to outperform private venture capital in funding startups, although corporate venture capital’s actual success is varied.46 Before proceeding further, let me be clear that this is largely a descriptive rather than normative Article. For example, I do not argue for a change in corporate law to make large corporations even more intrapreneurial. Indeed, I do not even know if that is desirable from an aggregate social welfare perspective. On the whole, 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. II. Intrapreneurship and the Innovator’s Dilemma This Part asks a series of preliminary questions. First, what is “intrapreneurship” and how does it differ from entrepreneurship? Second, what do we know about intrapreneurial companies? And third, what reasons can we find for why even more innovation doesn’t take place inside large corporations given the many advantages they appear to enjoy over startups? 44. See infra Section V (proposing that corporate venture capital might be the best way for large corporations to develop intrapreneurship). 45. See Josh Lerner, Corporate Venturing, HARV. BUS. REV. (Oct. 2013), (last visited Dec. 15, 2016) (noting that “companies as diverse as Google, BMW and General Mills are complementing traditional R&D by joining with other investors to put money in promising start-ups”) (on file with the Washington and Lee Law Review). 46. Infra Section V.B. A. Intrapreneurship and Entrepreneurship Differentiated The basic difference between intrapreneurship and entrepreneurship is that intrapreneurship is innovative activity that happens within a large, established firm,47 whereas entrepreneurship is innovative activity that is pursued through a new firm (a startup) established primarily for that purpose.48 An “entrepreneur assumes the risk of the venture, generally by investing his or her own capital and reputation and by forsaking a guaranteed income,”49 whereas an intrapreneur is commonly thought of as an employee inside a large corporation who stays in-house to pursue her idea rather than leaving to form a startup50 (although I will conceive of the employee and management team together as the true intrapreneur). Entrepreneurship is glorified in our collective mindset.51 Joseph Bankman and Ronald Gilson write that “in Silicon Valley, the defining myth takes as its stage David Packard’s or Steve Jobs’ garage . . . . In this community, the myth is taken seriously. Over and over again, people set out on the path of heroes: They leave their comfortable, secure jobs, and start from scratch.”52 47. Gifford Pinchot is credited with coining the term “intrapreneur” to “describe a person who creates innovation of any kind within an organization.” Timothy D. Schellhardt, DAVID in GOLIATH: Some Giant Companies Are Particularly Good at Fostering an Entrepreneurial Spirit. Here’s How They do It, WALL ST. J., May 23, 1996, at R14; see also Art Fry, The Post-It Note: An Intrapreneurial Success, 52 SAM ADVANCED MGMT. J. 3, 4 (1987) (“‘Intrapreneuring’ is a word coined by Gifford Pinchot in his book, Intrapreneuring. We had intrapreneurs for years at 3M, but didn’t know what to call them.”). 48. See D. Gordon Smith & Masako Ueda, Law & Entrepreneurship: Do Courts Matter?, 1 ENTREPRENEURIAL BUS. L.J. 353, 356 (2006) (defining entrepreneurship as “‘getting novel things done’ by new for-profit enterprises,” yet not discussing “entrepreneurial activities by established firms”). 49. David E. Polzen, We Are All Entrepreneurs Now, 43 WAKE FOREST L. REV. 283, 285 (2008). 50. See Patrina Ozurumba, Girl Power: How Female Entrepreneurs Can Overcome Barriers to Successful Businesses, 34 WOMEN’S RTS. L. REP. 24, 37 (2012) (“[A]n intrapreneur is an employee within an organization who undertakes innovative internal business development initiatives.”). 51. See Polzen, supra note 49, at 286 (“Entrepreneurs, in the American imagination, are leaders, innovators, pioneers, problem solvers, and takers; they are diligent, persistent, charismatic, dynamic, imaginative, and resourceful . . . .”). Bankman & Gilson, supra note 6, at 289–90. Similarly, John Coyle and Gregg Polsky observe that Silicon Valley engineers are “willing to accept lower salaries and fewer perks in exchange for . . . the intangible benefits of participating in a startup in Silicon Valley, where entrepreneurship is cherished.”53 Not only does entrepreneurship dominate in cultural and popular significance, these social norms are also embedded in our legal system.54 Mirit Eyal-Cohen has detailed the benefits that the legal system grants small businesses (which include startups) simply due to their size.55 As a descriptive matter, she notes that these benefits—which include the ease of complying with securities laws56 and lower patent application fees57—are available to startups but not to large corporations.58 As a normative matter, she argues that this “legal favoritism of small entities results in the waste of revenues and the misallocation of government resources” and that “[t]his occurs because the rules governing the allocation of benefits focus on firm size,”59 even if size is not the best proxy for innovation.60 53. John F. Coyle & Gregg D. Polsky, Acqui-hiring, 63 DUKE L.J. 281, 291 (2013). 54. See Eyal-Cohen, Legal Mirrors, supra note 4, at 719 (“Our legal system is full of benefits granted to small entities.”). 55. See id. at 742–46 (arguing that in response to small businesses failing over time Congress started to favor small businesses); Eyal-Cohen, DownSizing, supra note 4, at 1068–69 (detailing the rationale behind small business favoritism in the eyes of the law). 56. See Eyal-Cohen, Down-Sizing, supra note 4, at 1065–86 (“Securities laws govern business entities’ abilities to access public capital markets. These laws treat small entities favorably by granting them more relaxed registration and reporting requirements.”). 57. Id. at 1076–78 (“[A] key part of the statutory patent fee structure is a two-tier free system, which provides small entities with discounted rates for fees required for application, issuance, search, and maintenance of patents.”). 58. Id. at 1051 (“Entrepreneurship has been commonly equated with smallbusiness ownership, and it has been used to justify regulatory concessions.”). 59. Eyal-Cohen, Legal Mirrors, supra note 4, at 721. Notably for purposes of my argument, Eyal-Cohen thinks preferential legal treatment should be granted to businesses that are truly innovative, whether startups or large corporations. See id. at 763–65 (proposing a conceptual model that aims to determine a firm’s entrepreneurial character by weighting the firm’s age, knowledge procurement ability, innovation yield, labor expansion, and entrepreneurial success). 60. See Thomas J. Chemmanur, Elena Loutskina & Xuan Tin, Corporate Venture Capital, Value Creation, and Innovation, 27 REV. FIN. STUD. 2434, 2434 Perhaps it is not surprising, then, that legal academics focus on startups, including their legal organization,61 financing,62 governance,63 and exit mechanisms.64 Conversely, Gordon Smith and Masako Ueda observe that “[s]cholarly interests in intrapreneurship are clustered around the issue of how to circumvent inertia in established firms and to get novel things done . . . .”65 Thus, intrapreneurship is viewed as the study of overcoming organizational bureaucracy rather than a topic for legal scholars.66 But it is richer than that. (2013) (analyzing “how corporate venture capital (CVC) differs from independent venture capital (IVC) in nurturing innovation [through patents] in entrepreneurial firms”). 61. See LARRY E. RIBSTEIN, THE RISE OF THE UNCORPORATION 227–28 (2010) (asserting that but for venture capital investments, startups would rationally organize as “uncorporations” such as LLCs); Joseph Bankman, The Structure of Silicon Valley Start-Ups, 41 UCLA L. REV. 1737, 1738–41, 1764–65 (1994) (contending that startups are organized as C corporations due to a “gambler’s mentality” on the part of the founders); Victor Fleischer, The Rational Exuberance of Structuring Venture Capital Start-ups, 57 TAX L. REV. 137, 143– 80 (2003) (explaining that there are rational reasons why start-ups are organized as C corporations). 62. See generally Ronald J. Gilson, Engineering a Venture Capital Market: Lessons from the American Experience, 55 STAN. L. REV. 1067 (2003) (breaking down venture capital financing); Darian M. Ibrahim, The (Not So) Puzzling Behavior of Angel Investors, 61 VAND. L. REV. 1405 (2008) (outlining angel investor financing); Darian M. Ibrahim, Debt as Venture Capita l, 2010 U. ILL. L. REV. 1169 (elucidating venture debt financing). 63. See generally Jesse M. Fried & Mira Ganor, Agency Costs of Venture Capitalist Control in Startups, 81 N.Y.U. L. REV. 967 (2006) (observing the unusual governance scheme in startups, with venture capitalists as preferred stockholders versus common shareholders who control other corporations). 65. Smith & Ueda, supra note 48, at 356. See Schellhardt, supra note 47 (“Intrapreneurs often face giant stumbling blocks within hierarchical organizations, whose corporate cultures can serve to repel—not embrace—the entrepreneurial spirit.”). Clayton Christensen rightfully observes that many analyses of “organizational impediments” to intrapreneurship “stop with such simple rationales as bureaucracy, complacency, or ‘risk-averse’ culture,” although there are exceptions that go deeper. THE INNOVATOR’S DILEMMA, supra note 23, at 33–34. 66. See Darian M. Ibrahim & D. Gordon Smith, Entrepreneurs on Horseback: Reflections on the Organization of Law, 50 ARIZ. L. REV. 71, 82 nn.62–65 (2008) (citing that the emerging “law and entrepreneurship” literature primarily focused on startups). There are exceptions of legal scholarship that discuss intrapreneurship. See generally Ronald J. Gilson, Locating Innovation: B. Intrapreneurship’s Practical Importance The entrepreneurial startup backed by venture capital deserves its due attention. Fledgling startups become household names that employ thousands of people and bring us many of the technological innovations we hold dear.67 But the research labs inside large corporations (that have been large for some time) bring us many notable successes too, also employing thousands of people.68 While it may be difficult to quantify the amount of innovation that comes from R&D laboratories inside large corporations as opposed to startups, proxies can illuminate the comparison.69 Patents are sometimes used as a measure of innovative activity.70 Gideon Parchomovsky and R. Polk Wagner note that the “major drivers of the recent increases in patenting activity are medium-to-large corporations” and that large corporations including “IBM, Intel, and Hewlett-Packard . . . have consistently ranked among the top patent recipients in recent years.”71 As one striking example, the authors note that “[s]ince 1994, IBM has The Endogeneity of Technology, Organizational Structure, and Financial Contracting, 110 COLUM. L. REV. 885 (2010) (considering the “dilemma faced by an established company in deciding whether to keep an employee’s innovation or allow the employee to pursue innovation through a startup”). 