Darian M. Ibrahim 0 1
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1 William & Mary Law School
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
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
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)
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 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
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
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), http://www.forbes.com/2002/09/30/0930booksintro.html
(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)
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, http://www.bookawards.bizland.com/ financial_times.htm
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
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
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), https://hbr.org/2015/11/the-prius-approach
(last visited Dec.
(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
35. See infra notes 163–179 and accompanying text (analyzing the
relationship between the business judgment rule, intrapreneurship, and risk
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
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)
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
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
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
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
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
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
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
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,
(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]
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), https://www.entrepreneur.com/article/
(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), http://www.cloud
(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.
[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
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,
(last visited Dec. 15, 2016)
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
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
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.
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)
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
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
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”).
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
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
178. See supra note 174 and accompanying text (arguing that the business
judgment rule gives managers within a corporation more leeway to utilize
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
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
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
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
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
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
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.
www3.hp.com/~/media/Files/H/HP-IR/documents/others/technology-committeecharter.pdf. 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),
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
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)
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
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
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.
(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
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
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
234. See The 104 Most Active Corporate VC Firms, CB INSIGHTS (Feb. 6,
(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
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)
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, http://www.gv.com/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, http://www.gv.com/sprint/
(last visited Dec. 10,
(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,
(last visited Dec. 10,
(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)
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
249. See Michael Margolis, The GV Research Sprint: A 4-day Process for
Answering Important Startup Questions, GV (Aug. 4, 2014)
(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
C. Why Corporate Venture Capital Doesn’t Dominate Private
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
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
262. See Benson & Ziedonis, supra note 242, at 480 (explaining that
investment in venture capital firms “subsided with the plummet in technology
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
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
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
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, http://www.gv.com/2014/
(last visited Dec. 10, 2016)
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
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)
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
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
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
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
283. Id. at 494.
284. Id. at 496.
285. See Scotty D. Anthony, The New Corporate Garage, HARV. BUS. REV. 1, 4
(Sept. 2012), https://hbr.org/2012/09/the-new-corporate-garage
(last visited Dec.
(listing the decreasing cost of innovation, large companies adopting
open innovation, and business) (on file with the Washington and Lee Law
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)
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
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
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), http://www.forbes.com/
(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,
http://www.lockheedmartin.com/us/100years/stories/u2.html (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 ), https://www.vocoli.com/blog/may-2014/10-inspiring-
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