Corporate Venture Capital from the Perspective of Technology-Based

The core focus of the present dissertation is to examine the benefits from corporate venture capital for technology-based new firms and the factors influencing those benefits. This focus is motivated by high potential value from corporate venture capital investors for technology-based new firms (Gompers & Lerner 1998, Kelley & Spinelli 2001, Maula & Murray 2000a), simultaneous high risk for new ventures (Hellmann 2001, Kann 2000), and the lack of rigorous empirical research examining the value-added mechanisms and the factors influencing the value-value-added mechanisms.

In the following sections, earlier studies on the performance implications, value-added mechanisms, and the factors influencing the value-value-added mechanisms in corporate venture capital are briefly summarized. Table 2-2 summarizes these studies focusing on three primary areas: performance implications, value-added mechanisms, and the factors influencing those mechanisms.

Table 2-2 Literature on value creation by ventures in corporate venture capital

Category Studies Performance implications for ventures

Gompers & Lerner 1998, Maula & Murray 2000) Value creation mechanisms (non-financial)

Resource acquisition

Maula & Murray 2000a, McNally 1997 Knowledge

acquisition

Maula & Murray 2000a, McNally 1997

Endorsement Kelley & Spinelli 2001, Maula & Murray 2000a, McNally 1997 Factors influencing the value creation

Partner

Gompers & Lerner 1998, Hellmann 2001, Kelley & Spinelli 2001, Maula & Murray 2000a

Performance Implications for Ventures from Corporate Venture Capital

Among the few studies examining corporate venture capital from the venture perspective, Gompers and Lerner (1998) found that corporate venture capital backing was associated with higher likelihood of initial public offering especially when the venture and the corporation were strategically related. This study did not focus on the value-adding mechanisms but provided strong empirical evidence on the benefits by covering 32,364 venture capital and corporate venture capital investments between 1983-1994.

In another study examining the benefits from corporate venture capital for technology-ventures, Maula and Murray (2000a) analyzed 325 initial public offerings between 1998-1999 by venture capital and corporate venture capital backed companies. In this study focusing on information and communications technology ventures, Maula and Murray found that ventures backed by Global Fortune 500 corporations in the same industry group received higher valuations at initial public offering than ventures financed by independent venture capitalists alone. Their conclusion was that prominent corporate venture capital investors complement traditional venture capitalists in syndicates and may provide valuable value-added for new ventures. Although that study did not directly test the role of various value-added mechanisms due to the limitation of using limited secondary data, they hypothesized that endorsement benefits, operational synergies and better selection were the key drivers of higher valuation.

Value Creation Mechanisms for Ventures in Corporate Venture Capital

McNally (1997) is among the few studies surveying the various benefits ventures receive from corporate venture capital investors. McNally (1997) surveyed technology-based firms in United Kingdom that had received indirect or direct corporate venture capital funding. In this review, I focus on his findings regarding direct corporate venture capital. His sample included 23 companies that had received direct corporate venture capital. As one of his key findings, McNally found that corporate venture capital had played an important role relative to other sources of external financing (McNally 1997:170, 181). The survey indicated that when selecting sources of funding to target, sample firms foresaw advantages to be gained from direct corporate venture capital investors when compared with other forms of external equity financing (McNally 1997:187). Some of the most important advantages were considered to be enhanced credibility, help with short-term problems, access to corporate management expertise, enhanced credibility, and access to corporate technical expertise (McNally 1997:189). Regarding the relationship with corporate investors, the survey suggested that the communication between the corporate venture capital investor and investee was typically relatively frequent and corporate venture capital investors provided hands-on value-added. Table 2-3 presents the benefits the 23 interviewed representatives of corporate venture capital-backed companies mentioned in his study (McNally 1997:196).

Table 2-3 Perceived benefits from corporate venture capital investments for ventures (adopted from McNally 1997)

Benefit from corporate venture capital investment Number of mentions

Help with short-term problems 19 83 %

Access to corporate management expertise 16 70 %

Credibility 16 70 %

Access to corporate technical expertise 11 48 %

Pricing benefits 10 43 %

Lower performance targets 9 39 %

Access to corporate marketing/distribution networks 9 39 %

Extra production/R&D support 8 35 %

Opportunity to establish further business relationships 8 35 % Access to more sophisticated financial control systems 1 4 %

Access to corporate office space 1 4 %

Access to possible exit routes 1 4 %

Synergy 1 4 %

Enhanced attractiveness to other investors 1 4 %

Stability 1 4 %

Access to corporate operational expertise 1 4 %

Strengthening of vertical relationships 1 4 %

Source: Survey by McNally (1997:196). Total number of interviewed direct corporate venture capital backed firms was 23.

Focusing on the endorsement benefits, Kelley and Spinelli (2001) examined the role of corporate venture capital investments in improving the legitimacy of new ventures. In their analysis of 84 corporate venture capital backed technology ventures, they found that corporate venture capital backed ventures with business relationships with their corporate investors were able to form higher number of alliances with other firms. They argued that not only corporations have strategic objectives in corporate venture capital but perhaps also start-ups have strategic reasons for seeking corporate venture capital financing.

Factors Influencing Value Creation for Ventures in Corporate Venture Capital There is no earlier research systematically examining the factors that influence the value-added in corporate venture capital for technology-based new firms. Gompers and Lerner (1998) identified strategic relatedness as an important determinant of the benefits for ventures. Similarly, Maula & Murray (2000a) predicted that complementarities would be important but did not directly test this hypothesis. They found that Global Fortune 500 corporations operating in same broad industry sectors had a positive influence on the IPO valuation of the portfolio companies. Further, Hellmann (2001) assumed in his theoretical analysis that complementarities would be a key determinant of the benefits for the ventures.

As another factor that has received attention is the strength of the relationship between the venture and the corporate venture capital investor. Kelley and Spinelli (2001) found that corporate venture capital backed ventures with business relationships

with their corporate investors were able to form higher number of alliances with other firms.

Conclusions from Research on Value Creation for Ventures in Corporate Venture Capital

Overall, it can be concluded that there is no extant rigorous empirical research comprehensively examining the value-added mechanisms and the factors influencing the value-added mechanisms in corporate venture capital from the perspective of corporate venture capital backed new ventures. The present study attempts to fill this gap by building a theory-based model of the potential value-added mechanisms and the factors influencing those mechanisms, and testing the model by employing data collected from corporate venture capital backed ventures.

In the following sections, extant research on other related fields is reviewed to create a better understanding of the potential forms of value-added. These fields include value-added provided by independent venture capitalists, benefits for ventures from strategic alliances with large firms, and benefits from the parent corporation for the ventures in internal corporate venturing. These reviews examine the performance implications for the ventures, value creation mechanisms for ventures, and the identified factors influencing the value creation.