67. See Amanda Davis, How These Three Startups Became Household Names, INSTITUTE (Sept. 4, 2015), (last visited Dec. 15, 2016) (highlighting how “Microsoft, Sony, and Tata Consultancy Services found success through intrapreneurship, risk taking, and a bit of luck”) (on file with the Washington and Lee Law Review). 68. See WILLIAM J. BAUMOL, THE FREE-MARKET INNOVATION MACHINE: ANALYZING THE GROWTH MIRACLE OF CAPITALISM 56 (2002) (“Routinized innovation is . . . of great and probably growing significance, as [evidenced] by the fact that the bulk of U.S. R&D is now channeled through [established] firms.”). 69. See, e.g., Chemmanur, Loutskina, & Tin, supra note 60, tbl.1 (reporting statistics that measure patents as a proxy for a firm’s innovation output). 70. See, e.g., Zvi Griliches, Ariel Pakes & Bronyn H. Hall, The Value of Patents as Indicators of Inventive Activity, in ECONOMIC POLICY & TECHNOLOGICAL PERFORMANCE 97, 121 (Partha Dasgupta & Paul Stoneman eds., 1987) (“[P]atent data represents a valuable resource for the process of technological change.”); Chemmanur, Loutskina & Tin, supra note 60 (using patents as a proxy for a firm’s innovativeness). amassed over 25,000 U.S. patents, far more than any other company.”72 In a study examining the relationship between patents and firm size, John Allison and Mark Lemley empirically found that large corporations filed about 70% of issued patents in their sample, while small businesses filed only 11%.73 Silicon Valley tech giants are leaders in intrapreneurship.74 Amazon’s Amazon Web Services (AWS), an intrapreneurial project, has itself become a highly lucrative business.75 Google has an “innovation time off” program which allows employees to spend part of their workday on their own intrapreneurial ideas.76 72. Id. at 46. 73. John R. Allison & Mark A. Lemley, Who’s Patenting What? An Empirical Exploration of Patent Prosecution, 53 VAND. L. REV. 2099, 2128 (2000). The remaining balance was almost 18% filed by individuals and 1% filed by nonprofits. Id. 74. See George Deeb, Big Companies That Embrace Intrapreneurship Will Thrive, ENTREPRENEUR (Mar. 19, 2015), 243884 (last visited Dec. 15, 2016) (listing several examples of intrapreneurial successes within Silicon Valley tech companies) (on file with the Washington and Lee Law Review). 75. See Randy Bias, What is Amazon’s Secret for Success and Why Is EC2 a Runaway Train?, CLOUDSCALING (Oct. 13, 2011), (last visited Dec. 15, 2016) (“AWS is staying on-track for 100% year-over-year growth, revenues in the 1B range for 2011, and no end in sight to the high flying act.”) (on file with the Washington and Lee Law Review); see also Eugene Kim, This One Chart Gives You an Idea of How Crazy Amazon’s Cloud Growth Really Is, BUS. INSIDER (Dec. 15, 2015, 3:56 PM), (last visited Dec. 15, 2016) (“AWS is seeing 78% year-on-year revenue growth, an astonishing growth rate compared to other large cap enterprise vendors on this list that had an average growth rate of a mere 6%.”) (on file with the Washington and Lee Law Review). 76. See generally RYAN TATE, THE 20% DOCTRINE: HOW TINKERING, GOOFING OFF, AND BREAKING THE RULES AT WORK DRIVE SUCCESS IN BUSINESS (2012) (pointing out the difficulties that established companies have when dealing with disruptive technology). While reports suggest Google is no longer officially offering “20 Percent Time,” the company culture is such that employees continue to work on what they call “20 Percent Projects” even though they receive little to no institutional support. See Ryan Tate, Google Couldn’t Kill 20 Percent Time Even If It Wanted To, WIRED: BUS. (Aug. 21, 2013, 6:20 AM), (last visited Dec. 15, 2016) [hereinafter Tate, Google’s 20 Percent] (noting that even though Google has formally cancelled its “20 Percent Project” program, it still encourages its employees to pursue “20 Percent Projects”) (on file with the Washington and Lee Law Review). Notably, half of the programs Google launched in the latter half of 2005 were developed through this program, including Gmail and Google News.77 Facebook and LinkedIn have their own permutations of the innovation-time-off rule.78 Intrapreneurship is not only the province of the Silicon Valley tech companies, however. Internal employee collaboration created the Post-It Note at 3M79 and Lockheed Martin’s “Skunk Works” innovation team developed the U-2 spy plane.80 A junior employee at Sony developed the Playstation gaming console by tinkering with his daughter’s Nintendo.81 Though his immediate supervisors were not particularly amused, senior leaders saw the promise of the new creation and were open to innovation at a time before “intrapreneurship” was a developed principle.82 Whirlpool—not exactly the first company one thinks of when it comes to innovation—enrolled every salaried employee in a business innovation course and trained specific employees to facilitate intrapreneurial projects.83 C. Why Intrapreneurship Isn’t Even More Successful This Article is agnostic on the normative question of whether it is more desirable to see innovation pursued inside large corporations or through startups.84 But it is puzzling that intrapreneurship doesn’t completely dominate here.85 Bankman and Gilson argue that theoretically we should never PlayStation). 83. See Jay Rao & Joseph Weintraub, How Innovative Is Your Company’s Culture, MIT SLOAN MGMT. REV.: RES. (Mar. 19, 2013), (last visited Dec. 15, 2016) (detailing how Whirpool switched from an engineering and manufacturing oriented company to an innovation oriented company) (on file with the Washington and Lee Law Review). By 2008, 1,100 of Whirlpool’s approximately 61,000 worldwide employees were “I-mentors,” who received specialized training to facilitate innovation projects among the employee base. Id. 84. From an aggregate social welfare perspective, we may not care if large corporations or startups are innovating—but the directors and shareholders of the large corporations do. See Minda Zetlin, Why Big Companies Suddenly Care About Small Companies and What You Should Do About It, INC (May 31, 2013), (last visited Dec. 15, 2016) (“Across the nation, executives in boardrooms are thinking, worrying and talking about the new factor that’s changing everything in their world-the growth, innovation, and market power of small and start-up companies.”) (on file with the Washington and Lee Law Review). Also, given that retail investors are more likely to find themselves as shareholders of large corporations through retirement funds and the like (as opposed to the exclusive club of wealthy angel investors and venture capitalists that fund startups), there may be egalitarian issues here as well. See InvestorGuide Staff, What is the Difference Between Retail Investors and Institutional Investors?, INVESTORGUIDE, 11202/what-is-the-difference-between-retailinvestors-and-institutional-investors/ (last visited Dec. 15, 2016) (discussing the different investments that a retail investor and an institutional investor will make) (on file with the Washington and Lee Law Review). 85. See Bankman & Gilson, supra note 3, at 293 (arguing large employers have advantages in innovation compared to individual employees). see startups.86 Instead, large corporations should be able to dominate innovation given their tax, information, and scope advantages.87 Further, the market should incentivize large corporations to innovate to stay relevant.88 Still, intrapreneurship does not, on the whole, seem to be all roses. A recent article in the Harvard Business Review claims that intrapreneurial projects “fail between 70% and 90% of the time.”89 Christensen likewise notes that “most attempts to create successful new projects [inside a large corporation] fail.”90 86. See id. at 299 (“[W]e should not observe auctions [between large corporations and startups for an employee’s innovative idea], and we should not observe start-ups.”). 87. See id. at 293 (explaining that “[w]hen all else is equal, the employer has advantages—tax, information, and scope—that should result in it consistently winning the auction” to keep employees and their ideas in-house); see also Eyal-Cohen, Legal Mirrors, supra note 4, at 730 (observing despite popular opinion, large established firms may be “more entrepreneurial and innovative than small firms” because they “have more resources to invest in innovation and to attract and incentivize entrepreneur-employees” (footnotes omitted)). 88. See GIFFORD PINCHOT III, INTRAPRENEURING: WHY YOU DON’T HAVE TO LEAVE THE CORPORATION TO BECOME AN ENTREPRENEUR 7 (1985) (“The more rapidly American business learns to use the entrepreneurial talent inside large organizations, the better. The alternative in a time of rapid change is stagnation and decline.”); see also Henry Chesbrough, Graceful Exits and Missed Opportunities: Xerox’s Management of Its Technology Spin-off Organizations, 76 BUS. HIST. REV. 803, 807 (2002) (noting that as early as 1969, Xerox’s head of research warned his company of falling the way of RCA, which “continued to invest in perfecting the vacuum tube and failed to invest in the transistor, which quickly rendered the vacuum tube obsolete”). 89. Beth Altringer, A New Model for Innovation in Big Companies, HARV. BUS. REV. (Nov. 19, 2013), (last visited Dec. 15, 2016) (on file with the Washington and Lee Law Review); see also Susan Foley, 5 Reasons Why Intrapreneurship Is Important, CORP. ENTREPRENEURS (Nov. 8, 2013), http://corporate-entrepreneurs. com/blog1/2013/11/08/5-reasons-why-intrapreneurship-is-important/ (last visited Dec. 15, 2016) (“Most studies report a 60%–70% failure rate when it comes to change initiatives. Risk adverse cultures and resistance to change impede an organizations [sic] ability to grow.”) (on file with the Washington and Lee Law Review). This is not to say that the percentages are better for startups. See, e.g., Ibrahim, supra note 62, at 1176 (noting “the well-known fact that most start-ups fail” (footnotes omitted)). 