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Swimming with sharks in Europe: When are they dangerous and what can new ventures do to defend themselves?
Abstract
Research summary: This study replicates Dushnitsky and Shaver (2009) in an institutional setting different from the United States, that is, the European venture capital market. We highlight the role played by this switch of boundary condition in influencing how legal defenses protect new ventures' knowledge from misappropriation and encourage the formation of ties between these ventures and same‐industry corporate venture capitalists. Furthermore, we consider timing and social defenses and their interactions with legal defenses in Europe. Our results indicate that the use of legal and other defenses by new ventures does vary, depending on the characteristics of the institutional context.
Managerial summary: In this study, we focus attention on the formation of corporate venture capital (CVC) ties in Europe. We highlight that the institutional context of the European venture capital market differs from the one in the United States, and this difference influences how legal defenses protect new ventures' knowledge from misappropriation and encourage the formation of ties between these ventures and same‐industry CVCs. We also consider the protection offered to new ventures by postponing CVC ties to later stages and by affiliation with prominent independent VCs. We show that, in Europe, these protections are less effective than in the United States. However, the protection provided by legal defenses is reinforced when new ventures are affiliated with prominent independent VCs . Copyright © 2016 John Wiley & Sons, Ltd.
... On the other hand, they expose the startup to potential opportunistic behavior on the part of the corporate investor (c.f., Maula et al., 2009). This opportunism may take the form of expropriation of valuable capabilities and knowledge, leading many to refer to engaging in CVC relationships as akin to "swimming with sharks" for startups (Colombo & Shafi, 2016;Katila, Rosenberger, & Eisenhardt, 2008). ...
... In such instances, a corporate investor electing to abandon a syndicate would have considerably less impact on the remaining partners because it is easier to replace their contributions. That is, although a history of sustained commitment will be important in general, it will be considerably more important when the parent firm and startup operate in the same industry because then there would be more shared resources and knowledge in these circumstances (Colombo & Shafi, 2016;Veer et al., 2022). Moreover, a CVC parent from the same industry also has significant value for the startup from an endorsement perspective, as the following quote indicates: Although these endorsements have a positive effect, conversely, withdrawal by a corporate parent in the same industry may send a stronger negative signal regarding the startup's quality, even if the withdrawal is unrelated to quality. ...
... We compute the distance measure from both the CVC location and the parent organization headquarters and use the smaller of the two values. We also include a dummy variable IndPref, which takes a value of one if the CVC has identified an interest in a specific startup industry in VentureXpert (Colombo & Shafi, 2016) as this could impact investment patterns. ...
... Morgan, Anokhin, and Wincent 2018;Homfeldt, Rese, and Simon 2019;Kurpjuweit and Wagner 2020;Shankar and Shepherd 2019;Weiblen and Chesbrough 2015), research remains scattered covering different topics across levels of analysis independently. For instance, studies have explored openness versus protection from the perspective of the incumbent (Dushnitsky and Lenox 2005a), the startup (Gans and Stern 2003;Greul, West, and Bock 2018;Maula, Autio, and Murray 2009), at the dyad-level (Colombo and Shafi 2016;Dushnitsky and Shaver 2009) and at the network level (Anokhin et al. 2011). At the same time, research covers various literatures such as innovation, technology diffusion, external knowledge sourcing, interfirm collaboration, alliances and networks, strategy, and entrepreneurship, among other domains. ...
... Startups fear that corporates with opportunistic tendencies may attempt to take away their technology, and this misappropriation risk is a substantial threat to a startup's existence. The intellectual property protection (IPP) regime, timing, social defences, together with the importance of the legal environment, stock markets, and social cognitive considerations, weaken the misappropriation risk (Colombo and Shafi 2016). The effectiveness of legal defence mechanisms such as IPP (Idelchick and Kogan 2012;Weiblen and Chesbrough 2015) depends on the legal environment and can involve a more robust IPP regime like the USA or the weaker ones like Europe (Colombo and Shafi 2016). ...
... The intellectual property protection (IPP) regime, timing, social defences, together with the importance of the legal environment, stock markets, and social cognitive considerations, weaken the misappropriation risk (Colombo and Shafi 2016). The effectiveness of legal defence mechanisms such as IPP (Idelchick and Kogan 2012;Weiblen and Chesbrough 2015) depends on the legal environment and can involve a more robust IPP regime like the USA or the weaker ones like Europe (Colombo and Shafi 2016). Timing defences involve practicing temporal sequencing in corporatestartup relations -the best performing startups first form board interlocks with promising partners and add a strategic alliance later (Knoben and Bakker 2019). ...
Research on corporate-startup coll aboration has accelerated during the last two decades, and scholars have started to distinguish underlying drivers and challenges when these two types of partners engage to innovate. Despite accumulating insights, however, the body of literature on corporate-startup collaboration is rather fragmented with little integration, impeding the extent to which different perspectives can inform and draw from each other in finding ways to improve the collaboration between corporates and startups. In this paper, we conduct a systematic literature review and apply a paradox perspective to bring together separated domains of research about corporate-startup collaboration. In particular, our framework identifies four organisational tensions that manifest in corporate-startup collaboration and explains distinct coping mechanisms across different levels of analysis. Our emergent framework highlights the multi-faceted nature of corporate-startup collaboration and provides various new avenues of research moving forward.
... Given this multiple agency framework of IVC-CVC syndicates, differing objectives are likely to give rise to conflicts of interests and produce agency costs. Such conflicts in addition to other "typical" risks associated with CVC investing such as the outflow of intellectual property [Colombo and Shafi (2016); Dushnitsky and Shaver, (2009)], may lead the co-investors to assume more competitive stances towards their syndicate partners, "limiting the type, amount and quality of resources" they provide [Makarevich (2018) p. 3252]. In consequence, the efficiency of syndication is likely limited, eroding its above outlined benefits. ...
... (2016)]. Otherwise, portfolio firms and IVC co-investors may be required to either exclude the CVC manager entirely from the board or employ social, legal, or staging-related defense mechanisms [Colombo and Shafi (2016)]. We argue that the necessity for defensive mechanisms against co-investors limits the degree to which CVCs are capable of contributing value to the portfolio firm and, thereby, the syndicate. ...
... Further, the aforementioned misappropriation of intellectual property by CVCs [Dushnitsky and Shaver (2009)] may be defended specifically, through staging. The rationale here is that delaying the engagement with the CVC increases the corporate investor's difficulty in misappropriating knowledge [Colombo and Shafi (2016); Lei et al. (2017)]. However, this also delays valuable and, more importantly, distinguishable CVC resources that may be highly relevant to the recipient portfolio firm at earlier stages ]. ...
Consistent with the resource-based view research on investment syndicates indicates relative performance advantages of syndicate-backed ventures. However, in line with agency theory, the literature shows that heterogeneous syndicates between independent venture capital (IVC) and corporate venture capital (CVC) produce portfolio firms that exert only marginal growth and are less likely to exit successfully. These contrasting views motivate this study, which aims to shed light on the determinants of value creation for new venture firms in IVC–CVC co-investing. Our qualitative research builds on a cross-industry sample of 35 interviewees identifying a distinctive set of value drivers comprising shareholder relationships, corporate setup, venture life cycle, and deal terms.
... Knowledge transfer-the transmission of knowledge beyond the firm's boundaries (Easterby-Smith et al., 2008;Frishammar et al., 2015)-is a double-edged sword. It can increase venture performance (Weber et al., 2016;Weber and Weber, 2007), but likewise the risk of misappropriation if ventures transfer explicit, yet not formally protected, knowledge (Colombo and Shafi, 2016;Devarakonda and Reuer, 2019;Diestre and Rajagopalan, 2012;Katila et al., 2008). ...
... Thus, our measure differs from most of those in the empirical literature that approximate the degree of complementarities through broad industry matches (Colombo and Shafi, 2016;Dushnitsky and Shaver, 2009;Hallen et al., 2014;Katila et al., 2008) or even finer grained industry matches (Kim et al., 2019). Only a few studies in adjacent fields (strategic alliances and mergers & acquisitions) observe more detailed forms of these ties such as the patent cross-citations between two partners (Ahuja and Katila, 2001) or common scientific research fields as measured by publications (Lane and Lubatkin, 1998). ...
... These 10 components comprise: 1) the current total head count, 2) current net sales, 3) current monthly active users (Eesley and Roberts, 2012;Eggers and Song, 2015;Eisenhardt and Schoonhoven, 1990)., 4) how the venture operated in the previous three to four months, 5) in which area and 6) how exactly the venture developed its business with the CVC's parent (Bens et al., 2011;Botosan and Stanford, 2005;Hope and Thomas, 2008;Leuz and Wysocki, 2016), 7) what kind of direct help is needed from the CVC to improve the venture, 8) the internationalization plans, 9) details about potential fundraising plans, and 10) the milestones that the venture targets for the coming three to four months (Jääskeläinen and Maula, 2014;Schertler and Tykvová, 2011). All 10 knowledge disclosure items closely match those that Narayanan et al. (2000), Maula et al. (2009), Colombo andShafi (2016), and Dushnitsky and Shaver (2009) posit as knowledge that is valuable to exchange. ...
We build a new theoretical framework that conceptually differentiates ventures' knowledge disclosure to their corporate venture capitalist (CVC) from knowledge broadcasting beyond the venture-CVC dyad and links them to venture-CVC complementarity. We test their direct, indirect, and interactive effects on venture performance. Our moderated mediation model (i) establishes knowledge disclosure as a mechanism that connects complementarity with venture performance, and (ii) predicts knowledge broadcasting beyond this dyad as a boundary condition to this indirect effect. We use 944 observations of 349 ventures along with Twitter data to test our model. Disclosure and broadcasting have a positive direct effect on performance, complementarity has an indirect effect on performance through disclosure, and this indirect link diminishes with broadcasting. Our findings point to a conflict in ventures' broadcasting strategies.
