Performance Assessment of “Buy-and-Build” Strategies Applied in Digital-Driven Corporate Venturing

Abstract

Currently, many large established companies which perform digital transformation use corporate venturing. It is the practice of directly investing corporate funds into external start-up companies. One of the strategies of such venture companies is the "buy and build" approach or using a platform company that makes sequential add-on acquisitions of smaller companies. However, there is controversial evidence that such a strategy can underperform conventional leveraged buyout (LBO) strategy and even can destroy the value of the company. Unlike LBO, a buy-and-build strategy requires careful execution and deployment of large financial and non-financial resources.There is few research that provides a comparative analysis between the mentioned strategies. Thus, the goal of this paper is to compare the performance of the buy-and-build strategy with that of LBO. Our sample included 2206 venture capital firms from nine countries in 1997-2020. Our findings indicated that the buy-and-build strategy in a cross-industrial setting outperforms LBO in terms of sales but underperforms in return of assets (ROA). Nevertheless, PE firms with an above-average reputation can count on higher sales, return on assets, and return on sales in buy and build rather than in LBO. The results of the study can be used by managers of industrial companies pursuing a corporate venturing approach to predict the performance of buy-and-build compared to that of conventional LBO.