90. See CLAYTON M. CHRISTENSEN & MICHAEL E. RAYNOR, THE INNOVATOR’S SOLUTION: CREATING AND SUSTAINING SUCCESSFUL GROWTH 73 (2003) [hereinafter CHRISTENSEN & RAYNOR, THE INNOVATOR’S SOLUTION] (“Over 60 percent of all new-product development efforts are scuttled before they ever reach the market. Of the 40 percent that do see the light of day, 40 percent fail to become There are several explanations for why the entrepreneurship/intrapreneurship balance is often struck for the former. First, should a corporate employee come up with a disruptive innovation at work, it may be unclear whether she owns it or whether her employment agreement assigns property rights to the corporation. The employee is then faced with a dilemma of her own. On the one hand, she could pursue intrapreneurship, which means disclosing the innovation to her superiors and putting the ownership question front and center.91 As an alternative, the employee can leave the corporation, form a startup, and probably have an easier claim to the innovation.92 Therefore, it takes an innovative employer—one with an intrapreneurial mindset—to assure an employee that she will reap the rewards of disclosing her idea and staying in-house.93 Second, an employer must commit to intrapreneurship in another way: compensation. Bankman and Gilson note that in large corporations, you risk “the perception of unfairness resulting from wide pay disparities.”94 Gilson nuances the issue further in another essay, arguing that intrapreneurial companies who financially reward innovative ideas get more employees to stay, but among themselves, employees will “hoard research to protect their property rights . . . .”95 This conundrum leads to the profitable and are withdrawn from the market.”); see also Altringer, supra note 89 (“Studies show that efforts to stimulate intrapreneurship—entrepreneurship within an established company—more often than not fall flat.”). 91. See Gilson, supra note 20, at 896 (“A number of scholars have focused on the risk to the employee of merely disclosing the innovation; by doing so, the employee will compromise her intellectual property.”). 92. See Robert P. Merges, Property Rights Theory and Employee Inventions (Berkeley Ctr. for L. & Tech., Working Paper No. 97-03, 1997) (arguing that, when the employee leaves the employer, employees have a better ownership claim on their innovations—free of an employer’s ownership claim—the earlier the innovation is in its development). 93. See infra notes 140–141 and accompanying text (discussing Thermo Electron, a large corporation that created a new subsidiary for each intrapreneurial idea and gave the employee with the idea an entrepreneur-like ownership stake in the subsidiary). 94. Merges, supra note 92. 95. Gilson, supra note 20, at 899; see also Bankman & Gilson, supra note 3, at 302 (citing Edward P. Lazear, Pay Equality and Industrial Politics, 97 J. POL. ECON. 561, 562 (1989) (noting employees may sabotage each other’s efforts if the “prize” from having an intrapreneurial idea pursued is large enough)). outcome that “[e]stablished technology companies both perform substantial amounts of innovation and lose employees to startups.”96 Third, an employee gets a psychic reward from “going it alone” and becoming a successful entrepreneur that a large corporation may be unable to match.97 Recall the earlier discussion of the entrepreneur as the modern American hero.98 It is unclear whether an employee who innovates in-house would feel the same sense of personal accomplishment.99 On the other hand, for risk-averse employees who know that most startups fail, the compromise of being able to pursue an innovative idea while keeping a steady paycheck favors intrapreneurship.100 Finally, I turn to the best-known and most influential theory on why intrapreneurship often fails: Clayton Christensen’s The Innovator’s Dilemma.101 Christensen counterintuitively argues that it is not stodgy old corporations resistant to change that get disrupted.102 Instead, he observes that “[c]orporate executives often bet the future of billion-dollar enterprises on an innovation,” citing IBM, DuPont, and Corning as examples.103 Indeed, even though New Coke was a spectacular failure, the corporate employees who developed it were given raises and promotions.104 Christensen contends that it is actually well-run 96. Gilson, supra note 20, at 899. 97. See Bankman & Gilson, supra note 3, at 305–06 (“Employees do not regard venture capital entrepreneurship as an identical substitute for continued employment. Employees have different utility functions . . . .”). 98. See supra notes 51–60 and accompanying text (discussing the glorification of entrepreneurs). 99. See id. at 306 (“[A]n employee may positively value the opportunity to be her own boss, as well as the favorable cultural image of an entrepreneur.”). 100. See id. (discussing an employee’s risk calculus and considerations). 101. While Christensen made the problems with large corporations innovating famous, other commentators had made similar observations. See, e.g., Rebecca Henderson, Underinvestment and Incompetence as Responses to Radical Innovation: Evidence from the Photolithographic Alignment Equipment Industry, 24 RAND J. ECON. 248, 251, 267–68 (1993) (contending that large corporations focus on incremental improvements while startups are more likely to engage in radical innovation). 102. See CHRISTENSEN & RAYNOR, THE INNOVATOR’S SOLUTION, supra note 90, at 2–3 (discussing corporations insistent on focusing on their core business). 103. Id. at 7. 104. See Bedda, supra note 78 (“Even though the product was a complete The basic economic calculus for shareholders and directors differs when it comes to taking significant risks. As Stephen Bainbridge outlined, the shareholders of large corporations “will have a high tolerance for risky corporate projects” for two reasons.167 First, under corporate law, shareholders enjoy limited liability, meaning that if a risky project fails, the shareholders only suffer that loss to the extent of their capital investment— their personal fortune is not at risk.168 Second, shareholders in large corporations tend to also be shareholders in other large corporations; i.e., they hold a diversified portfolio of investments.169 Thus, risky projects that fail for one corporation can be offset by risky projects that succeed in another.170 The directors’ economics are much different. Directors cannot diversify their human capital to the extent that shareholders can diversify their financial capital.171 There are only so many boards on which a director can sit and adequately do her job; thus, directors make firm-specific human capital investments.172 Also, while directors earn compensation from the corporations they serve, both through salary and stock options, theirs is a relatively small ownership percentage in the corporation. Thus, without the business judgment rule, if directors take on a risky project, they Members and Managers of Limited Liability Companies?, 68 ST. JOHN’S L. REV. 21, 41 (1994) (“The policy underlying the [business judgment] rule encourages risk taking, innovation, and creative entrepreneurial activities.”); Michael C. Pollack, Judicial Deference and Institutional Character: Homeowners Associations and the Puzzle of Private Governance, 81 U. CIN. L. REV. 839, 875 (2013) (“The business judgment rule is a means of incentivizing innovation and risk-taking in the development of new products and business methods.”). 167. Bainbridge, supra note 32, at 111. 168. See id. (“Because shareholders thus do not put their personal assets at jeopardy, other than the amount initially invested, they effectively externalize some portion of the business’ total risk exposure to creditors.”). 169. See id. at 112 (“[S]hareholders can largely eliminate firm-specific risk by holding a diversified portfolio . . . .”). 170. See id. (citing that shareholders of large corporations tend to diversify to account for risk). 171. See id. at 113 (“[M]anagers obviously cannot diversify their human capital among a number of other firms.”). 172. See id. (“Corporate managers typically have substantial firm-specific capital.”). enjoy only a limited upside if it succeeds, but face a significant downside if it fails.173 By encouraging directors to take risks that shareholders would want, the business judgment rule aligns directorshareholder interests.174 As Chancellor Allen colorfully put it, to allow directors to be liable for risky projects gone bad where “the investment was too risky (foolishly risky! stupidly risky! egregiously risky!)—you supply the adverb[,]” would “be very destructive of shareholder welfare in the long-term.”175 Thus, perhaps an important reason why previous entrepreneurial studies have found little difference in risk-taking appetites among managers in large corporations and entrepreneurs in startups is because corporate law evens the playing field.176 It permits management who might otherwise be disinclined to pursue risky projects to do so without the fear of personal liability.177 In sum, the risk-taking encouraged by the 173. See Gagliardi v. TriFoods Int’l, Inc., 683 A.2d 1049, 1052 (Del. Ch. 1996) (determining that without the business judgment rule, there would be “this stupefying disjunction between risk and reward for corporate directors”). 174. The [business judgment] rule could rationally be no different . . . . Shareholders don’t want (or shouldn’t rationally want) directors to be risk averse. Shareholders’ investment interests, across the full range of their diversifiable equity investments, will be maximized if corporate directors and managers honestly assess risk and reward and accept for the corporation the highest risk adjusted returns available that are above the firm’s cost of capital. 176. See supra note 173 and accompanying text (citing the business judgment rule as a corporate law structure in which risk taking among managers is evaluated similarly to risk taking of entrepreneurs). 177. According to Charles O’Kelley, Frank Knight’s seminal work, Risk, Uncertainty, and Profit, anticipated this connection to some extent. See Charles R. T. O’Kelley, Berle and the Entrepreneur, 33 SEATTLE U. L. REV. 1141, 1148 (2010) (discussing FRANK H. KNIGHT, RISK, UNCERTA INTY, AND PROFIT (2009 )). The article explains: “Knight believed that a proper understanding of the nature of business judgment would lead to a discovery that the modern corporation was business judgment rule can help reduce the asymmetric motivation problem inside large corporations.178 To pursue both sustaining and disruptive innovations simultaneously, management can establish a new organizational unit within the corporation or form a new corporate subsidiary to house the intrapreneurial project.179 Both decisions would be protected by the business judgment rule. B. Risk Identification and the Duty to Monitor Next I turn to the other asymmetry that lies at the heart of the innovator’s dilemma: the asymmetric information problem. That is, senior management (including the board of directors) not learning of disruptive employee innovations hatched below them.180 1. The Modern Duty to Monitor The corporate law doctrine that most aptly speaks to risk identification is the duty to monitor.181 The modern formulation of the duty to monitor was first set forth in 1996 by the Delaware actually managed and controlled by an approximation of the classic entrepreneur.” Id. See also id. at 1149 (noting the “apparent separation of the functions of making decisions and taking the ‘risk’ of error in decisions” inside the corporation). 178. See supra note 174 and accompanying text (arguing that the business judgment rule gives managers within a corporation more leeway to utilize disruptive ideas). 