Corporate venture capital (CVC) and Entrepreneurial Firms’ R&D Investment

What is it about?

While experts generally have found that startup ventures financed by venture capital (VC) experience a significant boost in their innovation subsequent to receiving additional funding from established corporations—known as corporate venture capital (CVC) investment—, the mechanisms through which this effect materialize was not well understood. The primary purpose of our study is to shed light on why and how CVC funding causes startup ventures to experience a significant boost in their innovation. We find that CVC investors, founder-managers, and the interaction between them encourage the venture to allocate more resources to R&D activities (relative to other activities such as marketing) because of goal congruence and knowledge spillover from the established corporation, which improves its innovation. • “Knowledge spillover from CVC investors may occur through various channels and may affect both the level of a venture’s R&D intensity and the venture’s overall productivity.” • “Overall, our results demonstrate that CVC investors not only provide financial resources but also affect venture strategy through significant ownership and that founders effectively utilize knowledge spillover from CVC investors.”

Featured Image

Why is it important?

With the significant increase in CVC investment activity in recent years, we believe our study would be of interest to the general public because it has important implications for entrepreneurs (and would-be entrepreneurs) seeking multiple sources of professional funding from institutional investors such as VCs and CVCs. Our study implies that financial resources provided by VCs and CVCs are not the same because they shape the overall governance structure of the investee venture differently. Consequently, the dynamics among VCs, CVCs, and founders can lead to different outcomes for the investee venture depending on the source and amount of funding. In addition, our study provides implications to managers at large established corporations that are increasingly seeking technological knowledge by strategically investing in startup ventures. Our findings show that knowledge flow is bilateral and that founders can strategically benefit from knowledge spillover from the corporate investor as well.