... Inter-organizational relationships between entrepreneurial firms and established firms have been widely studied in different contexts, including R&D partnerships (Colombo & Shafi, 2016;Diestre & Rajagopalan, 2012;Feng et al., 2019;Oukes et al., 2019), acquirer-merger relationships (Graebner, 2009), and buyer-supplier relationships (Caniëls & Gelderman, 2007;Dutta & Hora, 2017;Prashantham & Birkinshaw, 2020). Compared with large, established firms, entrepreneurial firms are more innovative, but are smaller and lack resources, capability, and experience (Colombo & Shafi, 2016;Diestre & Rajagopalan, 2012;Oukes et al., 2019). ...
... Inter-organizational relationships between entrepreneurial firms and established firms have been widely studied in different contexts, including R&D partnerships (Colombo & Shafi, 2016;Diestre & Rajagopalan, 2012;Feng et al., 2019;Oukes et al., 2019), acquirer-merger relationships (Graebner, 2009), and buyer-supplier relationships (Caniëls & Gelderman, 2007;Dutta & Hora, 2017;Prashantham & Birkinshaw, 2020). Compared with large, established firms, entrepreneurial firms are more innovative, but are smaller and lack resources, capability, and experience (Colombo & Shafi, 2016;Diestre & Rajagopalan, 2012;Oukes et al., 2019). ...
... There are significant differences between entrepreneurial and established firms in terms of a wide range of factors: organizational structure, resources, business focus, innovativeness, status in competition, economic/political power, and attention to the relationship (Das & He, 2006). The majority of previous studies characterize this type of relationship as asymmetrical in dependence and power (Colombo & Shafi, 2016;Diestre & Rajagopalan, 2012)-a structure described as "dancing with gorillas" (Prashantham & Birkinshaw, 2008, 2020 or "swimming with sharks" (Colombo & Shafi, 2016;Diestre & Rajagopalan, 2012), because entrepreneurial firms generally lack capability, experience, and access to key resources, which makes them dependent on established customers, such that they gradually lose bargaining power when distributing co-created benefits. Extensive evidence shows that such asymmetric characteristics have negative impacts on relationships and relational outcomes (Colombo & Shafi, 2016;Diestre & Rajagopalan, 2012;Oukes et al., 2019). ...
Although tension commonly exists in business-to-business (B2B) relationships, past research pays little attention to the potential dark side effects of psychological tensions, especially those between entrepreneurial firms and their client firms, despite their significant impact on these firms' performance. We address this important research gap by exploring the nature and impact of psychological tensions between entrepreneurial firms and their client firms during the conceptualization and commercialization stages of the new product development (NPD) process. We employ a qualitative approach to conduct semi-structured interviews with 19 entrepreneurial firms operating in the artificial intelligence field in China, and identify two types of psychological tensions at the conceptualization stage (fear of losing the B2B relationship and divergent expectations) and one type of psychological tension at the commercialization stage (attention embeddedness). We also find that fear of losing the B2B relationship and divergent expectations lead to technological decontextualization, while attention embeddedness yields singular learning.
... There is a stark distinction between venture capital investors that is related to their connection to incumbent corporations. While independent venture capitals (IVCs) are private equity investors with no direct connection to corporations, corporate venture capitals (CVCs) belong or are closely linked to incumbent corporations (Colombo & Shafi, 2016;Dushnitsky & Shaver, 2009;Gompers & Lerner, 2000). Our focus in this study is on the relation of startups with the latter investors-which AIPA potentially impacts. ...
... This concern is more serious in weaker IP regimes (Dushnitsky & Shaver, 2009). As a result, CVC investors face rampant informational constraints about startups' technology compared to other investors in the venture financing market (Colombo & Shafi, 2016;Dushnitsky & Shaver, 2009). ...
... Affiliation with a prominent IVC can be interpreted as a strong quality signal for other investors (Hsu, 2006;Stuart et al., 1999), leading to less information asymmetries. In addition, this affiliation provides social defenses against misappropriation risks and facilitates information release by the startup (Colombo & Shafi, 2016;Hallen, Katila, & Rosenberger, 2014). ...
Research Summary
We investigate the effects of patent disclosure on corporate venture capital (CVC) investments in technology startups. Toward this end, we focus on the passage of the American Inventor’s Protection Act (AIPA), which mandated public disclosure of patent applications. Theoretically, technology disclosure enables CVCs to better evaluate startups and thus, increases the likelihood of investment relations. Conversely, such disclosure may already satisfy the technology‐acquisition objectives of CVCs, reducing CVCs willingness to form an investment relation after disclosure. Our empirical analysis finds that patent disclosure through AIPA increased the likelihood of receiving CVC investments for startups—specifically in industries where patents have higher information significance. We provide evidence that the observed pattern is mainly driven by a reduction of information constraints regarding startups with patent applications.
Managerial Summary
Receiving corporate venture capital (CVC) funding is an important success factor for technology startups. Would disclosure of a startup’s innovation increase or decrease its chance of receiving CVC funding? On the one hand, disclosure by startups would reduce uncertainty and search costs for CVC investors, which could increase the chance of CVC funding. On the other hand, such a disclosure would reveal the startups’ technology to the corporations, which would in turn reduce corporate incentive to use funding as a window to the startup’s technology. Thus, disclosure could also reduce the chance of CVC funding of startups. In this paper, we study the above issue by examining the case of the American Inventor’s Protection Act (AIPA), which mandated public disclosure of patent applications. Our results suggest that innovation disclosure significantly improves the likelihood of CVC funding of startups.
... By asking entrepreneurs for their preferences, we can exclude confounding effects that are prevalent in ex-post investment data (e.g., Bengtsson and Wang, 2010;Zheng, 2011) or deal terms (e.g., Smith, 2001;Valliere and Peterson, 2007). Being able to break down the CVC preference in terms of resources needed and aspired exit paths, we further advance the literature on CVC attractiveness (e.g., Colombo and Shafi, 2016;Katila et al., 2008). We thereby specify the often-highlighted notion that CVC investors' complementary resources add value to the venture beyond what IVC investors can provide (Katila et al., 2008;Maula et al., 2005;Park and Steensma, 2012). ...
... Moreover, the study deliberately leaves out the question of whether the start-up can protect its unique intellectual property (IP) through safeguard mechanisms. Several studies have highlighted the role of IP protection in the likelihood that a CVC investment is accepted (Colombo and Shafi, 2016;Dushnitsky and Shaver, 2009;Katila et al., 2008;Maula et al., 2009). The complexity of the topic including the evaluation of key factors such as industry overlap of start-up and incumbent, the complementarity or competition between their products, as well as the IP protection regime (Dushnitsky and Shaver, 2009;Hellmann, 2002) require a separate evaluation. ...
Purpose
Literature on entrepreneurial finance has long overcome the view of an investor as a sole provider of financial capital. Entrepreneurs need to consider more aspects when deciding on an investor. Especially the depiction of corporate venture capital (CVC) investors has long highlighted advantages and disadvantages compared to independent VC (IVC) investors. The authors investigate what drives entrepreneurs' preferences for CVC relative to IVC and thereby focus on two key issues in the entrepreneur's consideration – the role of resource requirements and exit strategies.
Design/methodology/approach
The data were collected in an online survey that gathered information on several characteristics of entrepreneurs and their ventures. The resulting data set of 105 German entrepreneurs was analyzed using logistic regression and revealed important drivers for entrepreneurs' investor preferences.
Findings
The study’s findings confirm that the venture's resource needs, specifically the need for marketing resources and access to the corporate network, which play a significant role in the decision on whether a CVC or IVC investor is preferred. Moreover, the analysis debunks the hypothesis that entrepreneurs view a CVC investment as the first step toward acquisition. However, those entrepreneurs striving for an IPO are less likely to prefer CVC.
Originality/value
The study expands the literature on CVC attractiveness and specifically considers the entrepreneurs' intentions and needs. The results confirm but also debunk some widespread perceptions about why entrepreneurs choose to pursue financing from a CVC investor.
... This tension on "CVC as a value-adding investor vs. risk of misappropriation" is the second most studied second-order tension in the CVC literature, accounting for 26% of all CVC tensions (see Fig. 3). The research has examined how startups can manage this tension by setting up various defense mechanisms, including enforcing trade secrets, accepting later-stage funding, limiting corporate investors' ownership stakes and board seats (Colombo and Shafi, 2016;Katila et al., 2008;Masulis and Nahata, 2009;Maula et al., 2009), and obtaining investments from central or reputable VCs prior to accepting CVC investments (Colombo and Shafi, 2016;Hallen et al., 2014;Hellmann, 2002;Katila et al., 2008;Masulis and Nahata, 2009;Maula et al., 2009). Additionally, the research has found that startups can be more aware of the opportunistic tendency of corporate investors if they have established social ties at the individual level with corporate investors (Kim et al., 2019). ...
... This tension on "CVC as a value-adding investor vs. risk of misappropriation" is the second most studied second-order tension in the CVC literature, accounting for 26% of all CVC tensions (see Fig. 3). The research has examined how startups can manage this tension by setting up various defense mechanisms, including enforcing trade secrets, accepting later-stage funding, limiting corporate investors' ownership stakes and board seats (Colombo and Shafi, 2016;Katila et al., 2008;Masulis and Nahata, 2009;Maula et al., 2009), and obtaining investments from central or reputable VCs prior to accepting CVC investments (Colombo and Shafi, 2016;Hallen et al., 2014;Hellmann, 2002;Katila et al., 2008;Masulis and Nahata, 2009;Maula et al., 2009). Additionally, the research has found that startups can be more aware of the opportunistic tendency of corporate investors if they have established social ties at the individual level with corporate investors (Kim et al., 2019). ...
We systematically review the past four decades of research on tensions in corporate venture capital (CVC) and inductively identify three main tensions: (1) multiple stakeholders championing CVC-based exploration versus core business-focused exploitation, (2) CVC programs simultaneously belonging to the corporate parent versus the startup/venture capital (VC) world, and (3) startups and VCs viewing CVC programs as a threat versus an opportunity. By combining the understanding of the CVC phenomenon with that of the paradox literature, we expand our understanding of why, how, and when contradictory goals and multiple stakeholder expectations result in tensions and how these tensions can be managed.