179. See Victor Fleischer, Options Backdating, Tax Shelters, and Corporate Culture, 26 VA. TAX REV. 1031, 1048 (2007) (“[L]arge, bureaucratic organizations sometimes develop ‘skunkworks’: small, subversive units within a larger organization charged with developing technological innovation.”). 180. See CHRISTENSEN & RAYNOR, supra note 90 (citing that middle management often censors information that it sends to upper management). 181. A preliminary note: the entrepreneurship literature often conflates or uses interchangeably risk identification and risk assessment, which are actually two different notions. The duty to monitor might help directors identify risks, but legal doctrine does not speak to how directors bring to bear their experiences and judgments in assessing those risks. See In re Caremark Int’l Inc., 698 A.2d 959, 967 (Del. Ch. 1996) (setting forth the modern formulation of the duty to monitor). Chancery Court in In Re Caremark.182 Caremark rejected prior notions that directors were only required to monitor employees if “red flags” existed, and instead made instituting a monitoring system a mandatory requirement.183 Through this pronouncement, Chancellor Allen recognized that most activity within a large corporation happens below the board level and sought to increase the board’s awareness of subordinate action.184 The Caremark decision led commentators to speculate that the new duty to monitor would be a significant change in directors’ duties under Delaware law.185 Yet, Caremark itself had limited reach for several reasons. First, it was a settlement opinion, and thus largely dicta.186 Second, although the Delaware Supreme Court later disputed this, at the time it was fairly obvious that the duty to monitor was treated as a subset of the duty of care, and thus subject to exculpation under DGCL Section 102(b)(7).187 Further, even without exculpation, the duty did not seem difficult to satisfy, as a good faith attempt at a monitoring system was sufficient and the details of the system were left to the directors’ business judgment.188 182. See id. (setting forth the modern formulation of the duty to monitor). 183. See Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125, 130 (Del. 1963) (observing that middle managers often only send information to senior management that will win senior management’s approval and that “absent cause for suspicion there is no duty upon the directors to install and operate a corporate system of espionage to ferret out wrongdoing”). 184. See Bernard S. Sharfman, Enhancing the Efficiency of Board Decision Making: Lessons Learned from the Financial Crisis of 2008, 34 DEL. J. CORP. L. 813, 847 (2009) (“In Caremark, Chancellor Allen explained that he wanted a board to be more actively involved in company oversight and monitoring.”). 185. See, e.g., Hillary A. Sale, Monitoring Caremark’s Good Faith, 32 DEL. J. CORP. L. 719, 719–20 (2007) (“[F]ormer Chancellor Allen’s opinion In Re Caremark International Derivative Litigation is destined to be one of the most prominent Delaware opinions of all time.”). 186. See generally In re Caremark Int’l Inc., 698 A.2d at 960 (assessing the strengths and weaknesses of the respective claims to evaluate the fairness of the settlement agreement at issue). 187. See Del. Code Ann. tit. 8, § 102(b)(7) (West 2015) (allowing corporations to preemptively absolve directors of personal liability for violating the duty of care). 188. See In re Caremark Int’l Inc., 698 A.2d 959, 970 (Del. Ch. 1996) (“[A] director’s obligation includes a duty to attempt in good faith to assure that a corporate information and reporting system . . . exists, and that failure to do so under some circumstances may . . . render a director liable for losses caused by non-compliance with applicable legal standards.”). Caremark’s progeny have had more reach. Most notably, Stone v. Ritter189 presented the Delaware Supreme Court with the opportunity to examine “a classic Caremark case.”190 In Stone, as in Caremark, illegal conduct by corporate employees led to the U.S. government imposing a fine on the corporation.191 The shareholders sued to have the directors repay the fine to the corporate treasury.192 The Stone Court affirmed the Caremark monitoring standard but with two changes.193 First, the Court proclaimed that the fiduciary duty being breached by not monitoring was good faith, a subset of loyalty, to which neither 102(b)(7) or the business judgment rule apply.194 Second, the Court clarified that the directors must not only install a monitoring system, they must use it.195 For instance, a board cannot employ a compliance officer and never hear from her claiming that never receiving a report is a matter of business judgment.196 Still, only an “utter failure” to monitor results in liability, and the duty to monitor only requires monitoring for certain actions—namely, illegal activity specific to the corporation’s 189. 911 A.2d 362 (Del. 2006). 190. Id. at 364. 191. See id. at 365 (determining that defendant had paid close to fortymillion dollars in fines); see also In re Caremark Int’l Inc., 698 A.2d at 960 (“Caremark pleaded guilty to a single felony of mail fraud and agreed to pay civil and criminal fines.”). 192. See Stone, 911 A.2d at 368–69 (citing cases in which shareholders sued directors to personally repay, to the corporate treasury, the fine imposed on the business due to the directors’ own legal conduct). 193. See id. at 365 (citing In re Caremark Int’l Inc., 698 A.2d 959, 970 (Del. Ch. 1996) (determining a director’s duty to monitor)) (concluding that Caremark articulated the correct conditions for assessing director oversight liability). 194. See id. at 370 (“Where directors fail to act in the face of a known duty to act, thereby demonstrating a conscious disregard for their responsibilities, they breach their duty of loyalty by failing to discharge that fiduciary obligation in good faith.”); Stephen M. Bainbridge, Star Lopez & Benjamin Oklan, The Convergence of Good Faith and Oversight, 55 UCLA L. REV. 559, 582 (2008) (“[T]he [Stone] court subsumed good faith into the duty of loyalty, a marriage we believe will prove most unwise.”). 195. See Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006) (noting that directors must oversee operations and use monitoring systems). 196. See id. at 368 (determining that a board must exercise good faith judgment when receiving compliance reports). business.197 In Caremark the allegation was failing to monitor employees who violated the federal Anti-Referral Payments Law by providing kickbacks to doctors;198 in Stone the allegation was failing to monitor employees who violated the federal Bank Secrecy Act’s anti-money laundering regulations.199 Failing to appreciate business risks, such as those from disruptive innovation, are outside the specter of illegal conduct. Indeed, in the important 2009 case of In re Citigroup Inc. Shareholder Derivative Litigation,200 plaintiff-shareholders suing in the wake of the Great Recession tried to expand the monitoring duty to reach employee activity related to business risks.201 The claim in Citigroup was “based on defendants’ [directors’] alleged failure to properly monitor Citigroup’s business risk, specifically its exposure to the subprime mortgage market.”202 ThenChancellor Chandler rejected characterizing these as monitoring claims, instead describing them as classic duty-of-care claims “attempting to hold the director defendants personally liable for making (or allowing to be made) business decisions that, in hindsight, turned out poorly for the Company.”203 The former Chancellor wrote that “[w]hile it may be tempting to say that directors have the same duties to monitor and oversee business risk, imposing Caremark-type duties on directors to monitor 197. Id. at 364. 198. In re Caremark Int’l Inc., 698 A.2d 959, 961, 964, 967 (Del. Ch. 1996) (alleging that Caremark’s board of directors breached their duty of care by “allow[ing] a situation to develop and continue which exposed the corporation to enormous legal liability,” which was in part due alleged “inappropriate referral payments” that violated the Anti-Referral Payments Law). 199. See Stone, 911 A.2d at 364–65 (alleging that the directors had breached their duty of oversight by “utterly fail[ing] to implement any sort of statutorily required monitoring, reporting or information controls that would have enabled them to learn” that company employees had not filed Suspicious Activity Reports, “as required by the federal Bank Secrecy Act”). 200. 964 A.2d 106 (Del. Ch. 2009). 201. See generally id. 202. Id. at 123; see also id. at 130 (contrasting another recent monitoring case, AIG, and noting that “[u]nlike the allegations in this case, the defendants in AIG allegedly failed to exercise reasonable oversight over pervasive fraudulent and criminal conduct”). 203. Id. at 124. business risk is fundamentally different.”204 This decision has been both criticized205 and supported.206 2. The Duty to Monitor and Risks from Disruptive Innovation The duty of monitoring in its current formulation does not mandate that directors monitor for business risks, including the risk their business will be disrupted by a startup.207 Limiting the duty to monitor to illegal employee activity makes sense due to slippery slope possibilities.208 Further, this is not a normative Article where I reflexively urge expansion of the monitoring duty to encourage more intrapreneurship. Still, I believe the duty to monitor will encourage intrapraneurship for three reasons. First, as a matter of legal liability, it is possible to distinguish Citigroup’s facts from disruptive innovation concerns. 204. Id. at 131. 205. See Eric J. Pan, Rethinking the Board’s Duty to Monitor: A Critical Assessment of the Delaware Doctrine, 38 FLA. ST. U. L. REV. 209, 245 (2011) (“What is the point of making the duty to monitor more robust if directors never face out-of-pocket liability?”). Hillary Sale, writing about the duty to monitor before Citigroup, cites the case of a General Motors board member who resigned because management was not adequately informing the board, including by not timely sending out materials before board meetings. Sale, supra note 185, at 743–44. Sale notes that while the GM situation “does not arise in the context of criminal liability for individuals or the corporation, the lack of ongoing information and preparation by the GM board is, if true, arguably a breach of its good-faith Caremark/Stone obligations.” Id. at 744. More recent decisions do not seem to have borne this out. 206. See Hurt supra note 39, at 259 (2014) (arguing that “not only does a duty to manage financial risk not exist within the prevailing corporate law framework of duties, but also that recognizing a separate duty to manage financial risk would be imprudent” (citation omitted)); Robert T. Miller, Oversight Liability for Risk-Management Failures at Financial Firms, 84 S. CAL. L. REV. 47, 103–05 (2010) (arguing that expanding the duty to monitor to riskmanagement failures would eviscerate business judgment rule); see also Martin Petrin, Assessing Delaware’s Oversight Jurisprudence: A Policy and Theory Perspective, 5 VA. L. & BUS. REV. 433, 479 (2011) (concluding that the duty to monitor as currently applied “works, and, contrary to what many critics say, strikes the correct balances between directors’ accountability and authority”). 