Abstract
Corporate venture capital (CVC) investors are regularly painted with the same brush, a fact underscored by the often observed belief in the extant literature that corporate venture capitalists (CVCs) form a homogeneous group. In contrast to this simplifying perspective, this paper categorizes CVCs into subgroups by examining their levels of strategic and financial investment motivation using computer-aided text analysis and cluster analysis. To validate the resulting clusters, this paper studies the impact of CVC type on startup valuation from an intra-group perspective by applying hierarchical linear modeling, thus illustrating which particular investment motivation might be preferable to others in the context of negotiating valuations. An empirical analysis of 52 CVC mission statements and 147 startup valuations between January 2009 and January 2016 revealed that first, CVCs with a strategic investment motivation assign lower startup valuations than CVCs with an analytic motivation that have moderate levels of the two scrutinized dimensions, suggesting that entrepreneurs trade off these CVCs’ value-adding contributions against a valuation discount; second, CVCs with an unfocused investment motivation pay significantly higher purchase prices, thus supporting the hypothesis that they have a so-called liability of vacillation; and third, the valuations of CVCs with a financial investment motive are not significantly different from those of their analytic peers. In sum, our results add to the knowledge of the continuum of corporate investors’ investment motivation by illustrating how startup valuations differ across CVC types.
Highlights
Corporate venture capital (CVC), which comprises minority equity investments from incumbent enterprises in private startups, is on the increase and has returned to the levels of its heyday in 2000, a fact that underscores the cyclical nature of corporate venture capitalists (CVCs) (Caldbeck 2015; Dushnitsky and Lenox 2006; Gompers and Lerner 2000; National Venture Capital Association (NVCA) 2016)
To validate the resulting clusters, this paper studies the impact of CVC type on startup valuation from an intra-group perspective by applying hierarchical linear modeling, illustrating which particular investment motivation might be preferable to others in the context of negotiating valuations
A rigorous combination of explorative and theory-testing approaches meant we were able to illustrate that the investment motivation of CVCs goes beyond the simplistic assumptions currently dominating the academic discourse
Summary
Corporate venture capital (CVC), which comprises minority equity investments from incumbent enterprises in private startups, is on the increase and has returned to the levels of its heyday in 2000, a fact that underscores the cyclical nature of CVC (Caldbeck 2015; Dushnitsky and Lenox 2006; Gompers and Lerner 2000; NVCA 2016). The empirical evidence, is mixed; for instance, Gompers and Lerner (2000) reported that CVCs pay higher purchase prices than independent venture capitalists (IVCs), while Heughebaert and Manigart (2012) found no significant difference between the two investor types. It is surprising that to date the impact of CVCs’ heterogeneity on startup valuations in terms of their strategic and financial investment motivation has not been explored further. To address this conundrum, we analyzed the variability of startup valuations with CVC involvement against the backdrop of CVCs’ underlying investment motivations. In contrast to previous research that generally studies the inter-group comparison between the valuations of CVCs and IVCs, we deliberately shift the focus to an intra-group perspective to effectively scrutinize how CVCs’ startup valuations differ based on the evidence of their publicly stated investment motives
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