Corporate Venture Capital as a Window on New Technologies: Implications for the Performance of Corporate Investors When Acquiring Startups

Abstract

G aining a "window" on new technologies is a prominent motive for corporate venture capital (CVC) investing. Recent studies suggest that information gained through CVC-related activities can improve the internal R&D productivity of established firms. This study investigates an alternative means by which information gained through CVC investing could improve firm performance-by increasing the returns to corporate investors when acquiring startups. We provide new insights based on an event study of the returns to 34 corporate investors from acquiring 242 technology startups. Consistent with predictions drawn from the absorptive capacity literature, we find that the effect of CVC investing on acquisition performance hinges critically on the strength of the acquirer's internal knowledge base: as CVC investments increase relative to an acquirer's total R&D expenditures, acquisition performance improves at a diminishing rate. We also find that firms consistently engaged in venture financing earn greater returns when acquiring startups than do firms with more sporadic patterns of investing, even controlling for firm profitability, size, and acquisition experience. These findings suggest that corporate investors systematically differ in their abilities to derive added benefits from external venturing as acquirers of entrepreneurial firms.

Does incremental and radical innovation performance depend on different types of knowledge accumulation capabilities and organizational size?

“…Purvis et al (2001) demonstrate that new knowledge about a methodology affects the absorption of this new methodology. In turn, Benson and Ziedonis (2009) show empirically that corporate venture capital (CVC) investment can improve the results obtained by corporate investors when acquiring start-ups if they have a strong internal knowledge base. Camisón and Forés (2011) also confirm the relationship between internal knowledge creation capability and absorptive capability, by demonstrating in an empirical study that even if firms are operating in environments where knowledge flows freely, such as industrial districts, the assimilation and application of these flows is heavily conditioned by the development of a previous internal knowledge base that enables them to be understood and integrated into the organization.…”

New ventures in an emerging industry: access to and use of international resources

“…Large corporations usually have higher funding capabilities than other private investors because they could possess high amounts of capital since they do not have the same portfolio pressure and required rate of return (Katila, Rosenberger, & Eisenhardt, 2008). This implies that large firms have more reasons to invest than only sheer profits, and the most common reasons are access to new technology or foothold in new markets (Benson & Ziedonis, 2009;Schildt, Maula, & Keil, 2005;Van de Vrande & Vanhaverbeke, 2013). For a pre-commercial venture, a corporate investment is attractive as it can involve both considerable funding and access to critical resources such as networks, manufacturing and technology expertise (Katila et al, 2008;Maula, Autio, & Murray, 2005).…”

Selection Capability: How Capability Gaps and Internal Social Frictions Affect Internal and External Strategic Renewal

“…Several insightful studies examine the ability of firms to implement different modes of capability sourcing after the firms have selected a means of obtaining new capabilities. The studies highlight the importance of skills needed to implement external sourcing modes, such as acquisitions Singh 2004, Puranam et al 2009), alliances (Kale et al 2002), corporate venture capital investments (Benson and Ziedonis 2009), and contracts (Mayer and Argyres 2004), while emphasizing the role of recombination capabilities for internal development (Szulanski 1996, Galunic and Rodan 1998, Katila and Ahuja 2002. However, before implementing a particular means of obtaining new capabilities, a firm must select that mode, choosing between internal development and external sourcing.…”