207. See In re Citigroup Inc., 964 A.2d 106, 122 (determining that directors are only liable for a failure to monitor due to a sustained or systematic failure to exercise oversight). 208. See supra note 206 and accompanying text (citing sources discussing the imprudence of expanding directors’ duty to monitor). In Citigroup, Chancellor Chandler discusses how entertaining a monitoring claim on these facts would essentially be punishing directors for taking a risk.209 Recall that Citigroup lost money by betting on subprime mortgages.210 Taking risks is exactly the sort of thing the business judgment rule is supposed to protect, and thus Chancellor Chandler properly analyzed Citigroup under the duty of care.211 But identifying risks posed by disruptive innovation is different. A board being unaware—that the relevant information is not filtering to the top—is properly in the realm of monitoring since no business judgment is being made.212 Still, given the realities of corporate law decisions, I doubt legal liability will lie anytime soon for failing to identify a business risk. The more likely result is that the duty to monitor in its limited scope will function concurrently with market pressures to influence management to better monitor for business risks.213 Market pressures are already causing boards to monitor for business risks just as they do for law compliance.214 For example, 209. In re Citigroup Inc., 964 A.2d at 126. See id. at 112 (outlining Citigroup’s exposure to subprime mortgages). 211. See id. at 124 (analyzing the liability for director defendants by using the business judgment rule). Another Caremark case, Massey Energy, is also distinguishable, as it focuses not only on monitoring but also on management causing the corporation to violate applicable law. See In re Massey Energy Co., 2011 Del. Ch. LEXIS 83, *74 (2011) (“Massey continued to think it knew better than those charged with enforcing the law, and in fact often argued with the law itself.”). 212. See, e.g., Francis v. United Jersey Bank, 432 A.2d 814, 822 (N.J. 1981) (“Directors are under a continuing obligation to keep informed about the activities of the corporation.”). Although the Citigroup opinion could be read more broadly to close the door on even this possibility as a matter of law. See In re Citigroup, 964 A.2d. at 131 (“Oversight duties under Delaware law are not designed to subject directors, even expert directors, to personal liability for failure to predict the future and to properly evaluate business risk.”). 213. Also, as it often does, federal securities law is working in tandem with Delaware corporate law on risk identification. The SEC has new rules requiring public corporations to give more disclosure about their risk monitoring practices. See Proxy Disclosure Enhancements, 74 Fed. Reg. 68,344 (Dec. 29, 2009) (to be codified at 17 C.F.R. pts. 229, 239, 240, 249, 274). 214. See Stephen M. Bainbridge, Director Primacy: The Means and Ends of Corporate Governance, 97 NW. U. L. REV. 547, 570 (2003) (“Directors are held accountable to shareholder interests through a variety of market forces, such as the capital and reputational markets.”); Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. POL. ECON. 110, 112 (1965) (stating that a Hewlett-Packard has a technology committee, which is responsible for recommendations to the board on technology strategies, execution of technology strategies, and guidance on technology.215 Other companies have committees very specific to their industry and relevant technologies. Boeing, for example, has a Special Programs Committee, which reviews classified programs the company has undertaken on behalf of the U.S. Government.216 While not explicitly stated, these programs are likely dealing with R&D and product innovation issues.217 J.P.Morgan, in the face of huge losses, adopted new technologies to monitor for rogue traders.218 The technology, which was originally developed for counter-terrorism efforts, uses an algorithm to electronically analyze patterns in human communications—identifying potential collusions and allowing J.P.Morgan to proactively intervene regarding both legal and business matters.219 company that does not generate a good return for its shareholders will likely see a drop in the market price of its shares against the shares of other companies in the same industry). 215. Hewlett-Packard Company Board of Directors: Technology Committee Charter, HEWLETT-PACKARD 1, 2–3 (Nov. 19, 2014), http://h30261. In particular, “Guidance on Technology” includes providing guidance on such things as investments, R&D investments, and market entry and exit, among other responsibilities. Id. at 3. 216. Special Programs Committee Charter, BOEING 1 (Feb. 21, 2011), r_special_programs.pdf. 217. See John E. Pepper, “Best Practice” Boards and CEOs, CORPORATE BOARD, July 2008, at 1 (quoting a former Chairman and CEO at Procter & Gamble, who pointed to other examples of directors focused on such topics as innovation, thinking of the customers in developing nations, and diversifying management). 218. See Hugh Son, JPMorgan Algorithm Knows You’re a Rogue Employee Before You Do, BLOOMBERG (Apr. 8, 2015, 12:00 AM), (last visited Dec. 15, 2016) (explaining that with large Wall Street investment banks losing billions of dollars in fines for illegal employee actions, the $6.2 billion London Whale trading loss, and riggings of currency and energy markets, JPMorgan has created an internal surveillance system) (on file with the Washington and Lee Law Review). 219. See id. (describing how the software reads language used in emails to decipher a potentially rogue employee’s intentions). Layering on even further, pronouncements of the Delaware courts—even absent corresponding liability—can work with these market pressures to affect director behavior. In a well-known article, Ed Rock argues that Delaware courts pen “corporate law sermons,” or “parables—instructive tales—of good managers and bad managers . . .”220 that are more standards than rules.221 Because corporate managers of large Delaware corporations “form a surprisingly small and close-knit community,” these standards are consumed by corporate lawyers and communicated to managers, thus influencing managers’ behavior.222 Similarly, per Melvin Eisenberg, one can think of Delaware courts as providing both standards of conduct and standards of review.223 Standards of conduct are aspirational and directed to primary actors (directors), whereas standards of review are where liability actually lies for nonperformance and are directed at reviewing bodies (courts).224 Thus, for the monitoring duty, Delaware judges could pronounce a broad duty to monitor as a standard of conduct, yet keep monitoring for law compliance as the narrower standard of review.225 The trick is to get directors to “hear” the conduct rules and act better than legally required, while judges hear the review rules—thus noting the aspirations but permitting greater leeway before imposing liability. In the real world, such acoustic separation between conduct rules and review rules may be mere aspirational thinking. For example, in the case of the business judgment rule, well-counseled directors no doubt “hear” the permissive liability rule as well as the aspirational directive to follow best practices.226 However, directors may have bounded rationality and are less familiar with newer laws such as the duty to monitor, which may help the acoustic separation work better.227 Thus, Delaware judges should inspire directors to monitor for all important risks to their businesses, but only hold them liable for failing for law compliance. In these ways, then, the duty to monitor can speak—albeit softly—to the asymmetric information problem. V. Corporate Venture Capital Finally, this Article turns to what may be the best way for large corporations to develop an innovation strategy: corporate venture capital. This Part first describes corporate venture capital. Second, it details what appear to be competitive advantages of corporate venture capital over private venture capital in funding startups. Finally, this Part shows that the real evidence on corporate venture capital success is a mixed bag, and explores possible reasons for that outcome. A. Basics of Corporate Venture Capital What if large corporations can continue focusing on sustaining innovations but also avoid disruption? That balance would be the best of both worlds. This is what corporate venture capitalists (CVCs) allow large corporations to do.228 CVCs are 226. See id. (“In the real world, complete acoustic separation is not possible. As a result, each audience, general public and officials, may hear the rules addressed to the other.”). 227. See id. at 466–67 (“Although it is common to assume that individuals act rationally on the basis of full information, in fact most actors make decisions on the basis of bounded rationality involving limited information.”). 228. See Christian Guirnalda, Corporate Venture Capital is Back . . . But We’re in it for the Partnership, VERIZON VENTURES (Apr. 2, 2015), venture arms established by a corporation. CVCs invest in promising startups, usually related to their parent corporation’s business,229 although some CVCs have a purely financial focus and invest in any startup that seems promising.230 As Josh Lerner writes: “A corporate VC fund . . . can move faster, more flexibly, and more cheaply than traditional R&D to help a firm respond to changes in technologies and business models.”231 Importantly, Lerner also notes that a CVC “can serve as an intelligence-gathering initiative, helping a company to protect itself from emerging competitive threats.”232 (last visited Dec. 15, 2016) (describing how corporate venture capital projects allow large corporations to gain an edge in innovative ideas, while also avoiding high research and development expenses, as well as the bureaucracy of large corporate structures) (on file with the Washington and Lee Law Review). 229. These are referred to as “strategic” investments because they complement the corporation’s core business. Id. For example, Verizon states that “the financial return can sometimes matter less than the innovation return for both the parent company and co-investors.” Id.; see also Paul A. Gompers & Josh Lerner, The Determinants of Corporate Venture Capital Success: Organizational Structure, Incentives, and Complementarities, in RANDALL K. MORCK, CONCENTRATED CORPORATE OWNERSHIP 19 (2000) (“Corporations are likely to benefit from indirect gains (e.g., strategic alliances and greater understanding of industry trends) as well as direct financial returns.”). 