Venture capital activities under uncertainty: US and UK investors behavior

Abstract

We investigate how in the context of Corporate Venture Capital (CVC), the investment decisions affect the likelihood of their subsequent exit strategies. We use OLS and probit regression as well as Weibull distribution of residual values, given its reliability and validity for studying lifetime analysis. Based on a sample of 8722 VC-backed ventures with the first investment dates between 1999 and 2018 in United States (US) and United Kingdom (UK), the results show that the presence of CVCs positively affects the funding amounts and the duration of the investment. CVC funds are more generous and more patient than Independent Venture Capital (IVC) funds regarding their investments in ventures. Moreover, the findings provide evidence that the exit strategies are directly influenced by the funding amounts and the duration of the investment which are influenced, in turn, by the fund type. Greater funding increases the likelihood of IPO exit which is reduced by longer investment duration. Our results are robust to alternative estimation methods, namely two-stage treatment-effects regressions. These results help the various stakeholders (VC funds, investors, ventures) make crucial decisions regarding investment amounts and duration, and exit.

Investment decisions under uncertainty: Corporate venture capital as a real option

“…First, this study contributes to the expanding studies on CVC investments (Basu et al, 2011; Drover et al, 2017; Shuwaikh et al. 2022a; Shuwaikh, et al, 2022b; Wadhwa et al, 2016). Our work complements this stream of literature by comparing IVC and CVC funding and how their funded companies choose between them.…”

“…A CVC programme is subject to exploration‐exploitation tension (Jeon & Maula, 2022) typically managed through organisational ambidexterity (Jeon & Maula, 2022; Shuwaikh et.al., 2022a; Shuwaikh et al, 2022b). Moreover, the sector fit may mitigate this tension.…”

“…Then we add the Market‐to‐book ratio to consider the potential growth of the venture. We control for sector fit dummy variable, which depends on the industry core between the investor and the backed company (Cefis et al, 2020; Shuwaikhet al., 2022a; Shuwaikh et al, 2022b). We add the geographic fit dummy variable to address the issue raised by Lerner (1995) of approaching a funding round between an investor and a firm that depends on the firm's area.…”