How alliance formation shapes corporate venture capital investment in the software industry: a resource‐based perspective

Abstract

Corporate venture capital (CVC) investments serve as interfi rm relationships that enable established fi rms to tap into emerging technology markets. Nevertheless, fi rms may also leverage their strategic alliances to this end. Does alliance formation reinforce or attenuate a fi rm's tendency to invest in entrepreneurial ventures? We introduce a resource-based perspective whereby resource complementarity and network resource visibility prompt a reinforcing association between CVC investment and alliance formation. In turn, external resource redundancy and internal resource allocation constraints yield an attenuating effect of alliance formation on CVC investment. Analyzing the alliances and CVC investments of 372 software fi rms during the 1990s, we reconcile these opposing arguments by revealing an inverted U-shaped association between CVC investment and alliance formation. Accordingly, the number of CVC investments fi rst increases, but then decreases, with the number of alliances formed. Moreover, the positive association between CVC investment and alliance formation diminishes as fi rms invest in their internal INTRODUCTIONEstablished fi rms often invest in external entrepreneurial ventures as a means of sourcing innovative ideas and sponsoring emerging technologies (Alvarez and Barney, 2001;Dushnitsky, 2006;Hill and Birkinshaw, 2008;Hill et al., 2009;Zahra, 1996). Commonly referred to as corporate venture capital (CVC), these sponsorships involve minority equity investment by the established fi rm in an entrepreneurial venture that seeks capital for growing its operations (Gompers and Lerner, 1998;Dushnitsky, 2006;Hill et al., 2009). In the year 2000 alone, nearly $16 billion was invested by more than 300 fi rms-representing 15 percent of the entire venture capital market. Despite the recent economic downturn and subsequent reduction in CVC investment, many fi rms have maintained a steady commitment to their venturing programs (Chesbrough, 2002;Ernst and Young, 2008).Extant research sheds light on the practice of CVC, which became pervasive during the 1990s (Dushnitsky, 2006). CVC activity facilitates in novation as well as access to new markets and complementary technologies Lenox, 2005a, 2005b;Hill et al., 2009;Siegel, Siegel, and MacMillan, 1988;Zahra, 1996;Zahra and Covin, 1995). Thus, CVC investing fi rms can enhance innovation (Dushnitsky and Lenox, 2005b;Wadhwa and Kotha, 2006) and fi nancial performance (Dushnitsky and Lenox, 2006;Gompers and Lerner, 1998). Nevertheless, little is known about fi rms' inclinations to engage in CVC activity and what drives a fi rm's tendency to invest in entrepreneurial ventures. In the current study, we focus on the role of strategic alliances in shaping a fi rm's CVC investment policy. Prior research has examined the merits of CVC activity relative to other types of interfi rm relationships, such as strategic alliances (Keil et al., 2008;Nicholls-Nixon and Woo, 2003;Powell, Koput, and Smith-Doerr, 1996). However, we know very little about the nature of interdepend...

Corporate venture capital portfolios and firm innovation

“…Consequently, information about a corporate investor's entire portfolio of CVC relationships is more likely to be available than similar information about a firm's alliance portfolio. Additionally, CVC investments also represent an important and distinct class of interfirm relationships (Dushnitsky and Lavie, 2010) that allow us to examine the effect of portfolio diversity based on portfolio partner attributes by holding the type of relationship and type of partner constant.…”

A world of difference? The impact of corporate venture capitalists’ investment motivation on startup valuation

“…This process yielded an initial sample of 58 CVCs with 161 distinctive CVC-startup pairs. Finally, we reviewed the identified CVCs and included only those that complied with the definition and governance of CVCs proposed by Dushnitsky and Lavie (2010), focusing on legally separate CVC arms and established companies with external corporate business development units. Hence, we excluded the direct startup investments of JumpStart Inc., Facebook Inc., Citrix Systems Inc., MasterCard Inc., Second Century Ventures LLC and Peacock Equity, resulting in a final sample of 52 CVCs with 147 unique investments, which compares favorably to the sample sizes of Dushnitsky and Lenox (2006) and Wadhwa and Basu (2013).…”

Corporate venture capital (CVC) investments and technological performance: Geographic diversity and the interplay with technology alliances

“…At the same time, these two modes differ significantly in their approaches and practices with respect to inter-organizational relationships and knowledge exchanges. Whereas technology alliances involve mutual knowledge development and knowledge exchange and typically occur between established firms who share resources and costs, in CVC activities a target firm almost exclusively carries out the technology development processes, with the CVC investor providing mainly financial backing and, in some cases, strategic benefits such as offering solutions to short-term problems, allowing the venture to use its R&D facilities, or introducing the venture to its network (Dushnitsky, 2006;Dushnitsky and Lavie, 2010).…”

“…Hill and Birkinshaw, 2015;Dushnitsky 2011). Technology alliances are similar to CVC investments in terms of the level of resource commitment, flexibility, explorative focus, and duration (van de Vrande, 2013;Dushnitsky and Lavie, 2010) and have exhibited a strong tendency towards internationalization (e.g. Lavie and Miller, 2008).…”

“…Lavie and Miller, 2008). Recent research on the propensity to engage in alliances and CVC activities suggests a complex balance between the two strategies, resulting from internal resource constraints, potential redundancy, and reputational and visibility effects (Dushnitsky and Lavie, 2010). However, extant studies on knowledge-sourcing and firm performance, while recognizing that CVC investments are often used as technology-sourcing instruments in conjunction with other external knowledge-sourcing strategies, have juxtaposed the various sourcing strategies without considering the potential synergetic or detrimental effects that their joint engagement could bring about (e.g., Keil et al, 2008;Rothaermel and Hess, 2007;van de Vrande et al, 2011;Wadhwa and Kotha, 2006;Wadhwa et al, 2015).…”