230. Corporate venture capital funds sometimes invest in unrelated sectors purely for financial gains. See Gompers & Lerner, supra note 229, at 25 (explaining that Xerox began its corporate venture capital program to maximize return on investment). This is less common, but is the strategy of Google Ventures, the largest corporate venture capital fund. See Rachel King, Corporate VC Investments Hold Steady Amid Broader Downturn in Market, WALL ST. J. (January 22, 2016), (last visited Dec. 15, 2016) (noting that Google invests “for financial [not strategic] returns”) (on file with the Washington and Lee Law Review). 232. Id.; see also Massimo G. Colombo, Evila Piva & Cristina Rossi-Lamastra, The Sensitivity of High-Tech Entrepreneurial Ventures’ Employment to a Sales Contraction in a Negative Growth Scenario: The Moderating Role of Venture Capital Financing, 35 MANAGERIAL AND DECISION ECON. 73, 76 (2014) (explaining that corporate venture capital gives parent corporations a view of “technological progress in leading-edge fields, which are surrounded by high uncertainty, without committing resources to internal research and development activities” (internal citations omitted)). CVCs have been around almost as long as private venture capitalists (PVCs).233 The ten most active CVCs are arms of wellknown, mostly-tech corporations: Google Ventures, Intel Capital, Salesforce Ventures, Qualcomm Ventures, Comcast Ventures, Novartis Venture Funds, Samsung Ventures, Cisco Investments, Siemens Venture Capital, and SR One.234 CVCs appear to invest at all stages of startup development, although one study found they invested most often in the middle stages—i.e., not in very early rounds, or later when a startup is close to an IPO.235 B. Advantages of Corporate Venture Capital over Private Venture Capital Corporate venture capital appears to enjoy real advantages over private venture capital as a funding option for startups.236 To understand why, it is important to note that venture capital of any kind succeeds or fails based on a VC’s ability to select the right startups to fund ex ante investment and help them grow ex-post investment.237 First, in terms of selecting startups to fund, the CVC’s managers should be able to bring to bear expertise from within the parent corporation.238 If the CVC has a strategic focus, as 233. See Gompers & Lerner, supra note 229, at 21–22 (giving a brief history of CVC). 234. See The 104 Most Active Corporate VC Firms, CB INSIGHTS (Feb. 6, 2015), (last visited Dec. 15, 2016) (listing the most active corporate venture capital programs in 2014) (on file with the Washington and Lee Law Review); see also If You Can’t Beat Them, Buy Them, ECONOMIST (January 14, 2016) (citing statistics that “[o]ver the past five years the number of corporate-venture units worldwide has doubled to 1,100; 25 of the 30 firms that comprise the Dow Jones Industrial Average have one”). 235. See Gompers & Lerner, supra note 229, at 32 (“Corporate funds tend to invest slightly less frequently in start-up and mature private firms. Instead, they are disproportionately represented among companies in the middle stages, such as ‘development’ or ‘beta.’”). 236. See id. at 46 (noting that corporate venture investments seem to be at least as successful as private venture capital investments). 237. See id. (concluding that corporate venture programs must select programs that fall within the corporation’s overall strategic vision for the CVC to succeed). Perhaps the CVC is staffed by former corporate executives. Even if it is most do, its people should have substantial expertise in the startup technologies being funded.239 The corporation would also possess superior knowledge of the entrepreneur if she came from inside the corporation.240 Both of these advantages reduce preinvestment uncertainty and information asymmetry in ways at least as effective as the PVC’s staged financing tool.241 Second, in terms of growing startups ex–post investments, CVCs take board seats and closely monitor startups as PVCs do.242 Beyond what PVCs can offer, though, CVCs can also tap into the numerous resources of their parent corporations to add extra value to their portfolio startups.243 As Lerner writes: “Companies bring a lot of value to the start-ups they fund, in the form of reputation, skills, and of course, resources—from research scientists to sophisticated laboratories to armies of salespeople.”244 As an example, Google Ventures appears to be very involved with its portfolio startups—providing support to startups in the areas of security, PR, technology platforms, and not, the corporation’s people should be available for the CVC to consult. See Gina Dokko & Vibha Gaba, Venturing Into New Territory: Career Experiences of Corporate Venture Capital Managers and Practice Variation, 55 ACAD. MGMT. J. 563, 571 (2012) (exploring the prior work histories of CVC managers, including those coming from PVCs). 239. See id. at 566 (explaining that individuals with prior experience in a certain facet of business or entrepreneurism will better understand the problems involved in a new business or entrepreneurial project). 240. See Bankman & Gilson, supra note 3, at 299 (explaining auctions between corporations and PVCs for employee talent). 241. See Ronald J. Gilson, Engineering a Venture Capital Market: Lessons from the American Experience, 55 STAN. L. REV. 1067, 1076 (2003) (identifying uncertainty and information asymmetry as pre-investment problems in startup investing); id. at 1078–79 (discussing staged financing as a PVC’s primary solution to these problems); see also Steven N. Kaplan & Per Stromberg, Financial Contracting Theory Meets the Real World: An Empirical Analysis of Venture Capital Contracts, 70 REV. ECON. STUD. 281, 304 (2003) (“There is no evidence that the VC’s liquidation claim is larger when asymmetric information problems are more severe, because volatility, pre-revenue, and repeat entrepreneur are not significant.”). 242. See David Benson & Rosemarie H. Ziedonis, Corporate Venture Capital and the Returns to Acquiring Portfolio Companies, 98 J. FIN. ECON. 478, 479 (2010) (citing prior studies that CVC managers “assume roles on [startup] boards of directors”). 243. See id. at 478–79 (“Corporate investors commonly provide technical and commercial advice to portfolio companies.”). others.245 Google Venture’s “library” provides articles on design, product management, user research, hiring, engineering, marketing, entrepreneurship, and workshops.246 Google Ventures also provides a “Design Sprint” and “Research Sprint” for its portfolio startups.247 The Design Sprint is a five-day process that focuses on product design and prototyping.248 The Research Sprint is a four-day process providing startups with information on user research and how to utilize it.249 These pre- and post-investment advantages over PVCs have led to CVC successes. Studies have found that CVC-backed 245. See Emily Chang, How Google Ventures Chooses Its Investments, BLOOMBERG (Oct. 17, 2015), (last visited Dec. 10, 2016) (discussing how Google Ventures helps its investments) (on file with the Washington and Lee Law Review); see also Brad Coffey, Will Google Disrupt Venture Capital?, FORTUNE (June 22, 2011), (last visited Dec. 10, 2016) (explaining that Google is trying to continue its history of reinventing industries through its use of venture capital) (on file with the Washington and Lee Law Review). 246. See GV LIBRARY, (last visited Dec. 10, 2016) (listing articles discussing aspects of Google Ventures) (on file with the Washington and Lee Law Review). 248. See THE DESIGN SPRINT, (last visited Dec. 10, 2016) (describing multi-day processes for discussing business, design, prototyping, and testing ideas with customers) (on file with the Washington and Lee Law Review); see also John Koetsier, How Google Ventures Does Rapid Prototyping ‘Design Sprints’ with Its 170 Startups, VENTURE BEAT (Aug. 14, 2013) (last visited Dec. 10, 2016) (explaining how “Google Ventures built its own rapid prototyping process, with a defined five day schedule to understand the challenge, create multiple options, build multiple prototypes, and get real customer feedback”) (on file with the Washington and Lee Law Review); Leena Rao, Inside a Google Ventures Design Sprint, TECHCRUNCH (Oct. 23, 2013) (last visited Dec. 10, 2016) (“Google offers its portfolio startups the opportunity to participate in a Design Sprint, which is an intensive, visual bootcamp around a design problem for portfolio companies.”) (on file with the Washington and Lee Law Review). 249. See Michael Margolis, The GV Research Sprint: A 4-day Process for Answering Important Startup Questions, GV (Aug. 4, 2014) ant-startup-questions-97279b532b25#.vhm0syds2 (last visited Dec. 10, 2016) (stating that four-day research sprints allow for testing of ideas without an actual launch of the idea) (on file with the Washington and Lee Law Review). startups that go public “produce more patents and patents that are of higher quality,”250 and that CVC investment has a positive signaling effect on upon a startup’s later IPO.251 Gompers and Lerner empirically found that CVC investments “appear to be at least as successful” as PVC investments, especially where the CVCs had a strategic (as opposed to financial) focus.252 The parent corporation benefits both through financial gains and by bringing the knowledge gained through CVC operations in C. Why Corporate Venture Capital Doesn’t Dominate Private Venture Capital 250. Chemmanur, Loutskina & Tian, supra note 60, at 2437. 251. See Toby E. Stuart, Ha Hoang & Ralph C. Hybels, Interorganizational Endorsements and the Performance of Entrepreneurial Ventures, 44 ADMIN. SCI. Q. 315, 315 (1999) (finding that startups with a prominent CVC investor launch IPOs more quickly and with higher valuations than startups without a prominent CVC investor). Gompers & Lerner, supra note 229, at 19. 253. See id. at 3 (stating that corporate venture investments benefit the parent corporations by providing direct financial returns and better understanding of industry trends). 254. See id. (explaining the benefits that large corporate structures can provide to their venture capital programs). 255. See Lerner, supra note 45 (noting that co-investors have the added value of forcing a CVC to more quickly cut ties with a failing startup). 