Investing in Innovation: The Life Cycle of Corporate Venture Capital

Recent decades have witnessed non-financial firms’ forays into venture capital by creating Corporate Venture Capital (CVC) divisions. CVCs differ from traditional VCs that are seeking pure financial returns. Instead, CVCs are in general strategic corporate divisions for incumbent firms to respond to negative innovation shocks, and CVCs help those firms to expose themselves to new technologies in order to fix their weaknesses and regain their innovation edge. These findings have implications for understanding entrepreneurial financing and corporate innovation policies.

Extract from an article by Song Ma, Assistant Professor of Finance at the Yale University School of Management

Recent decades have witnessed non-financial firms’ forays into venture capital by creating Corporate Venture Capital (CVC) divisions. Specifically, firms create corporate-affiliated VC divisions to make systematic minority equity investments in innovative startups. CVC has become a common form of corporate investment adopted by hundreds of firms and has emerged as an important source of entrepreneurial capital. CVC’s nature as corporate investment distinguishes it from the traditional intermediary VC model that seeks pure financial return. A firm that wants to maximize shareholder value should focus not only on financial return but also on the strategic value that CVC investments may add to the parent firm. Survey evidence shows that parent firms view CVCs primarily as strategic investments, with the goal of benefiting internal corporate innovation.

The question naturally arises: What is the strategic role of CVCs in incumbent firms’ innovation efforts? My article, The Life Cycle of Corporate Venture Capital, aims to empirically investigate two different views. On the one hand, firms can make CVC investments with the intention to “fix the weaknesses.” That is, CVCs are used by firms experiencing deteriorating internal innovation to expose themselves to new technologies and regain their innovation edge. This view arises from theories on information acquisition and innovation. These theories argue that firms dedicate resources to external knowledge acquisition, in this case using CVCs to learn from startups, when internal innovation. These information acquisition efforts strengthen internal innovation in later periods.

On the other hand, firms can make CVC investments to “build on strengths.” That is, leading technological firms use their advantageous information to identify promising startup innovation, and these new technologies complement their strong internal innovation and strengthen their market power. This view is rooted in the literature on mergers and acquisitions and innovation. Previous research show that firms with stronger internal R&D are more willing to expand firm boundaries because they are better at harvesting innovation synergies.

Read the complete article at The Life Cycle of Corporate Venture Capital

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