Managerial Implications

The findings of the present study have several implications for entrepreneurs either selecting investors or managing an existing investor relationship, corporate venture capitalists, and independent venture capitalists. These implications are briefly discussed in the following chapters.

6.3.1 Implications for Entrepreneurs

Importance of investor selection. The empirical data demonstrated that there are significant differences in the value-added received by ventures from their corporate venture capital investors. The findings of the present study imply that complementarities between the businesses of the corporate investor and the portfolio company are a crucially important success factor. Because complementarities are

largely exogenous, a clear implication for entrepreneurs considering corporate venture capital investors is that careful investor selection is extremely important for start-up CEOs. Fortunately, start-ups often do have some choice in this matter. Depending of the specific array of needs of the start-up company, an optimal ‘value-added portfolio’

may be constructed by specifically selecting both corporate venture capitalists and independent venture capital investors on the basis of their ability to provide complementary support and advice in their respective areas of strength.

Understanding of the forms of value-added provided by corporate venture capital investors. The present study has identified three important classes of benefits available in varying degrees for the portfolio companies from their relationships with corporate venture capitalists. While there are numerous ways to classify different potential benefits from the relationships, it helps entrepreneurs to have a coherent understanding of the major classes of benefits. The present study identified three theoretically and empirically grounded classes of value-added benefits: (1) resource acquisition, (2) knowledge acquisition (3) and endorsement benefits. Understanding the nature of these benefits and the factors influencing them helps entrepreneurs in approaching suitable corporate investors.

Importance of complementarities as a success factor. As one of the key factors important for ventures when selecting investors, the present study identified complementarities as a key determinant of value creation in relationships between ventures and their corporate venture capital investors. The finding of the major role of complementarities between the parent of the corporate venture capital investor and the portfolio company has important implications both for the portfolio companies and corporate investors. Given that complementarities were found to be an important structural factor influencing the benefits available from the relationship, complementarities should always be considered by the entrepreneur when considering accepting an investment from a corporate venture capital investor.

Role of social interaction in the management of the investor relationship. As one factor important for entrepreneurs in managing the relationships with corporate venture capital investors, the present study identified social interaction as a key facilitator of resource and knowledge acquisition. The finding that social interaction mediates the benefits from complementarities and greatly facilitates resource and knowledge acquisition from corporate investors has implications for entrepreneurs managing the relationships with corporate venture capitalists. This finding suggests that social interaction is an important lever that the entrepreneurs can use to obtain greater benefits from their relationships with corporate investors. While it was shown that the complementarities have a significant catalyzing role for social interaction, it is up to the management to interact with the corporate investors and reap the benefits from the association. Therefore, active relationship management is recommended for the entrepreneurs.

Factors influencing endorsement benefits. Endorsement effect may be a particularly important benefit from having a corporate investor particularly if the products of the venture are critical for the business of the customers so that the customers or partners would have high switching costs. A small start-up may not be a credible enough supplier alone. Investment by an industry-leading corporation may improve the credibility and visibility of the venture as a supplier and enhance the impression that the product is reliable and fits potential standards and road maps in the industry. The more prominent the investor, the higher the endorsement benefits for the venture.

When selecting corporate venture capital investors, the prominence of the investor is an important consideration.

In addition to the investor prominence and customer switching costs, the present study identified the young age of the venture as a factor that influence the value of endorsements. The younger the venture, the more potential partners and customers will pay attention to the existing partners including corporate venture capital investors.

The younger and more uncertain the venture is, the more it can benefit from endorsements by prominent investors.

Further, the characteristics of the relationship between the venture and the corporate investor were found to influence the endorsement. The closer the relationship is the stronger the endorsement effects in the eyes of outsiders. In addition to facilitating resource and knowledge acquisition, investments in relationship building can therefore have indirect benefits through increased endorsement effects.

For entrepreneurs, a short summary list of the research-based recommendations is presented in Table 6-1.

Table 6-1 Ten research-based recommendations for technology-based new firms on corporate venture capital

Recommendation

1 Select your investors very carefully. Just as investors conduct due diligence on potential

investment targets, it pays off for start-ups to conduct due diligence on their potential investors.

2 Build a portfolio of investors that fits your needs. It may be beneficial to have different types of investors bringing different value-added benefits.

3 Pay a considerable amount of attention to the complementarities between your firm and the parent firm of the potential corporate investor. Complementarities are critical for cooperation.

4 Use social interaction to facilitate knowledge acquisition from corporate investors and enable identification of opportunities for cooperation.

5 Consider the potential for acquiring critical resources from the parent of the corporate investor when selecting investors. Complementarities are a key enabler for resource sharing, but social interaction helps in identifying opportunities for cooperation. However, keep in mind that investor relationship does not always give preferential access to corporate resources.

6 Consider the potential learning benefits when selecting corporate investors. Start-up companies may learn a lot from large global corporations regarding markets, customer needs, competition, and technological issues. Social interaction facilitates knowledge acquisition.

7 Consider the potential endorsement benefits when selecting corporate investors. The more influential the corporation, the more valuable the endorsement. Uncertainty and high switching costs for customers make endorsement more valuable. Complementarities improve the value of endorsements and concrete resource sharing makes complementarities more visible.

8 Consider taking multiple instead of only one corporate investor. Multiple investors may increase the endorsement and balance each other reducing the risks for conflicts of interest.

9 Do not reveal more technical documentation to the corporate investor than is necessary for the investment relationship and good cooperation. Revealing too much increases the risk of exploitation and reduces the incentives for continued cooperation.

10 Consider the potential help from taking corporate investors when entering foreign markets.

Global corporations (or significant local players in foreign markets) may help to open doors in foreign markets.

6.3.2 Implications for Corporate Venture Capital Investors

For corporate venture capitalists, it is naturally important to understand how they can add value. The findings imply that complementarities are a key determinant of the potential economic value of their portfolio firms. The existence and extent of complementarities, therefore, should be explicitly studied during the due diligence process.

Furthermore, social interaction is an important factor facilitating value creation.

While social interaction helps ventures to get more out from the relationship through learning and identification of opportunities for resource sharing, closer collaboration also helps corporate venture capitalists to learn more from the venture (Keil 2000).

6.3.3 Implications for Independent Venture Capital Investors

The findings of the present study are also important for independent venture capitalists.

Because the number of deals syndicated between independent venture capitalists and corporate venture capitalists has grown high (LeClair et al. 2000), it is important for independent venture capitalists to understand what corporate venture capitalists can

bring to syndicates. Further, it is important for venture capitalists to understand the conditions under which corporate venture capital investors can add value to syndicates.

The findings of the present study indicate that complementarities between the ventures are an important determinant of value-added provided by corporate venture capital investors for their portfolio companies. Independent venture capitalists are therefore advised to examine the complementarities when considering inviting a corporate venture capital investor in the syndicate.

When the venture needs endorsements for commercializing the products, co-investment by prominent corporate venture capitalists can often do the trick. The prominence of the corporate investor is an important factor to consider when seeking endorsement benefits for the venture. Industry-leading corporations are more influential in this respect compared to smaller corporations. The endorsement by large corporations may be particularly valuable when the venture operates in a systemic business environment offering products that are critical for the business of the customers.