256. In fact, private venture capital’s limited partnership structure, with funds having a ten-year life span, can put exit pressure on corporate venture capital, as CVCs are corporate subsidiaries and under no such life-span deadline. The PVC will push the CVC to make a quicker decision on exit than it otherwise might. See Gilson, supra note 20, at 1076 (“The fact that portfolio company investments are of limited duration rather than long term is critical to the operation of the venture capital market.”). But see Chemmanur, Loutskina & Tian, supra note 60, at 2435 (arguing that not having a ten-year lifespan is actually a positive that CVC has over PVC). problems with corporate venture capital including: 1) instability and short-term focus; 2) inability to capitalize on knowledge spillovers that could flow from CVC-funded startups to parent corporations; and 3) inadequately compensating CVC fund managers.257 First, corporate venture capital appears cyclical, and although that mirrors the cyclical nature of private venture capital,258 parent corporations tend to turn and cut bait on CVCs more quickly than PVCs do.259 When times are good—as in the last several years—corporate venture capital accounts for anywhere from 11–13% of all venture capital dollars invested.260 In 2015, a particularly good year, CVCs “invested over $7.5 billion in 905 deal to high-growth startups.”261 But the bad times are a different story. CVC investments dropped off precipitously after the stock market crash of 1987 and again after the dot-com crash of the late 1990s.262 Lerner estimates that a CVC’s life span may be as short as a year.263 This short-term focus may sometimes be due to corporate venture capital’s mostly strategic nature; once the technological need of the corporation is met, the 257. See Gompers & Lerner, supra note 229, at 45 (listing structural problems, lower compensation of investors, and short time frame of corporate investments as CVC’s disadvantages). 258. See id. at 22 (writing in 2000 that “corporate involvement in venture capital has mirrored (perhaps even in an exaggerated manner) the cyclical nature of the entire venture capital industry over the past three decades”). 259. See Lerner, supra note 45 (explaining that a corporation can often more easily jettison a poorly performing venture investment than they can abandon internally developed innovations). 260. See King, supra note 230 (citing statistics that corporate venture capital accounted “for 13 percent of all venture capital dollars invested [in 2015], and 21 percent of all deals”); Lerner, supra note 45 (“In the first half of 2011 . . . more than 11% of the VC dollars invested came from corporate venture funds, a level not seen since the dot-com bubble.”). 261. King, supra note 230; see also Benson & Ziedonis, supra note 242, at 478 (“From 1980 through 2003, established firms invested over $40 billion in entrepreneurial ventures.”). 262. See Benson & Ziedonis, supra note 242, at 480 (explaining that investment in venture capital firms “subsided with the plummet in technology markets”). 263. See Lerner, supra note 45 (“[l]arge companies have been wary of corporate venturing . . . . The median life span of these funds has been about one year.”). startup investment is no longer necessary.264 Or perhaps some CVC arms are CEO pet projects, and thus not part of long-term corporate strategy.265 Either way, the instability of corporate venture capital may cause promising entrepreneurs to prefer funding from private venture capital.266 Second, to fully capitalize on corporate venture capital’s potential, the knowledge gained from strategic startup investments must find its way back to the parent corporation.267 If not, this is not really a hybrid form of intrapreneurship at all, but merely the same as any other corporate financial investment. There are alternative ways to bring the knowledge from CVC portfolio startups back into the parent corporation. One way is to acquire the startup once it develops.268 However, a recent empirical study found poor returns to corporations acquiring their own CVC–funded startups.269 Indeed, my own research into the top CVCs revealed that they do not often acquire their portfolio startups.270 264. See Gompers & Lerner, supra note 229, at 19 (“[I]t may be that corporations need to employ such programs only during periods of severe technological discontinuity. After such periods of rapid change pass, the programs are no longer needed.”). 265. See Benson & Ziedonis, supra note 242, at 489 (citing studies for the proposition that a “common criticism against corporate venturing programs is their use to fund CEO ‘pet projects’”). 266. See id. (questioning why takeovers of portfolio companies often drastically reduce value for shareholders of CVC investors). 267. See Gary Dushnitsky & J. Myles Shaver, Limitations to Inter Organizational Knowledge Acquisition: The Paradox of Corporate Venture Capital, 30 STRATEGIC MGMT J. 1045, 1045 (2009) (noting that a corporation will often not invest in an entrepreneur’s invention unless the entrepreneur discloses details about his invention). 268. See Benson & Ziedonis, supra note 242, at 479 (examining whether investors earn positive returns when they acquire startups). 269. See id. at 489 (explaining the methodology of their study on returns on investment for corporations acquiring CVC–backed startups). 270. For example, Google Ventures had fifteen of its portfolio startups acquired in 2014, but only three of these were acquired by Google. See GV Year in Review: 2014, GV, (last visited Dec. 10, 2016) (listing the various achievements and exits of Google Venture companies) (on file with the Washington and Lee Law Review). Salesforce Ventures has had twenty-one portfolio startups with an exit event since 2011; of the acquisitions, only two were undertaken by Salesforce. See Salesforce Ventures Exits, CRUNCHBASE, (last visited Dec. 10, 2016) (listing Salesforce ventures and the type of exit of A second way of effecting knowledge spillovers is to obtain information from portfolio startups while they are developing absent a parent company acquisition. CVCs sometimes appear to have problems facilitating this type of knowledge spillover.271 As Lerner observes: “Knowledge doesn’t automatically flow from start-ups to the large organizations that have invested in them,” and that there is “a cultural gap between the young MBAs who dominate most venture teams and the firm’s senior executives.”272 He suggests, citing the CIA’s example of In-Q-Tel, that “linked units” can be the bridge that transfers relevant information to the parent.273 Another paper sounded a similar note, stating that “CVC managers needed to be deeply embedded in the social networks of both the start-up venture and the incumbent” and needed to function as “knowledge brokers.”274 But large corporations are not always good at facilitating this knowledge spillover. A final problem with corporate venture capital is adequately compensating the managers running the funds. Private venture capital fund managers make substantial returns on carried interest, or the profits made on a portfolio startup’s exit.275 each venture) (on file with the Washington and Lee Law Review). Likewise, Intel appears to rarely acquire companies in which Intel Capital has invested. See Eric Blattberg, Intel Capital Saw More Exits than Sequoia, Greylock, or Google Ventures Last Year, VENTURE BEAT (May 8, 2014) (last visited Dec. 10, 2016) (“Intel Capital has the mandate to get the best exit possible for Intel Corp., not to serve as a feeder for Intel Corp.”) (on file with the Washington and Lee Law Review). These findings do not include strategic alliances or licensing agreements made between parent corporations and CVC portfolio startups, which may be another way the parent corporation becomes more intrapreneurial through corporate venture capital programs. 271. See Lerner, supra note 45 (“The barriers to knowledge transfer are many: The corporate venturing and business development groups may be located far from the firm’s central operations. Everyone is busy with day-to-day tasks.”). 272. Id. 273. Id. 274. Thomas Keil, Erkko Autio & Gerard George, Corporate Venture Capital, Disembodied Experimentation and Capability Development, 45 J. MGMT. STUD. 1475, 1491 (2008). 275. See Victor Fleischer, Two and Twenty: Taxing Partnership Profits in Private Equity Funds, 83 N.Y.U. L. REV. 1, 9 (2008) (“Because private equity funds are leanly staffed, a carried interest worth millions of dollars may be split Corporate venture capital fund managers, on the other hand, are compensated like comparable employees in parent corporations: through salaries and bonuses.276 As a result, corporate venture capital fund managers make far less than their private venture capital counterparts, and often leave for them, resulting in a talent drain at CVCs.277 Remedying the problem is not easy. Just as it is difficult to compensate intrapreneurial employees like entrepreneurs,278 it is challenging to compensate corporate venture capital fund managers like their private venture capital fund counterparts without creating interorganizational issues.279 General Electric’s CVC arm lost many people to private venture capital firms in 1998 and 1999 for this reason.280 The practical effect of this talent drain further negates the seeming advantages of corporate venture capital over private venture capital. One way to overcome these obstacles is for the parent corporation to design a strong corporate venture capital program.281 Studies have found that a CVC’s likelihood of success increases if the parent corporation establishes dedicated units (e.g., subsidiaries), rather than housing the corporate venture among just a handful of individuals.”). 276. See Gompers & Lerner, supra note 229, at 23 (“Corporations have frequently been reluctant to compensate their venture managers through profitsharing (‘carried-interest’) provisions.”); Lerner, supra note 45 (“[C]orporate leaders are typically troubled by the disparity between what venture managers expect to earn and the compensation of executives with comparable seniority in other parts of the company.”). 277. See Gompers & Lerner, supra note 229, at 45 (“[F]ield research suggests that corporate venture groups are often plagued by defections of their most successful investors, who become frustrated at their low level of compensation.”). 278. See supra notes 93–96 and accompanying text (examining financial incentives for employees). 279. See Edward P. Lazear, Pay Equality and Industrial Politics, 97 J. POL. ECON. 561, 562 (1989) (explaining how a large disparity in salaries for similarly situated employees within a company can result in decreased cooperation and even sabotage among these employees). 280. See Lerner, supra note 45 (“Corporations that fail to provide adequate incentives [to the corporation’s private venture capital investors] face a steady stream of defections once junior investors master the venture process.”). 