Corporate venture capital as a real option in the markets for technology

Abstract

Research Summary: We apply real options (RO) theory to understand the role of corporate venture capital (CVC) investments and its relationship with internal R&D capabilities in supporting the acquisition of external technologies. We formulate hypotheses about key drivers of the option value of CVC and the decision to exercise the RO using a dyadic dataset of global pharmaceutical firms and their biotech partners. Our findings suggest that the option value of CVC is higher for investors with weaker scientific capabilities; engaging the markets for technology in distant technological fields; and, when their innovation pipeline is tilted toward the late‐stage development process. Finally, the licensing of high‐value technologies is the most likely form of option exercise when technological uncertainty is reduced post‐CVC. Managerial Summary: Despite the fact that one of the main goals of corporate venture capital (CVC) investments in high‐tech industries is to gain a window on future technologies, the relationship between CVC and other strategies used to acquire external technologies, such as licensing, has not been adequately explored. To address this gap, we formulate hypotheses about key drivers of the decision to make CVC investments as a wait‐and‐see strategy in the markets for technology (MFT) using a longitudinal dataset of global pharmaceutical firms and their biotech partners. We find that investors' scientific capabilities, technological domains, and research pipelines impact investors' decisions to make CVC investments prior to other MFT transactions. In our research setting, investors typically acquire high‐value technologies via licensing when technological uncertainty is reduced post‐CVC.

Dumb money or smart money? Meta‐analytically unpacking corporate venture capital

“…Strategic performance has been regarded as the primary consideration for most CVC investments (Ceccagnoli et al, 2018; Dushnitsky & Lenox, 2005a, 2005b; Gaba & Dokko, 2016), but this does not necessarily suggest a compromise on financial performance. In fact, among the handful of studies that tackle performance outcomes in both domains, the findings are equivocal.…”

Strategic Objectives of Corporate Venture Capital as a Tool for Open Innovation

“…In accordance with real options reasoning [31], if uncertainty is high, firms prefer to make small initial investments, while learning about the investment feasibility and delaying large investments until sufficient certainty about the invested venture is obtained [42]. This allows investments to be monitored and evaluated before making more restrictive commitments [101]. Real options are particularly of value for an investing organization if the industry is subject to fast technological change [95].…”

“…Real options are particularly of value for an investing organization if the industry is subject to fast technological change [95]. CVC investments allow organizations to enter licensing agreements to use new technologies [101], or to shift potential acquisition intentions to the future when the uncertainty on the new technology decreases [102].…”

“…As we outlined earlier, the use of CVC besides other strategies can limit the potential learning effect. Therefore, it must be clear to the investing organizations which objectives should be pursued by which mode of external sourcing, such that the different sourcing strategies can complement each other [42], and thus, a portfolio view is necessary to fully understand the potential of CVC in context of other forms of external R&D activities [101]. We suggest future research to extend the suggested framework and its strategic goals by examining which forms of external R&D activities hinder or complement achieving the three identified categories of strategic objectives of CVC.…”

The technological novelty of invention and speed to IPO of high-tech start-ups

“…To conduct the empirical analysis, we employed a sample of healthcare start-ups, notably biotech and medical device start-ups, for two reasons. First, both these sectors are generally used as empirical settings for high-tech research (Ceccagnoli et al, 2018). Second, our measurements of invention features are based on patents, for which the biotech and medical device industries have a high rate (Cohen et al, 2000).…”