*This paper is open access and can be downloaded at: https://doi.org/10.1016/j.jbusvent.2022.106226
... Corporate Venture Capital (CVC) may be defined as "a minority equity investment by an established corporation in a privately-held entrepreneurial venture" (Dushnitsky, 2012, p. 157). CVC is sometimes perceived with suspect by entrepreneurs who fears expropriation risk and predatory practices, therefore Dushnitsky and Shaver (2009) and Colombo and Shafi (2016) verified that an entrepreneur-CVC investment relationship is less likely to form when the entrepreneurial invention targets the same industry as corporate products in case of weak intellectual property protection, like the case of software industry. However, CVC investments are more likely to happen when the investing company has strong marketing position and/or strong technological resources, as discovered by Basu, Phelps and Kotha (2011). ...
... From a new ventures' perspective, relationship with corporate organization generates tensions between the advantages of leveraging external capabilities and the threat of misappropriation of resources by the corporate "sharks". This risk, formalized by Katila, Rosenberger and Eisenhardt (2008) and developed by Dushnitsky and Shaver (2009), and Colombo and Shafi (2016), is more concrete in fields with high appropriability threat (e.g. weak Intellectual Property Protection, like software development). ...
While Corporate Venture Capital (CVC) is a consolidated investment paradigm for business companies willing to foster innovation, Corporate Accelerators (CA) have been considered by corporation as instrument of open innovation. Particularly, there is limited knowledge about the interrelation of CVC and CAs in corporate entrepreneurial strategy and how they contribute to the early growth of a new technology ecosystem. By means of a case-study, namely the Amazon Alexa Fund, where the CVC and CA are part of a common plan to develop advanced technology by investing in new ventures, we propose a framework and identify best practices to align CVC and CA goals and structure. We conclude that the two investment models thrive when: i) the two programs complement each other in the type and size of venture they target, ii) they both contribute to the strategic goal to expand the target technology, and are managed by the same team, iii) they have limited interest in chasing financial returns or acquisitions in the short run, iv) the CA mitigates the risk of expropriation of CVC towards new startups, and v) the CA model allows the internationalization of the investment opportunities leveraging the network of the accelerator partner.
... In terms relationship with ventures, CVC is sometimes perceived with suspect by entrepreneurs who fears expropriation risk and predatory practices, therefore (Colombo & Shafi, 2016;Dushnitsky & Shaver, 2009) verified that "an entrepreneur-CVC investment relationship is less likely to form when the entrepreneurial invention targets the same industry as corporate products in case of weak intellectual property protection", like the case of software industry. However, CVC investments are more likely to happen when the company has strong marketing position and/or strong technological resources, as discovered by (Basu, Phelps, & Kotha, 2011). ...
... This specific focus is consistent with literature findings that "increasing portfolio diversity generated diminishing and ultimately negative returns to firm innovation" (Wadhwa, Phelps, & Kotha, 2016). Having as objective the development of the voice ecosystem, together with the possibility to provide a strong technology support to the new ventures has a positive effect on the CVC appeal (Basu et al., 2011), which outweighs the fears of expropriation, which (Dushnitsky & Shaver, 2009) and (Colombo & Shafi, 2016) formalized for fields where ventures perceive an high appropriability threat (weak Intellectual Property Protection, like software development). Given the above characteristics of the Alexa fund: ...
... Nowadays, independent ventures are confronting progressively questionable situations. Arranging can assist with thinking about elective future advancements, in this manner lessening vulnerability [2]. Arranging assumes a fundamental job in deciding the level of accomplishment acknowledged by another or independent company. ...
The pre-start process defines how individuals progress towards start-up, and therefore may be seen as the foundation for a plan to enable individuals to pass towards each stage towards business start-up participation. The step-by-step method may also be used to determine overall rates of entrepreneurship preparedness within the wider community and hence has the ability to be a valuable predictor of overall rates of entrepreneurial orientation. A business strategy provides more than a path to a goal. More definitely the reason you're reading this is because you need a financial strategy to get money for your company and if you're seeking equity investment interest or applying for a loan. If this is the case, then a business plan will be both essential and critical for your endeavor. When financial assistance is the only reason you're working up a business strategy, otherwise you make a huge error. Within three years, several start-ups should crash. They struggle on two points. The first is that the business will not have enough money to survive before cash income will cover costs and produce operating profit. The second is attributed to maladministration. A marketing strategy is the first line of protection to insure the company is not succumbing because of these two factors.
... These firms generally find it more difficult to protect their proprietary knowledge than larger, incumbent firms, as highlighted in the literature on "swimming with sharks" (e.g., Diestre & Rajagopalan, 2012). Accordingly, the costs associated with the risks of knowledge misappropriation and the related importance of legal and social protection, feature prominently in studies on corporate venture capital and are a key determinant of start-ups' choice of an investor (Katila et al., 2008;Dushnitsky & Shaver, 2009;Hallen et al., 2014;Colombo & Shafi, 2016;Kim et al., 2019). ...
... To model this matching process, we estimate factual-counterfactual logit models at the dyad level and compare the formation of realized VC investment dyads (i.e., the factual) relative to unrealized investment dyads that could have formed but did not (i.e., the counterfactual). For a similar approach in the context of VC investments, see, e.g., Dushnitsky and Shaver (2009), Colombo and Shafi (2016). For a tie to be considered potential but unrealized in a given year, at least one realized investment tie had to be observed for the firm and the VC investor in that year. ...
Patents are an important signal of the unobserved quality of young, innovative firms. We study patents that protect radical inventions associated with high earnings potential but also a high risk of failure. These previously disregarded signals convey positive and negative information simultaneously, i.e., strong signals that have a dark side. We argue that whether firms that send such signals are attractive investment targets for venture capital (VC) investors depends on the characteristics of the investors. Reputable VC investors are attracted to the strong quality signals of patents protecting radical inventions and are better able than other VC investors to deal with the dark side of these signals through syndication. These effects are stronger in the first financing round than in follow-on rounds, as the (positive and negative) informational value of patents protecting radical inventions diminishes over time as information asymmetries between young firms and prospective VC investors are reduced. We test these predictions using a sample of 759 young life science firms and 555 VC investors. Econometric estimates from a matching model support our predictions.
... The emergence of crowdfunding has attracted substantial attentions in academia, and many studies investigate the crowdfunding campaign from an empirical perspective, e.g., some examine the underlying motivations and economics of the crowdfunding (Agrawal et al. 2014;Mollick 2014;Burtch et al. 2013Burtch et al. , 2015Kim et al. 2015;Hildebrand et al. 2016;Mollick and Nanda 2016;Stanko and Henard 2017;Cornelius and Gokpinar 2020), while some compare crowdfunding with other financing schemes (Mollick, 2013;Colombo & Shafi, 2016;Drover et al., 2017;Roma et al., 2017;Ryu & Kim, 2018). ...
Most entrepreneurs seek VC funding after the reward-based crowdfunding campaign succeeds, and venture capitalists (VCs) can contribute to the project in two aspects: investment and operational expertise. With a game-theoretical model, we find that entrepreneurs face twelve possible scenarios contingent on the mass market revenue and revenue share, including the six scenarios wherein neither side exerts effort to complete the project. To attract VC funding and ensure the project completion after a campaign success, entrepreneurs should set the funding goal above a certain threshold. Specifically, we identify three ranges of the revenue share and derive the lower bound for the funding goal in each range. However, we notice that entrepreneurs prefer a low funding goal to promise the campaign success and the optimal goal will be the lower bound in each range. Moreover, we show that the revenue share is decisive to the role of VCs in the project. If the entrepreneur’s share exceeds a high threshold, the venture capitalist becomes a pure investor with no incentive to exert effort, similar to the role of banks; if the share is less than a low threshold, the entrepreneur won’t follow up but transfers the project, and the VC investor will be a project owner; if the share stays medium, the VC investor acts as a partner and there may exist “free-riding”. In the extension, we consider the revenue share an endogenous and analyse the role of VCs further. Interestingly, the VC investor prefers to own the project and occupy all revenue in mass market, while the entrepreneur treats the inefficient venture capitalist as a pure investor and the efficient one as a partner. In addition, when cooperating with efficient VCs, the entrepreneur is more likely to enlarge her share as the mass market revenue increases.
... While typical resource dependence studies focus on dependencies after forming relationships, they are ignoring anticipatory processes before tie formation (Hallen et al. 2014). In this respect, some previous studies have looked at defense mechanisms used by young ventures (Colombo and Shafi 2016;Hallen et al. 2014;Katila et al. 2008). We further argue that not only defense mechanisms but also the entrepreneurs' perceived resource dependence throughout their venture's lifecycle is anticipated by them and informs their decision-making when raising funds from investors. ...
Start-up growth is inevitably dependent on the provision of external resources. Yet, even though corporate venture capital could be an attractive funding source as it provides financial as well as crucial additional resources, corporate venture capitalists (CVCs) are seen as a two-sided sword by entrepreneurs. We, therefore, investigate entrepreneurs’ consideration of potential CVC investors and conceptualize a model of their willingness to approach a CVC investor. Using a conjoint experiment with 1680 investor profiles evaluated by 105 entrepreneurs, we show that entrepreneurs consider the investor’s motivation, deal experience, access to firm-specific resources, and long-term financial commitment of funds. However, entrepreneurs’ evaluation differs depending on their need for specific resources, as well as their fundraising experience. We thereby highlight entrepreneurs’ anticipatory trade-off decisions in the light of resource dependence and help CVC managers to optimize their communication and management efforts to attract the most suitable portfolio companies.
... However, the potential benefits that CVCs may provide to startups may be offset by a set of risks associated with corporate affiliation (Dushnitsky & Shaver, 2009;Katila, Rosenberger, & Eisenhardt, 2008;Maula, Autio, & Murray, 2009;Colombo & Shafi, 2016;Devarakonda & Reuer, 2019). Traditional VC firms invest purely for financial reasons and structure their investments to align their interests with those of the young firm (Sahlman, 1990). ...
