Do Corporate Venture Capitalists Add Value to Start‐Up Firms? Evidence from IPOs and Acquisitions of VC‐Backed Companies

Abstract

"We present evidence that corporate venture capitalists (CVCs) add value to start-up companies only when the start-ups have a strategic fit with the parent corporations of CVCs. We find that CVCs provide a variety of services and support that suit the specific needs of start-ups operating in different industries. CVC-backed start-ups are able to obtain higher valuations at the IPO than non-CVC-backed ones, and the value added by CVCs concentrates in start-ups with a strategic overlap with CVC parents. Entrepreneurial companies with strategic CVC backing also receive higher takeover premiums when they become acquisition targets". Copyright (c) 2010 Financial Management Association International.

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

“…Moreover, Alvarez-Garrido and Dushnitsky (2015), Chemmanur et al (2014) and Park and Steensma (2013) showed that after CVC involvement, ventures' innovativeness rates measured in terms of numbers of patents were higher than those of their counterparts backed by IVCs. In this regard, Ivanov and Xie (2010) found that CVCs only add value to startups that have a strategic fit with their parent organizations. Interestingly, from a CVC intra-group perspective, Gompers and Lerner (2000) reported that startup investments with a strategic fit with CVCs' parent firms, on average received a lower valuation than startup investments lacking such a relationship.…”

“…The literature distinguishes between the absorptive capacity entailed by the use of CVC as well as CVCs' value-added services supplied to startups (e.g., Dushnitsky and Lenox 2005a, b;Ivanov and Xie 2010;Maula et al 2005;Zu Knyphausen-Aufseß 2005). Absorptive capacity means that CVCs' parent organizations exploit knowledge through their venture investments, primarily to gain a window on innovative technology but also to explore new products and industry trends (Keil 2000;Maula 2007;Winters and Murfin 1988).…”

“…The critical issue, however, is how to determine and measure the degree of a CVC's strategic and financial motivation. While most scholars, like Masulis and Nahata (2009) and Ivanov and Xie (2010), present financial CVCs as merely the opposite of their strategic counterparts, we believe that this approach does not capture a more moderate motivation of CVCs. Interestingly enough, Dushnitsky and Lenox (2006) were unable to classify 116 of their total 171 CVCs as having either a strategic or a financial investment motivation.…”

“…Building on this, Masulis and Nahata (2009) found empirical evidence that complementary CVCs, which invest in startups with products that complement those of the CVCs' parent companies (as opposed to competitive CVCs, which favor startups with products that compete with those of their parent firms) pay lower purchase prices. Moreover, among others, Chesbrough (2002), Dushnitsky and Lenox (2006) and Ivanov and Xie (2010) draw a line between strategic and financial or non-strategic CVCs.…”

Organizational Choices and Venturing Modes: An Analysis of Corporate Venture Capital Activities in Legacy Media

“…With respect to the CVC literature dealing with a company's investment focus and its impact on corporate venturing performance, the notion of strategic fit with the parent corporation (Gompers & Lerner, 2000;Ivanov & Xie, 2010) and the concepts of the degree of relatedness (Da Gbadji, Gailly, & Schwienbacher, 2015;Yang, Narayanan, & De Carolis, 2014) and complementarities (Dushnitsky & Shaver, 2009;Park & Steensma, 2012) have been analyzed.…”