281. See Gompers & Lerner, supra note 229, at 18 (emphasizing the importance of having a strong link between a corporate parent’s strategic focus and the venture capital group’s investment focus). capital operation inside the parent.282 Although the results of CVC-funded startup acquisitions have not been good, one study found that when parent corporations later acquired their CVC’s portfolio startups, financial returns were significantly higher “when managers from dedicated CVC units [were] responsible for the initial funding decision.”283 The authors of that study state: “Investors that house CVC programs in autonomous organizational units realize more favorable outcomes than do corporate investors with less systematized programs.”284 VI. Conclusion This Article examined how corporate law plays at the margins to influence the intrapreneurship/entrepreneurship balance we observe. It also explores the hybrid option of large corporations funding startups through corporate venture capital projects, rather than competing with them. To close with a bit more on the entrepreneurial/intrapreneurial balance, a recent Harvard Business Review article offers three business reasons why large corporations will become increasingly important to innovation going forward.285 First, large corporations have competitive advantages due to brand recognition and staying power, whereas startups increasingly encounter rivals due to shorter product development cycles and an abundance of financing.286 In other words, due to 282. Benson & Ziedonis, supra note 242, at 491 (noting that prior studies demonstrate that firms often more easily find managers with backgrounds in finance or private equity when they organize their CVCs into autonomous subsidiaries). 283. Id. at 494. 284. Id. at 496. 285. See Scotty D. Anthony, The New Corporate Garage, HARV. BUS. REV. 1, 4 (Sept. 2012), (last visited Dec. 11, 2016) (listing the decreasing cost of innovation, large companies adopting open innovation, and business) (on file with the Washington and Lee Law Review). 286. See id. at 5 (“[Startups] are increasingly vulnerable to the same capitalmarket pressures that plague big companies—but before they’ve developed lasting corporate assets.”). Conversely, it could be argued that the abundance of capital and cheap cost of launching a startup would create more entrepreneurship relative to intrapreneurship, not less. See Coyle & Polsky, supra note 53, at 292–93 (noting that the cost of launching certain types of startups, notably software startups, has decreased significantly since the rise of cloud computing and that the amount and variety of funding for new startups is more abundant than ever). 287. See, e.g., Mike Isaac & Katie Benner, LivingSocial Offers a Cautionary Tale to Today’s Unicorns, N.Y. TIMES (Nov. 20, 2015), (last visited Dec. 10, 2016) (explaining how LivingSocial could not generate liquidity by going public, because a peer company, Groupon, attempted to go public, which generated investor skepticism about the sustainability of its and LivingSocial’s business model) (on file with the Washington and Lee Law Review). 288. See Anthony, supra note 285 (“[L]arge companies, taking a page from start-up strategy, are embracing open innovation and less hierarchal management and are integrating entrepreneurial behaviors with their existing capabilities.”). 289. See id. (“[A]lthough innovation has historically been product- and service-oriented, it increasingly involves creating business models that tap big companies’ unique strengths.”); id. (“One analysis shows that from 1997 to 2007 more than half of the companies that made it onto the Fortune 500 before their 25th birthdays—including Amazon, Starbucks, and AutoNation—were business model innovators.”) . II. Intrapreneurship and the Innovator's Dilemma...........1749 A. Intrapreneurship and Entrepreneurship Differentiated .......................................................... 1750 B. Intrapreneurship's Practical Importance................1753 C. Why Intrapreneurship Isn't Even More Successful.................................................................1756 III. Solving the Innovator's Dilemma..................................1765 A. Christensen 's Answer ..............................................1766 B. Borrowing from Entrepreneurship: What Makes a Good Entrepreneur? . ............................................1768 IV. Intrapreneurship and Corporate Law...........................1770 A. Risk Taking and the Business Judgment Rule .......1771 B. Risk Identification and the Duty to Monitor .......... 1774 1. The Modern Duty to Monitor............................. 1774 2. The Duty to Monitor and Risks from Disruptive Innovation........................................1778 V. Corporate Venture Capital ............................................1782 A. Basics of Corporate Venture Capital ......................1782 B. Advantages of Corporate Venture Capital over Private Venture Capital ..........................................1784 C. Why Corporate Venture Capital Doesn't Dominate Private Venture Capital ......................... 1787 3 . See Joseph Bankman & Ronald J. Gilson , Why Start-Ups?, 51 STAN. L. REV. 289 , 289 - 90 ( 1999 ) (commenting that “the prototypical start-up involves an employee leaving her job with an idea”). 4. On legal preferences granted to startups and other small businesses, see Mirit Eyal-Cohen, Legal Mirrors of Entrepreneurship , 55 B.C. L. REV . 719 , 719 ( 2014 ) [hereinafter Eyal-Cohen, Legal Mirrors] (analyzing why “Congress Cohen , Down-Sizing the Little Guy Myth in Legal Definitions, 98 IOWA L . REV. 1041 , 1046 ( 2013 ) [hereinafter Eyal-Cohen, Down-Sizing] (explaining some of businesses) . 5. See, e.g., Darian M. Ibrahim , The New Exit in Venture Capital, 65 VAND. L. REV . 1 , 2 ( 2012 ) (citing favorably statistics that show “[i]n 2008 public companies that were once venture-backed accounted for more than 12 million U.S. jobs and $2.9 trillion in revenues, which equates to 21 percent of U.S . GDP” Capital Industry (Apr. 29, 2009 ) ( on file with the Washington and Lee Law Review))) . 6. This Article, however, is by no means the first law review article to supra note 3 , at 299-308 ( examining why large corporations lose innovative employees to startups); see also Eyal-Cohen, Down-Sizing, supra note 4 , at 1087 entrepreneurial value.”) . 7. See Brent J. Horton , Modifying Fiduciary Duties in Delaware: Observing Ten Years of Decisional Law , 40 DEL. J. CORP . L. 921 , app . I ( 2016 ) 16 . See Amir N. Licht , The Entrepreneurial Spirit and What the Law Can Do About It , 20 COMP. LAB. L. & POL'Y J . 817 , 817 ( 2007 ) (writing on the unique characteristics that distinguish entrepreneurs from other civilians) . 19 . See D. Gordon Smith & Darian M. Ibrahim , Law and Entrepreneurial Opportunities , 98 CORNELL L. REV. 1533 , 1566 - 67 ( 2013 ) (describing how limited liability encourages entrepreneurship) . 20 . See Ronald J. Gilson , Locating Innovation: The Endogeneity of Technology , Organizational Structure , and Financial Contracting, 110 COLUM. L. REV . 885 , 896 ( 2010 ) (“A number of scholars have focused on the risk to the compromise her intellectual property . ”) . 21 . See infra Part II.C (observing that when a corporate employee invents a disruptive innovation at work ownership rights are unclear) . 22 . See infra Part II.C (mentioning that compensation leads to technology 38 . See Eric J. Pan , A Board's Duty to Monitor, 54 N.Y.L. SCH. L. REV . 717 , 738 ( 2010 ) (considering the duty to monitor and what requirements it imposes on the board of directors) . 39 . See Christine Hurt , The Duty to Manage Risk, 39 IOWA J. CORP . L. 253 , 259 ( 2014 ) (clarifying that the duty to monitor business risk does not exist within the corporate law framework of duties) . 40. See infra notes 200-212 and accompanying text (exploring the case of In re Citigroup Inc. S'holder Derivative Litig ., 964 A.2d 106 ( Del. Ch . 2009 )). 41 . See infra Part IV.B.2 (doubting that Delaware judges would hold board of directors legally liable for failing to identify a business risk) . 42. See infra notes 220-224 and accompanying text (explicating Ed Rock's conduct) . 43 . See infra Part IV.B (contending that although Delaware courts will not innovation , Delaware courts can affect director behavior) . 64 . See generally D. Gordon Smith , The Exit Structure of Venture Capital, 53 UCLA L. REV . 315 ( 2005 ) (describing venture capitalist strategies for exiting their portfolio startups) . 71 . Gideon Parchomovsky & R. Polk Wagner , Patent Portfolios, 154 U. PA. L. REV . 1 , 7 n.12 ( 2005 ). 77 . See Tate , Google's 20 Percent, supra note 76 (“The policy [ 20 % time] led Google Suggest; Gmail , and AdSense . . . .”). 78 . See id. (“[C] orporate hackathons [a cheaper version of 20% time] are are-just-like-entrepreneurs-its-not-true/ (last visited Dec . 15 , 2016 ) (sharing with the Washington and Lee Law Review) . 79 . See Dan Schawbel, Why Companies Want You to Become an Intrapreneur , FORBES (Sept. 9 , 2013 , 12 :29 PM), sites/danschawbel/2013/09/09/why-companies -want-you-to-become-an-intrapreneur/ (last visited Dec . 15 , 2016 ) (“[A]t 3M, they came up with Post-It Notes . . . .”) (on file with the Washington and Lee Law Review); Fry, supra note 47, at 5 (describing 3M's founders as innovative and noting that “3M is like a bunch of small companies pasted together”) . 80 . See The U-2 Dragon Lady , LOCKHEED MARTIN, (last visited Dec . 15, 2016 ) (recounting how and why the U-2 Dragon Lady was created) (on file RADICALLY SUCCESSFUL BUSINESSES 30-31 ( 2011 ) (noting that Intuit's five-member intrapreneurial team created SnapTax) . 81. See 10 Inspiring Examples of Successful Intrapreneurship , VOCOLI: BLOG (May 27 , 2014 ), examples-of-successful-intrapreneurship/ (last visited Dec . 15 , 2016 ) (presenting Lee Law Review) . 82 . See id. (discussing how “[m]any Sony Bosses were outraged at his work,” but a Sony employee in a senior position saw the promise of the Sony 175 . Id. at 1052- 53 . This position is not without its critics . Writing after the Financial Crisis of 2008 , David Rosenberg argues that the “widely accepted Future of Corporate Risk-Taking and the Business Judgment Rule, 6 BERKELEY BUS. L .J. 216 , 220 ( 2009 ) ; see also Karl S . Okamoto & Douglas O. Edwards , Risk Taking , 32 CARDOZO L. REV. 159 , 160 ( 2010 ) (proposing a nuanced approach on the idea of financial risk-taking) . 220 . Edward Rock , Saints and Sinners: How Does Delaware Corporation Law Work ?, 44 UCLA L. REV. 1009 , 1016 ( 1997 ). 221 . See id. at 1015-16 ( explaining that a narrative process generates standards that are difficult to reduce into a rule) . 222 . Id. at 1017; cf. David A. Skeel , Jr., Shaming in Corporate Law, 149 U. PA. L. REV . 1811 , 1811 - 12 ( 2001 ) (pointing out that while American society in form a relatively enmeshed community) . 223. See Melvin Aron Eisenberg, The Divergence of Standards of Conduct and Standards of Review in Corporate Law , 62 FORDHAM L. REV. 437 , 462 ( 1993 ) Separation in Criminal Law , 97 HARV. L. REV. 625 ( 1984 ). 224 . See Dan-Cohen, supra note 223 , at 630 ( explaining that a conduct rule judge should decide cases involving the criminal's illegal act ). 225 . See Eisenberg, supra note 223 , at 463 ( arguing that a discrepancy

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Darian M. Ibrahim. Intrapreneurship, Washington and Lee Law Review, 2018,