This paper examines the effect of reputation on a corporate venture capital firm’s ability to attract potential investments. We find that a reputation for experience, active involvement in the startup, and misconduct are all positively associated with the CVC ability to attract investments. An additional year of experience, a policy of taking seats on the boards of new ventures, and each additional lawsuit against the investors all bring at least one new venture to their portfolios. A reputation for misconduct does not deter startups when the CVC has a reputation for experience. However, when the CVC firm has a reputation for active engagement with its portfolio companies, every two additional lawsuits result in a loss of at least one investee. The results hold despite controlling for generalized favorability of the parent corporation. Our study suggests that finer grained measures are needed when studying the complex relationship between reputation and performance.
... This is so because entrepreneurs benefit from the active and well-developed VC market in the USA compared with other countries (M. G. Colombo and Shafi 2016). The results remain similar with the addition of this variable. ...
Reward-based crowdfunding not only provides finance to entrepreneurs but also generates valuable information on their products’ potential demand, their feasibility, and customers’ satisfaction. This study investigates how information from the campaigns, relating to the funding amount raised in excess of target capital, delays (if any) in product delivery, and crowd sentiment, influences the chances that a venture receives equity capital from professional investors in the aftermath of a campaign. To build a sample of ventures at risk of obtaining equity capital from professional investors, we focus on 300 successful hardware campaigns that have raised $100,000 or more on Kickstarter and Indiegogo. Our results indicate that the information provided by crowdfunding campaigns influences the odds of receiving external equity in the aftermath of the campaign; however, this relationship depends on whether the ventures have already backing from professional investors or not. Our study offers insights into what information professional investors use to assess crowdfunded ventures.
... Used to refer to investors or "corporate sharks" that might misuse their power when partnering with smaller, new ventures (e.g., Colombo and Shafi, 2016;Katila et al., 2008). ...
While the natural world is argued to serve as a powerful source of knowledge and insight, entrepreneurship scholars have struggled to fully engage with nature. This raises the question of whether the antecedents, mechanisms and consequences of entrepreneurship might look differently if nature's time-tested patterns were truly considered. This paper reviews the existing linkages between biology and entrepreneurship. The value of biomimicry in inspiring new insights into entrepreneurial phenomena is then discussed, followed by a biomimicry-based mode of theorizing. Examples and future research directions are provided.
... In contrast, we add to the limited but growing body of work that underscores the potential downsides (from the entrepreneur's perspective) associated with investment relationships. These include taking a company public prematurely as a means of grandstanding (Gompers, 1996), leaking sensitive information to other portfolio ventures (Pahnke, Katila, & Eisenhardt, 2015), or exposing valuable technologies to competitors (Colombo & Shafi, 2016;Diestre & Rajagopalan, 2012;Dushnitsky & Shaver, 2009;Katila et al., 2008). In contrast to the ex ante considerations for tie formation, the ex post consequences of the non-repetition of ties are the focus of this work, especially when these decisions are made at the discretion of a high-powered exchange party. ...
... The actions of firms and individuals can be shaped by institutions in various ways which can differ across geographies. Institutional theory has been used to help explain some of these, often cultural, country differences as exist between Europe and US ( Hisrich, 1994 andLi and Zahra, 2012;Colombo and Shafi, 2016). There are many different influences that institutions can have on VC actions ( Bruton and Ahlstrom, 2003;Bruton, Fried and Manigart, 2005). ...
Investment returns of European venture capital (VC) funds have consistently underperformed US VC funds. This has led to reduced allocations of funds raised for European venture from traditional institutional investors and consequently less finance available for investment into high-growth entrepreneurial companies in Europe. The aim of this study is to investigate the factors that may give rise to a performance difference between European and US VC funds in the attempt to explain the reasons for the gap in performance. Potential factors are structural resulting from characteristics of the funds themselves, operational such as the investment practices of the VC firms which manage the funds and wider environmental such as culture and attitude to risk and the wider ecosystem in which the funds operate. The characteristics of the better performing funds in Europe and US are also investigated.
Previous studies offer incomplete explanations on the reasons for the difference in performance. Studies have focused on the UK in comparison to US and have not included continental European funds. There are no studies that have reviewed the entire investment process from sourcing deals to exiting deals, specifically contrasting Europe and the US in the context of the variables pertaining to the investment process and the impact on the fund performance gap. Previous studies have been largely quantitative in approach and influences that cannot be quantified, such as the cultural dimension, are therefore not captured in the analyses.
The study engages a critical realist philosophy and embraces an engaged scholarship, qualitative approach with some 64 semi-structured interviews with separate VC firms in UK, continental Europe and USA and 40 interviews with other stakeholders from those geographies who are related to the VC industry, including limited partner investors, entrepreneurs and advisors. Key findings of the research are that US VC firms have proportionately more partners with operational and entrepreneurial backgrounds than do European firms, they use a theme approach to identify future areas for investment, pursue a “home run” investment strategy, do most of their due diligence in house, have entrepreneurially friendly terms in their term sheets and are more proactive in achieving optimal exits for their investments than European VCs. The research has had impact in that the findings have been shared and discussed with the UK professional VC association.
Purpose
Research generally believes that both corporate venture capital (CVC) and independent venture capital (IVC) promote the innovation value of entrepreneurial ventures, but their roles in innovation risk remain unclear. To reveal the bright and dark sides of CVC and IVC, we compare their influence on innovation performance and performance variability of entrepreneurial ventures as well as their interaction effects with innovation assets through physical and intellectual assets.
Design/methodology/approach
This study uses a panel dataset consisting of 630 high-tech ventures and the Heckman selection model to test the hypotheses and correct the endogenous problems.
Findings
We find that CVC improves the innovation performance of entrepreneurial ventures but at the cost of increasing their performance variability, whereas IVC is the opposite. We also find the combination effect of external and internal capital of entrepreneurial ventures. CVC and IVC complement intellectual assets to enhance innovation performance and dance with physical assets to reduce variability.
Originality/value
We use a value-risk dyadic perspective to reveal the bright side and dark side of CVC and IVC. We unveil the interplay mechanism between internal and external capital of entrepreneurial ventures and develop some kinds of capital configuration strategies to balance innovation value and risk.
We study the delegation of authority over strategic decisions in startups and how it relates to venture capital (VC) investment through a mixed-methods study. We first show that startups typically centralize decision authority. The extent of delegation is higher if startups are VC-backed. In startups backed by corporate VC investors the aim is to leverage the unique knowledge possessed by entrepreneurial team members in a context characterized by low principal-principal agency costs. In those backed by independent VC investors, the increase in delegation is paired with the emergence of a polyarchy and decoupling between the formal and real organizations. In this situation delegation may serve as a control mechanism aligning the actions of startups with the interests of the VC investors.
Research Summary
Recently, the venture capital (VC) industry has experienced the entry of several new capital providers. Using US data on investors and their portfolio startups from 2000 to 2022, we document the emergence of a new type of investors: the micro VC . Our analysis reveals that micro Venture Capitalists (VCs) have an idiosyncratic investment strategy, which differs from traditional VCs. Compared with these investors, micro VCs invest in riskier startups, that is, early‐stage ventures initiated by less experienced founders; yet, micro VCs are less likely to syndicate, stage their investments, and replace the startup founders. Additionally, startups funded by micro VCs are less likely to experience successful exits than those backed by traditional VCs. These results can be traced to a mix of smaller capital endowments, less sophisticated limited partners, and lesser human capital of which micro VCs dispose, and that may induce them to spread their thin capital across many investments to maximize returns. Our analysis also uncovers important differences in the strategies pursued by micro VCs and business angels.
Managerial Summary
The VC industry is increasingly populated by a variety of investors with disparate characteristics and objectives. One such type of investors is represented by the so‐called micro VC firms. These are VC firms that manage funds typically below $50 million and focused primarily on investing in founder‐led startups. We leverage comprehensive VC data in the United States to answer three questions: (1) Who leads micro VC firms? (2) How do micro VC firms invest? (3) How do startups backed by micro VC perform? We find that micro VC firms are often led by relatively inexperienced entrepreneurs with little VC experience, and these firms are supported by less sophisticated limited partners. Although micro VC firms invest in riskier startups, they are less engaged in syndication and investment staging than traditional VC firms. Finally, micro VC‐backed startups have a lower probability of successful exit as compared with those backed by traditional VC firms. Collectively, our results suggest that micro VCs differ from traditional VCs beyond being “micro.”
The effects of corporate venture capital (CVC) investments on ventures’ revenues and innovation-related outcomes depend on the characteristics of the investors and on the dynamics of the investment process. Recently, venture financing literature has highlighted the importance of investment timing as a driver for investee ventures development and success. Building on the literatures on complementary assets and relative absorptive capacity, we explore how the timing of CVC investments affects ventures’ revenues and R&D intensity. Using a dataset of Norwegian ventures in knowledge-intensive industries, we find evidence for a differential effect of CVC investments when comparing a venture’s early- and late-stage, showing that investments received in late-stage increase ventures’ revenues, but decrease ventures’ R&D intensity. Further, we find that syndication with multiple CVC investors amplifies this effect. This study contributes to the understanding of the CVC-venture relationship and the impact on venture’s post-CVC outcomes.
Purpose
Which venture capital is more beneficial in the product innovation of entrepreneurial ventures? The authors study the drawbacks and different effects of corporate venture capital (CVC) and independent venture capital (IVC) on the effectiveness and efficiency of product innovation in entrepreneurial ventures to answer this question.
Design/methodology/approach
This study uses a panel dataset of 502 high-tech ventures and runs the Heckman model to correct potential endogeneity issues.
Findings
The authors find that CVC increases the product innovation effectiveness of entrepreneurial ventures, but decreases their efficiency. IVC reduces innovation effectiveness and enhances efficiency. However, CVC performs less positively, while IVC performs more positively in terms of innovation effectiveness and efficiency in the B2B market than in the B2C market.
Practical implications
This study provides insights into how to leverage venture capital to develop new products effectively and efficiently.
Originality/value
This study moves beyond the current understanding of the finance-marketing interface. It delineates the two faces of venture capital and reveals the joint effects of equity stakes and market stakes between different types of venture capital and transaction markets in product innovation.
Established firms are instrumental in funding entrepreneurial ventures, a practice known as corporate venture capital (CVC). Yet, our knowledge of the reasons firms engage in CVC is calibrated mainly on data from the United States and Europe. Such a restricted focus limits our understanding of CVC practices and objectives. Accordingly, we adopt an abductive approach to study the antecedents of CVC in China. The country is a vibrant entrepreneurial setting, second only to the USA in total startup numbers and funding amounts. We construct a comprehensive data of Chinese CVCs during the late 2010s by integrate Chinese and international databases. Cross-industry analyses of CVC patterns underscore a novel objective; one that is predominantly associated with harnessing growth through market expansion rather than the prevailing view of CVC as a window on technology. The findings mirror the features of the Chinese setting, where entrepreneurs profit from the dramatic expansion in economic activity and serve as a vehicle to leverage the global innovation frontier.
Substantial research has focused on how innovation is influenced by geography from a macro perspective (e.g., at the country, state, or metropolitan level). However, less attention has been paid to how innovation is configured within a cluster from a micro perspective (e.g., at the district or firm level within a city), i.e., the “micro-geographical proximity” within a cluster. With this paper, we aim to “zoom into” a technology cluster to study the role of the inter-organizational micro-geographical proximity for the establishment of knowledge transfer relationships. Specifically, we analyse whether and how the micro-geographical proximity is related to the formation of three different types of inter-organizational relationships: venture capital (VC) deals, intellectual property (IP) transfer agreements, and R&D strategic alliances. We take empirical evidence from the biopharma cluster in the Greater Boston Area. Our findings suggest the importance of micro-geographical proximity for the establishment of VC deals and IP transfer agreements, which emphasizes the importance of adopting a micro-geographical perspective to highlight this “neighbourhood effect”, which would not be possible when considering spatial proximity at the macro level.
Back in 2005, the great president Nelson Mandela took to Trafalgar Square for the “Make Poverty History” rally, another of his many monumental acts after ending apartheid in South Africa: the attention he gave to poverty alleviation symbolizes its criticality. Yet he never lived to again see the world deeply at it perils: only this time with a far wider reach, way beyond his beloved homeland. Prompted by the looming threat of an unprecedented recession in SSA due to the prevailing global pandemic, we review the ties between Micro-entrepreneurs and Multinational Enterprises as one of the proposed conduits for development in the region: by systematically synthesizing Bottom of the Pyramid (BoP) literature from three master articles and Africa-centric studies into themes. We make five significant findings. First, there is need to redefine poverty in technological terms. Secondly, the evolution of micro-entrepreneurs’ role from largely non-existent to equitable supplier partnerships and conversely multinationals’ role from sell-to-the-poor at all cost and unidirectional fortune finding to fortune enabling narratives with local actors and networks is critical. Adversely, the harsh economic outlook increasingly encompasses developed economies too: as evidenced by social movements that play a pivotal advocacy role. In a call for collective effort and to further crystallize multinational embeddedness, we conceptualize integration of effectuation into BoP models in order to enhance the technological capacity of micro-entrepreneurs in the region.
Innovations have always been an essential factor for the long-term success of corporations. This is all the more true at times like the present, which is becoming increasingly dynamic and fast due to such effects as digitalization and globalization. However, as important as innovations are for the success of corporations, their systematic development is just as challenging. This fact can be demonstrated not least by numerous practical examples in which formerly successful corporations were unable to react appropriately to changing market and competitive conditions and consequently had to give up their market position. The challenges in the development of innovations can be traced back to different organizational conditions, which are necessary for the efficient exploitation of existing products on the one hand and the exploration of new innovations on the other. The scientific literature recommends, among other things, the separation of exploration and exploitation into different organizational units to meet the challenges mentioned above. In addition to the operational business units, which are usually responsible for the exploitation of existing products, it is advisable to establish innovation units, such as corporate incubators or corporate venture capital units, and to entrust them with the exploration of innovations. For a detailed examination of the current state of research on corporate incubators and corporate venture capital, two systematic literature analyses were carried out within the scope of this thesis. As a result, it was discovered that further research is needed, particularly concerning the organizational integration of such innovation units into the overall organization and the associated conflicts of objectives. To make an initial contribution to closing the research gap mentioned above, a further study of this work is devoted to the organizational integration of different innovation programs in an established corporation. This study differs from previous studies in that it takes an overarching perspective and considers the entire organization, including the innovation units, as a holistic innovation system. Such a corporate innovation system consists of at least three different types of innovation units in addition to the operational business units: exploration-oriented innovation units for the generation of disruptive innovations, exploitation-oriented innovation units for the further development of existing products and transformation-oriented innovation units for the transformation of the corporate culture. Such a system can ensure the systematic and sustainable generation of innovations, especially in the interaction of the various innovation units. In addition to the basic establishment of the innovation units mentioned above, however, appropriate organizational framework conditions are required to ensure that innovations can be developed successfully. The fourth study in this thesis is dedicated to the question of how continuity, competence and cooperation affect the innovation performance of corporations. It could be analyzed that the continuous implementation of innovation activities has the greatest positive effect on the innovation performance of enterprises. While cooperation, in combination with continuity, has a short- to medium-term impact on innovation performance, competence and continuity have a long-term effect on innovation performance. Cooperation and competence are complementary concepts in that cooperation should be used for short-term innovation activities, while competence should be used for the long-term sustainable development of innovations within the enterprise. As a result, this work addresses existing research gaps with regard to the integration of innovation units and the organizational structures of corporations and provides valuable insights and approaches for further research. For this purpose, it was necessary to link findings from the field of innovation management and corporate venturing with concepts of organizational theory. Through this connection, we have succeeded in gaining new scientific insights that previously could not be gained independently within the individual research streams. We are convinced that our findings on Corporate Innovation Systems and the effects of continuity, competence and cooperation on innovation performance have made an important scientific contribution. That is all the more true at a time when successful innovation is becoming increasingly important for corporations and a growing number of newly emerging innovation units can be observed in practice.
This paper studies the collaborations between entrepreneurial ventures and universities by investigating the “first match” , namely, the probability that a given entrepreneurial venture, which has never established university collaborations before, forms a collaboration with a given university (out of all the possible collaborations it might have formed). Expanding on the literature about university–industry collaborations, we argue that the formation of the first match is socially bounded. Specifically, we contend that individual social ties, which the founders of an entrepreneurial venture have formed with the personnel of a given university as they worked there, increase the probability of a first match because these ties reduce the costs and increase the benefits of forming a collaboration (H1). We also hypothesize that geographical (H2) and cognitive proximity (H3) between entrepreneurial ventures and universities influence these costs and benefits, thus moderating the relation sub H1. Econometric estimations on a large set of dyads, which represent realized and potential first matches between Italian high-tech entrepreneurial ventures and universities, support our hypotheses.
We study what determines delegation of authority over innovation decisions in firms. Extant research that addresses this topic in an open innovation context, suggests that firms that engage in open innovation tend to delegate authority over innovation decisions. We provide a more nuanced argument that considers important contingencies. Thus, we argue that the extent of delegation depends upon the combined effect of the relative importance of innovation decisions to the firm's strategy and, when a firm engages in open innovation, on the nature of the external knowledge (scientific vs. practical) that it seeks to absorb from the external environment. We test our hypotheses on data from a double-respondent survey of Danish firms that we link to Community Innovation Survey data and to the Danish Integrated Database for Labor Market Research. We provide econometric results that support our hypotheses.
Souvent présenté comme un mode de financement alternatif, le financement participatif – ou crowdfunding – est devenu une source potentielle de levée de fonds pour les jeunes entreprises innovantes. Cependant, les recherches permettant d’identifier les caractéristiques des entreprises qui ont recours à ce mode de financement sont rares. Cet article compare les caractéristiques de 3 groupes de jeunes entreprises innovantes : ayant recours au financement participatif, celles qui ont eu recours à des levées de fonds plus traditionnelles (capital-risque, anges d’affaires) et qui n’ont pas levé de fonds. Suivant Walthoof-Borm, Schwienbacher et Vanacker (2018), et sur la base d’un échantillon de 4 450 entreprises innovantes de moins de cinq ans, la recherche identifie les facteurs influençant le recours à la foule par les jeunes entreprises innovantes l’année de la levée de fonds. Les résultats laissent apparaître que les entreprises ayant recours au financement participatif ont une performance inférieure en termes de chiffre d’affaires, un niveau de dette supérieur et moins d’actifs incorporels que les entreprises ayant levé des fonds par d’autres moyens. Néanmoins, de faibles différences existent entre les entreprises ayant recours au financement participatif et celles qui n’ont pas levé de fonds.
We empirically investigate the largely unexplored relationship between corporate top management teams (TMT) and CVC unit managers. Doing so, we provide new insights into the interplay between TMT decisions and CVC managers’ behaviour and how agency conflicts between them influence the survival of CVC units. Using a proprietary dataset of 64 CVC units we apply fsQCA in order to identify the interrelatedness, causal asymmetry and equifinality of agency-related conditions leading to survival. We relativize former literature by demonstrating that financial incentivization of CVC managers need to be complemented by additional factors to impact the survival of CVC units. Further, we conclude that the decision-making autonomy of CVC managers seem to work as a form of non-financial incentive. Finally, we demonstrate that the configuration of providing strategic support, investing with high strategic proximity, and non-autonomously acting CVC managers is related to non-survival of the CVC unit.
Corporate Venture Capital (CVC) is highly relevant as a strategic tool to promote innovation in established companies. Although numerous scientific papers deal with the topic and confirm the positive effect on corporate innovation, many companies fail on the practical implementation and use of CVC. In order to contribute to the dissolution of the gap between theory and practice, the current state of the scientific literature is analyzed and research gaps are identified. On one hand, it is discovered that there is a high degree of disagreement in the scientific literature, particularly with regard to the objectives of corporate venture capital and the organizational structure. On other hand, it is found that the interests of young companies in the context of CVC have not been sufficiently appreciated.
This paper aims at providing novel evidence about the geographical concentration of venture capital (VC) activity in seven European countries. Drawing upon a unique dataset, VICO 2.0, we describe the geographical distribution of VC investments and VC-backed technology-intensive start-ups and analyse the regional and country-level factors associated to the regional concentration in VC activity. Results from econometric estimates suggest that regional VC activity is positively associated to the level of regional knowledge intensity, the level of regional human capital, the local supply of VC investors and a more favourable country’s legal and institutional environment.
This paper explores the role of anticipated knowledge misappropriation risks in contract design in non-equity alliances involving high-tech entrepreneurial ventures. We argue that these ventures anticipate higher knowledge misappropriation risks, and are, thus, inclined to negotiate more complex contracts, when partner firms have greater ability and incentives to appropriate the ventures' technological knowledge, and knowledge misappropriation is more detrimental to the ventures. In the empirical sections of the paper, we consider 211 dyadic non-equity alliances involving Italian high-tech entrepreneurial ventures, and we examine the relationship between contractual complexity and a series of characteristics of partner firms associated to either higher ability/incentives to appropriate ventures’ knowledge or more negative consequences of misappropriation.
This paper investigates the screening and certification abilities of government-managed venture capital (GVC) firms in Europe. Using a sample of European high-tech entrepreneurial companies, we show that GVC funding increases the likelihood that companies will receive private venture capital (PVC). Moreover, GVC-funded companies that have received a first round of PVC are at least as likely as other PVC-backed companies to receive a second round of PVC or to be listed or acquired. After ruling out alternative explanations, we interpret these results as positive evidence of GVC firms’ abilities in selecting promising companies and certifying them to PVC investors.
Interorganizational relationships offer many potential benefits, but they also expose firms to dangers, such as misappropriation, which pull partners apart. This tension between collaboration and competition is central to tie formation, especially for young technology firms that have both a high need for resources and high appropriability of their own resources. Prior work has examined legal and timing defenses that enable interorganizational ties by such low-power firms; we focus here on social defenses. In a longitudinal study of equity tie formation between young firms and established corporate "sharks," spanning five technology-based industries and 25 years, we unpack the effects of social defenses and find, intriguingly, that centrally positioned third parties are a particularly powerful social defense and that third-party social defenses are especially significant when more traditional defenses are unavailable. We thus offer the insight that third-party chaperones (central venture capital investors) play a key role in helping young firms to mitigate and navigate vulnerabilities while mobilizing resources.
Governments around the world have set up governmental venture capital (GVC) funds, and are increasingly doing so, with the aims of fostering the development of a private venture capital industry and to alleviate the equity capital gap of young innovative firms. The rationale and the appropriateness of these programs is controversial. In this paper, we borrow from the recent literature on entrepreneurial finance to document the evolution and to compare the effects of the different types of governmental support. In contrast with a lack of success in some countries, there have been successful GVC initiatives, such as the Australian Innovation Investment Fund. Consequently, the proper design of the investment processes of GVC funds is an urgent topic for scholars and policy makers.
Inter-organizational relationships offer many potential benefits, but they also expose firms to dangers, such as misappropriation, that pull partners apart. This tension between collaboration and competition is central to tie formation, especially for young technology-focused firms who have both high need for resources and high appropriability of their own resources. Prior work has examined legal and timing defenses that enable inter-organizational ties; we focus here on social defenses. In a longitudinal study of equity tie formation between young firms and established corporations, spanning 5 technology-based industries and 25 years, we unpack the effects of social defenses and find, intriguingly, that third-party social defenses are particularly significant when more traditional defenses are unavailable. Beyond providing resources and legitimacy, ties with centrally positioned third parties are a critical mechanism whereby young low-power firms can enhance their power in tie formation. Our study also sheds light on how a portfolio of ties helps young technology firms mobilize resources and manage resource vulnerabilities.
Over the past 25 years, the technology strategy literature has examined how four primary mechanisms—patents, secrecy, lead time, and complementary assets—influence whether and to what extent firms capture value generated by their innovations. Although this literature has had a profound impact on our understanding of how firms capture value from innovation, we have yet to develop a robust theory that allows us to unbundle the characteristics of institutions, industries, firms, and individual technologies that affect the selection of particular value capture mechanisms. The purpose of this article is to provide a foundation for addressing these gaps in the literature. We identify and assess relevant scholarly work regarding value capture mechanisms published in top-tier peer-reviewed management journals between 1980 and 2011. We then review the assumptions, insights, and causal mechanisms for the antecedents and consequences of the value capture mechanisms highlighted in these articles. The ultimate objective is to identify research opportunities that help to better understand the conditions under which specific bundles of value capture mechanisms are most likely to help innovating firms achieve persistent superior performance.
We study the investment strategies of different types of Venture Capital investors (VCs) using a unique dataset that includes 1,663 VC first investments made by 846 investors in 737 young high-tech entrepreneurial ventures located in seven European countries between 1994 and 2004. Using a transformed Balassa index, we analyze the relative investment specialization of independent VCs, corporate VCs, bank-affiliated VCs and governmental VCs along several dimensions that characterize investments (e.g., syndication, duration and exit mode) and investee companies (e.g., industry of operation, age, size, development stage, location and distance from investor’s premises at the time of the investment). Our findings indicate that VC types in Europe differ markedly in their patterns of investment specialization, especially governmental VC on the one side and private VC on the other. We compare our findings with evidence from the USA and find some interesting differences, notably regarding independent and governmental VCs.
This paper focuses on the tension that firms face between the need for resources from partners and the potentially damaging misappropriation of their own resources by corporate “sharks.” Taking an entrepreneurial lens, we study this tension at tie formation in corporate investment relationships in five U.S. technology-based industries over a 25-year period. Central to our study is the “sharks” dilemma: when do entrepreneurs choose partners with high potential for misappropriation over less risky partners? Our findings show that entrepreneurs take the risk when they need resources that established firms uniquely provide (i.e., financial and manufacturing) and when they have effective defense mechanisms to protect their own resources (i.e., secrecy and timing). Overall, the findings show that tie formation is a negotiation that depends on resource needs, defense mechanisms, and alternative partners. These findings contribute to the recent renaissance of resource dependence theory and to the discussion on the surprising power of entrepreneurial firms in resource mobilization.
In logit and probit regression analysis, a common practice is to estimate separate models for two Or more groups and then compare coefficients across groups. An equivalent method is to test for interactions between particular predictors and dummy (indicator) variables representing the groups. Both methods may lead to invalid conclusions residual variation differs across groups. New tests are proposed that adjust for unequal residual variation.
New ventures face a trade-off when considering corporate venture capital (CVC) funding. Corporate investors can provide complementary assets that enhance the commercialization of new venture technologies. However, tight links with a particular corporate investor has drawbacks and may constrain new ventures from accessing complementary assets from diverse sources in an open market. Taking this trade-off into account, we explore conditions under which CVC funding is beneficial to new ventures. Using a sample of computer, semiconductor, and wireless ventures, we find that CVC funding is particularly beneficial for new ventures when they require specialized complementary assets or operate in uncertain environments. Copyright © 2011 John Wiley & Sons, Ltd.
The VICO project collected a database on young high-tech entrepreneurial companies operating in seven European countries (Belgium, Finland, France, Germany, Italy, Spain, and the United Kingdom). The objective of the data collection process was to build a data infrastructure to conduct an extensive study about the venture capital (VC) activity in high-tech sectors in Europe. The dataset includes two strata of companies: the first is a sample of VC-backed companies and the second a control group of non-VC backed (but potentially investable) companies. Data were collected by local teams from each country (using a variety of commercial and proprietary sources) and checked for reliability and consistency by a centralized data collection unit. The dataset consists of 8,370 companies, 759 of which VC-backed, and 1,125 VC investors. Detailed information was collected for each firm, investor, and investment, including accounting data, patenting data, and investor type and experience.
The venture capital (VC) industry started in the United States and then spread worldwide. As it spread into other countries, there was a conscious attempt to copy industry practice from the U.S. However, venture capitalists in other countries are subject to different institutional forces that can impact their behavior. This article uses an institutional perspective to develop testable propositions on the impact of various institutions on venture capitalists’ behavior. The article concludes with a discussion of the implications of an institutional theory perspective for VC research and public policy.
Recent research has documented large differences among countries in ownership concentration in publicly traded firms, in the breadth and depth of capital markets, in dividend policies, and in the access of firms to external finance. A common element to the explanations of these differences is how well investors, both shareholders and creditors, are protected by law from expropriation by the managers and controlling shareholders of firms. We describe the differences in laws and the effectiveness of their enforcement across countries, discuss the possible origins of these differences, summarize their consequences, and assess potential strategies of corporate governance reform. We argue that the legal approach is a more fruitful way to understand corporate governance and its reform than the conventional distinction between bank-centered and market-centered financial systems.
This paper analyses the determinants of venture capital for a sample of 21 countries. In particular, we consider the importance of IPOs, GDP and market capitalization growth, labor market rigidities, accounting standards, private pension funds, and government programs. We find that IPOs are the strongest driver of venture capital investing. Private pension fund levels are a significant determinant over time but not across countries. Surprisingly, GDP and market capitalization growth are not significant. Government policies can have a strong impact, both by setting the regulatory stage, and by galvanizing investment during downturns. Finally, we also show that different types of venture capital financing are affected differently by these factors. In particular, early stage venture capital investing is negatively impacted by labor market rigidities, while later stage is not. IPOs have no effect on early stage venture capital investing across countries, but are a significant determinant of later stage venture capital investing across countries. Finally, government funded venture capital has different sensitivities to the determinants of venture capital than non-government funded venture capital. Our insights emphasize the need for a more differentiated approach to venture capital, both from a research as well as from a policy perspective. We feel that while later stage venture capital investing is well understood, early stage and government funded investments still require more extensive research.
linear regression models;least squares;statistical inference;standard regression theory;variance
This study empirically evaluates the certification and value-added roles of reputable venture capitalists (VCs). Using a novel sample of entrepreneurial start-ups with multiple financing offers, I analyze financing offers made by competing VCs at the first professional round of start-up funding, holding characteristics of the start-up fixed. Offers made by VCs with a high reputation are three times more likely to be accepted, and high-reputation VCs acquire start-up equity at a 10-14% discount. The evidence suggests that VCs' ''extra-financial" value may be more distinctive than their functionally equivalent financial capital. These extra-financial services can have financial consequences.
For decades, most of the European continent lagged behind the U.S. in attracting and retaining young entrepreneurs. Despite several government attempts to provide tax incentives and an appropriate infrastructure that allows young start-up firms to establish themselves, European private and public markets for high-risk companies are still weak. Despite the considerable growth of Europe's venture capital (VC) markets over the past eight years, they still underperform U.S. funds by a significant margin. Apart from its expensive and complicated patent system, the lack of adequate exits for venture capitalists is another problem faced by Europe. While several European exchanges have established trenches for high-risk firms in the past, many of them have failed. Many market participants blame corporate scandals for the downfall of the EURO.NM and similar markets across the continent. This chapter reviews the recent developments in the European venture capital (VC) markets, presents a detailed comparison the VC markets in Europe and the U.S., and explores the reasons behind this underperformance and discusses possible remedies. The chapter draws valuable lessons from the U.S. VC markets to show the importance of a flourishing venture capital market for a country's economic development and how Europe may close the existing gap between the old and the new world.
Alliances between entrepreneurial and large firms can create economic value. In many circumstances, however, much of that value is appropriated by the larger partner. In these situations, the performance and even long-term survival of entrepreneurial firms can be put at risk. This article describes the conditions under which the value created by alliances will be appropriated by the large firms, and describes actions that entrepreneurial firms can take to appropriate more of the value created by these alliances.
This article reviews the academic literature on corporate venture capital (CVC), that is, minority equity investments by established corporations in privately held entrepreneurial ventures. The article is organized as follow. It starts with a detailed definition of corporate venture capital, its historical background, and an extensive review of investment patterns. Next it discusses the corporate venture capital literature, with an emphasis on rigorous empirical studies published in leading academic journals. It reviews firms' objectives through the governance of their CVC programs and the relationships with the portfolio companies, and examines the interactions between CVC investment and other firm activities (e.g., alliances and M&A) as well as other entities (e.g., independent venture capital funds). The performance of the parent corporations, entrepreneurial ventures, and CVC programs is summarized next. The article concludes with directions for future research.
Social Capital, the advantage created by location in social structure, is a critical element in business strategy. Who has it, how it works, and how to develop it have become key questions as markets, organizations, and careers become more and more dependent on informal, discretionary relationships. The formal organization deals with accountability; Everything else flows through the informal: advice, coordination, cooperation friendship, gossip, knowledge, trust. Informal relations have always been with us, they have always mattered. What is new is the range of activities in which they now matter, and the emerging clarity we have about how they create advantage for certain people at the expense of others. This is done by brokerage and closure. Ronald S. Burt builds upon his celebrated work in this area to explore the nature of brokerage and closure. Brokerage is the activity of people who live at the intersection of social worlds, who have a vision advantage of seeing and developing good ideas, an advantage which can be seen in their compensation, recognition, and the responsibility they're entrusted with in comparison to their peers. Closure is the tightening of coordination in a closed network of people, and people who do this do well as a complement to brokers because of the trust and alignment they create. Brokerage and Closure explores how these elements work together to define social capital, showing how in the business world reputation has come to replace authority, pursued opportunity assignment, and reward has come to be associated with achieving competitive advantage in a social order of continuous disequilibrium.
This paper investigates how the interorganizational networks of young companies affect their ability to acquire the resources necessary for survival and growth. We propose that, faced with great uncertainty about the quality of young companies, third parties rely on the prominence of the affiliates of those companies to make judgments about their quality and that young companies "endorsed" by prominent exchange partners will perform better than otherwise comparable ventures that lack prominent associates. Results of an empirical examination of the rate of initial public offering (IPO) and the market capitalization at IPO of the members of a large sample of venture-capital-backed biotechnology firms show that privately held biotech firms with prominent strategic alliance partners and organizational equity investors go to IPO faster and earn greater valuations at IPO than firms that lack such connections. We also empirically demonstrate that much of the benefit of having prominent affiliates stems from the transfer of status that is an inherent byproduct of interorganizational associations.•.
Why and how do resources provide sources of competitive advantage? This study sheds new light on this central question of resource-based theory by allowing a single resource—entrepreneurial-firm patents—to play distinctive roles in different competitive arenas. As rights to exclude others, patents serve a well-known role as legal safeguards in product markets. As quality signals, patents also could improve access and the terms of trade in factor input markets. Based on the financing activities of 370 venture-backed semiconductor startups, we provide new evidence that patents confer dual advantages in strategic factor markets, improved access and terms of trade, above and beyond their added product-market protection. The study has important implications for empirical tests of resource-based theory and the measurement of resource value.
We examine how new biotechnology firms (NBFs) select pharmaceutical firms as R&D allies as a function of value creation and value appropriation considerations. We develop a theoretical framework to understand partnering decisions accounting for both, a potential partner's ability as well as incentives to appropriate and create value within an R&D alliance. Our empirical findings show that NBFs are more likely to ally with pharmaceutical firms with the ability to create value, as long as these firms have the incentives to use their skills to create rather than appropriate value. Our study highlights the double-edged sword nature of value creation skills and provides a deeper understanding into the contextual factors that determine when potential R&D partners will perceive such skills as increasing appropriation risks.
Introduction and Historical PerspectiveTechnical Background
Experimental ExperienceSummary Interpretation, and Examples of Diagnosing Actual Data for CollinearityAppendix 3A: The Condition Number and InvertibilityAppendix 3B: Parameterization and ScalingAppendix 3C: The Weakness of Correlation Measures in Providing Diagnostic InformationAppendix 3D: The Harm Caused by Collinearity
In recent years, a “third mission” pursued by universities, i.e. knowledge transfer to industry and society, has become more important as a determinant of enhancements in economic growth and social welfare. In the vast world of technology transfer practices implemented by universities, the establishment and management of university venture capital and private equity funds (UFs) is largely unknown and under-researched. The focus of this work is to provide a detailed description of this phenomenon from 1973 to 2010, in terms of which universities set-up UFs, their target industries and the investment stages of portfolio companies, which types of co-investors are involved in the deals, and which are the determinants of UFs’ ultimate performances. The picture offers us the opportunity to draw some implications about the relevance of UFs in different contexts (i.e. Europe and the United States) and provide to interested stakeholders with some useful guidelines for future development.
Social Scientists rarely take full advantage of the information available in their statistical results. As a consequence, they miss opportunities to present quantities that are of greatest substantive interest for their research and express the appropriate degree of certainty about these quantities. In this article, we offer an approach, built on the technique of statistical simulation, to extract the currently overlooked information from any statistical method and to interpret and present it in a reader-friendly manner. Using this technique requires some expertise, which we try to provide herein, but its application should make the results of quantitative articles more informative and transparent. To illustrate our recommendations, we replicate the results of several published works, showing in each case how the authors' own conclusions can be expressed more sharply and informatively, and, without changing any data or statistical assumptions, how our approach reveals important new information about the research questions at hand. We also offer very easy-to-use Clarify software that implements our suggestions.
The United States has many banks that are small relative to large corporations and play a limited role in corporate governance, and a well developed stock market with an associated market for corporate control. In contrast, Japanese and German banks are fewer in number but larger in relative size and are said to play a central governance role. Neither country has an active market for corporate control. We extend the debate on the relative efficiency of bank-and stock market-centered capital markets by developing a further systematic difference between the two systems: the greater vitality of venture capital in stock market-centered systems. Understanding the link between the stock market and the venture capital market requires understanding the contractual arrangements between entrepreneurs and venture capital providers; especially, the importance of the opportunity to enter into an implicit contract over control, which gives a successful entrepreneur the option to reacquire control from the venture capitalist by using an initial public offering as the means by which the venture capitalist exits from a portfolio investment. We also extend the literature on venture capital contracting by offering an explanation for two central characteristics of the U.S. venture capital market: relatively rapid exit by venture capital providers from investments in portfolio companies; and the common practice of exit through an initial public offering.
Examines the role that institutions, defined as the humanly devised constraints that shape human interaction, play in economic performance and how those institutions change and how a model of dynamic institutions explains the differential performance of economies through time. Institutions are separate from organizations, which are assemblages of people directed to strategically operating within institutional constraints. Institutions affect the economy by influencing, together with technology, transaction and production costs. They do this by reducing uncertainty in human interaction, albeit not always efficiently. Entrepreneurs accomplish incremental changes in institutions by perceiving opportunities to do better through altering the institutional framework of political and economic organizations. Importantly, the ability to perceive these opportunities depends on both the completeness of information and the mental constructs used to process that information. Thus, institutions and entrepreneurs stand in a symbiotic relationship where each gives feedback to the other. Neoclassical economics suggests that inefficient institutions ought to be rapidly replaced. This symbiotic relationship helps explain why this theoretical consequence is often not observed: while this relationship allows growth, it also allows inefficient institutions to persist. The author identifies changes in relative prices and prevailing ideas as the source of institutional alterations. Transaction costs, however, may keep relative price changes from being fully exploited. Transaction costs are influenced by institutions and institutional development is accordingly path-dependent. (CAR)
Reputations emerge if an actor's future partners are informed on his present behavior. Reputations depend on the "embeddedness" of interactions in structures or networks of social relations. They illustrate the effects of such embeddedness on the outcomes of interactions.This article presents simple game-theoretic models of reputation effects on efficiency (in the Pareto sense) in interactions. In a comparative perspective, the authors start with a baseline model of a social system in which reputation effects (of a specific kind) are excluded: actors do not receive information on their partners' behavior in interactions with third parties. Such a system of "atomized interactions" is compared to a system with interactions that are "perfectly embedded": actors are immediately informed on all interactions of their partners with third parties.Efficiency is more easily attained as a result of individually rational behavior in perfectly embedded systems. In a final step, the comparative perspective is broadened, and the extreme assumptions of either an atomized or a perfectly embedded social system replaced. Intermediate cases arise in the consideration of "imperfect embededness," that is, a situation in which actors are informed only after some time lag on the behavior of their partners vis-a-vis third parties. It is shown that the conditions for efficiency become more restrictive as the information time lag lengthens.
2In an influential paper, Freeman (1979) identified three aspects of centrality: betweenness, nearness, and degree. Perhaps because they are designed to apply to networks in which relations are binary valued (they exist or they do not), these types of centrality have not been used in interlocking directorate research, which has almost exclusively used formula (2) below to compute centrality. Conceptually, this measure, of which c(ot, 3) is a generalization, is closest to being a nearness measure when 3 is positive. In any case, there is no discrepancy between the measures for the four networks whose analysis forms the heart of this paper. The rank orderings by the
The logit and probit models have become critical parts of the management researcher's analytical arsenal, growing rapidly from almost no use in the 1980s to appearing in 15% of all articles published in Strategic Management Journal in 2005. However, a review of three top strategy journals revealed numerous areas in their use and interpretation where current practice fell short of ideal. Failure to understand how these models differ from ordinary least squares can lead researchers to misunderstand their statistical results and draw incorrect conclusions regarding the theory they are testing. Based on a review of the methodological literature and recent empirical papers in three leading strategy journals, this paper identifies four critical issues in their use: interpreting coefficients, modeling interactions between variables, comparing coefficients between groups (e.g., foreign and domestic firms), and measures of model fit. For each issue, the paper provides a background, a review of current practice, and recommendations for best practice. A concluding section presents overall implications for the conduct of research with logit and probit models, which should assist both authors and readers of strategic management research.
We analyze the impact of institutional and cultural differences on the likelihood of success in global venture capital (VC) investing. In both developed and emerging economies, we find better legal rights and their enforcement significantly affect the likelihood of VC success. As well, better developed stock markets have a positive influence on VC performance, which highlights the importance of capital markets for development of VC industry. Strikingly, we find that cultural distance between the countries of the portfolio company and its lead VC investor is positively related to VC success. Further analyses reveal that cultural differences create incentives for better ex-ante screening and due diligence, so transactions involving high cultural disparity materialize only when they have substantial economic potential. Finally, consistent with the "home bias" literature, the presence of local VC investors positively influences VC success and mitigates foreign VC firms' "liability of foreignness" arising from institutional and cultural differences, but only in developed economies. Local VC participation does not affect performance in emerging economies, which highlights the lack of expertise/experience of local investors in those countries. Our conclusions follow from the analyses of VC investments in more than 9,000 companies across 32 countries that include both developed and emerging economies.
In this paper, we investigate what drives companies to set up corporate venture capital (CVC) programs, specifically targeting Global Fortune 500 companies. We find that about 20% of these companies have a CVC program. Companies with a low return on assets are more likely to initiate such a program. This is consistent with the strategic renewal hypothesis implying that large corporations build CVC programs in order to seek new growth opportunities outside their boundaries, as a means to boost future revenue. Moreover, the innovative and entrepreneurial environments in which these large companies operate substantially affect whether or not they initiate CVC programs. CEO tenure as a measure of managerial stability has however no impact. A surprising result is the lack of difference between US and Western European CVC programs, in contrast with the situation of private VC funds. In line with our predictions, the CVC programs of financial institutions are not motivated by strategic renewal but are affected by the degree of development of the national later-stage venture capital market. The greater their size relative to GDP (and thus the greater the competition in this segment from independent funds), the lower the likelihood that they will have their own corporate venture program.
We review recent developments in the European venture capital (VC) markets. For decades, most of the Continent has lagged behind the U.S. in attracting and retaining young entrepreneurs. Despite several governmental attempts to provide tax incentives and an appropriate infrastructure that would allow young start-up firms to establish themselves, European private and public markets for high-risk companies are still weak. While we document that Europe’s VC markets have grown considerably over the past eight years, European VC funds underperform U.S. funds by a significant margin. We explore the reasons behind this underperformance and discuss possible remedies. Our study draws important lessons from the U.S. to show how important a flourishing venture capital market is to a country’s economic development and how Europe may close the existing gap between the old and the new world.
This paper extends information economics in corporate strategy and organizational governance research by using signaling theory to explain firms’ market entry modes. We exploit features of the IPO context to investigate how signals on newly-public firms shape other companies’ governance choices to form joint ventures with them versus acquire them. We also develop theoretical arguments on how the value of these signals will vary across exchange partners. The results reveal that companies are more apt to acquire versus partner with IPO firms taken public by reputable investment banks, compared to IPO firms associated with less prominent underwriters. Venture capitalist backing also appears to be a valuable signal for prospective acquirers, particularly when the acquirer and target reside in different industries and possess dissimilar knowledge bases. We also present evidence that signals affect target selection and the emergence of market segmentation for joint venture partners and acquisition candidates.
Examines the role that institutions, defined as the humanly devised constraints that shape human interaction, play in economic performance and how those institutions change and how a model of dynamic institutions explains the differential performance of economies through time. Institutions are separate from organizations, which are assemblages of people directed to strategically operating within institutional constraints. Institutions affect the economy by influencing, together with technology, transaction and production costs. They do this by reducing uncertainty in human interaction, albeit not always efficiently. Entrepreneurs accomplish incremental changes in institutions by perceiving opportunities to do better through altering the institutional framework of political and economic organizations. Importantly, the ability to perceive these opportunities depends on both the completeness of information and the mental constructs used to process that information. Thus, institutions and entrepreneurs stand in a symbiotic relationship where each gives feedback to the other. Neoclassical economics suggests that inefficient institutions ought to be rapidly replaced. This symbiotic relationship helps explain why this theoretical consequence is often not observed: while this relationship allows growth, it also allows inefficient institutions to persist. The author identifies changes in relative prices and prevailing ideas as the source of institutional alterations. Transaction costs, however, may keep relative price changes from being fully exploited. Transaction costs are influenced by institutions and institutional development is accordingly path-dependent. (CAR)
This article explores the rationale of syndications of institutional venture capital investors when they fund start-ups. There is an implicit labor division between institutional venture capital investors in which pure venture capital firms are in charge of converting investment uncertainty into risk by funding the seed stage of start-ups. The other investors invest in the following stages to sustain the start-ups' development. Relationships between investors are also handled following informal rules. Exchanges between institutional venture capital investors are based on a reciprocity that follows the informal principles of the gift exchange theory.
Sociological investigations of economic exchange pay particular attention to the manner in which institutions and social structures shape transactions among economic actors. Extending this line of inquiry, we explore how interfirm networks in the US venture capital (VC) market from 1986 to 1998 affect the spatial patterns of exchange. We present evidence suggesting that geographic and industry spaces represent natural boundaries that contain the transmission of information about potential investment opportunities. In turn, the highly circumscribed flow of information within these spaces contributes to the geographic- and industry-localization of venture capital investments. After establishing this finding, the majority of our empirical analyses document that the social networks in the venture capital community ? built up through the industry's extensive use of syndicated investing ? facilitate the diffusion of information across geographic and industry boundaries and therefore expand the spatial radius of exchange. We show that VCs that build axial positions in the industry's co-investment network can obtain information from distant sources and hence expand the scope of their investments over time. Consistent with the sociologist's general view of markets, variation across actors in their positioning within the structure of a market appears to differentiate market participants in their ability to overcome boundaries that otherwise would curtail exchange.
By highlighting conditions under which viable interorganizational relationships do not materialize, we explore the limitations of interorganizational knowledge acquisition. In the empirical context of corporate venture capital (CVC), we analyze a sample of 1,646 start-up-stage ventures that received funding during the 1990s. Under a regime of weak intellectual property protection (IPP), an entrepreneur-CVC investment relationship is less likely to form when the entrepreneurial invention targets the same industry as corporate products. In contrast, under a strong IPP regime, industry overlap is associated with an increase in the likelihood of an investment relationship. Our findings suggest that many relationships do not form because the corporation will not invest unless the entrepreneur discloses his or her invention, and the entrepreneur may be wary of doing so, fearing imitation. To the extent that a CVC has greater capability and inclination to target same-industry ventures, such industry overlap would exacerbate imitation concerns under a weak IPP regime, yet facilitate an investment relationship under a strong IPP regime. Beyond CVC, this insight may explain patterns of other interorganizational relationships, including research and development alliances and technology licensing between start-ups and incumbents. Copyright © 2009 John Wiley & Sons, Ltd.
"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.
This study builds on developments in transaction cost economics to examine how institutional environment and transaction (project) characteristics affect governance of inter-firm alliances. The focus is on the choice between equity and contractual alliance forms under differing regimes of intellectual property protection and other national institutional features. Empirical results identify transaction-level characteristics as primary drivers of governance choice in alliances, but intellectual property protection is also a significant factor: firms adopt more hierarchical governance modes when protection is weak. Complete understanding of the structure of inter-firm alliances thus requires a combined focus on the institutional environment and mechanisms of governance.
Why does the level of venture capital activity vary across countries? This study suggests that the variation can be attributed to the different levels of formal institutional development. Further, this study proposes that venture capitalists respond differently to the incentives provided by formal institutions depending on different cultural settings. Analysis of VC activity for 68 countries during the 1996–2006 period shows that formal institutions have a positive effect on the level of venture capital activity, but this effect is weaker in more uncertainty-avoiding societies and in more collectivist societies. This study has useful theory and policy implications for venture capital and entrepreneurship development.
The United States has many banks that are small relative to large corporations and play a limited role in corporate governance, and a well developed stock market with an associated market for corporate control. In contrast, Japanese and German banks are fewer in number but larger in relative size and are said to play a central governance role. Neither country has an active market for corporate control. We extend the debate on the relative efficiency of bank- and stock market-centered capital markets by developing a further systematic difference between the two systems: the greater vitality of venture capital in stock market-centered systems. Understanding the link between the stock market and the venture capital market requires understanding the contractual arrangements between entrepreneurs and venture capital providers; especially, the importance of the opportunity to enter into an implicit contract over control, which gives a successful entrepreneur the option to reacquire control from the venture capitalist by using an initial public offering as the means by which the venture capitalist exits from a portfolio investment. We also extend the literature on venture capital contracting by offering an explanation for two central characteristics of the U.S. venture capital market: relatively rapid exit by venture capital providers from investments in portfolio companies; and the common practice of exit through an initial public offering.