Corporate Venture Capital as Driver of Strategic Change? An Interorganizational Learning Perspective

Incumbent firms use corporate venture capital (CVC) as an interorganizational learning mechanism to get access to new technologies or to study and enter foreign markets. When companies adapt their product portfolios or expand their business activities geographically, strategic change takes place. Nonetheless, research still lacks an understanding of CVC's impact on both dimensions of strategic change. Building on learning theory, we examine the impact of CVC activity on product portfolio change and geographic change using a sample of 1,458 CVC units and 6,751 transactions. Our study empirically shows that technology-related CVC investments lead to subsequent product portfolio adjustments, while investments in foreign start-ups drive geographic change. Our paper also finds that these positive change effects diminish with increasing industry and cultural distance, as higher investment uncertainty and risk arise from identifying (excessively) heterogeneous knowledge. Thus, increasing distance reduces the effectiveness of interorganizational learning and impedes strategic change. However, our paper confirms that CVC represents an effective catalyst for knowledge acquisition and related strategic change, offering practical insights for firms seeking to leverage CVC as a low-cost mechanism for product and geographic diversification.

Research Summary Our qualitative study of five corporate venture capital (CVC) units reveals that CVC is organized along one of two distinct pathways—order‐taker or free‐bird. Our two‐pathway model deconstructs the heterogeneity within CVC designs and provides detailed insights into the processual nature of CVC search mechanisms. We find evidence that the locus of problem formulation influences the chosen search behavior. While order‐takers respond to predefined corporate‐led problem formulation, free‐birds allow the venture market to guide search behavior. Differences in search processes can thus be attributed to the pursuit of distinct problem‐solution pairs. Implications for CVC and organizational search literature are discussed. Managerial Summary Organizations search for new knowledge and technologies using corporate venture capital (CVC) units. Despite growing evidence of heterogeneity in CVC designs, managers continue to have limited insights for designing and running such CVC units. In contrast to previous recommendations to use structural attributes and/or institutional logics to design and manage CVCs, we provide managers an organizational search lens which reveals significant variations in how corporations search for new ventures. We identified two extreme CVC designs driven by the locus of problem formulation (internal vs. external): order‐takers—who respond to a predefined and corporate‐led problem formulation approach, and free‐birds—who shape the problem formulation guided by venture market dynamics. We point to design differences across popular CVC subprocesses which can be handy for managers.

Research Summary Via a study of the corporate venture capital (CVC) unit of a multinational corporation, we examine how CVC contributes to strategic renewal. We find the commonly featured direct path to renewal to have limited impact as access to venture technology is constrained by key external institutional barriers. By contrast, we highlight a less studied, but potentially more important, indirect path: the unit's and hence the parent corporation's access to a high‐technology ecosystem. Obstacles on this path are internal and organizational: including challenges of integration, goal disparities, and competition for resources and credit between the CVC unit and corporate parent. The significance of the indirect path and revelation of understudied institutional and organizational barriers suggest new directions for rechanneling and contextualizing studies of CVC. Managerial Summary We studied the corporate venture capital (CVC) unit of a large multinational firm to discover how such investments can have strategic contributions to the parent firm. We found numerous obstacles in using technological knowledge from the ventures the unit invests in because of legal and reputation barriers against disseminating proprietary information. By contrast, opportunities abound from participating in an entrepreneurial ecosystem to which the CVC activities provide access. These expose the unit to the promises and challenges of emerging technologies and fields, providing important information the unit is free to share with the parent to guide strategic renewal. To do so, however, managers must overcome substantial organizational, political, and resource barriers between the CVC unit and the parent corporation.

Corporate venture capital (CVC) is defined as an equity investment by an established corporation in privately held entrepreneurial ventures. The phenomenon involves the following players: the parent corporation; the corporate venture capital unit; and the entrepreneurial ventures. The corporation launches a CVC unit with the goal of realizing financial and/or strategic objectives. Through its investment in entrepreneurial ventures, the corporation deploys financial, technological, and managerial resources. From the venture’s perspective, CVC-backing is an important source not only for capital but also for advice and complementary assets. Finally, the CVC unit plays an important role of linking the incumbent corporation and entrepreneurial ventures. To that end, the CVC unit utilizes the parent corporation’s resources and knowledge to select and nurture ventures. The unit also helps the parent corporation to realize its financial and strategic objectives. The existing body of work offers various insights. There are studies that focus on the startups and others investigate the corporations that fund them, as well as the CVC units that are responsible for this activity. These studies underscore the antecedents to CVC investments and the consequences to the parent corporation. Similarly, extant works offer a nuanced understanding of startups’ decision to seek CVC-backing and the implications of that. A close reading of the CVC articles below also charts avenues for future work. For example, the interaction between CVC investments and other external venturing activities has received some attention yet there is an opportunity to further understand how does a firm choose among these options and further integrates among them. The structure and governance of CVC units is found to play a key role in shaping incumbents and startups outcomes, yet data limitation implies that systematic analysis is lacking. From the venture perspective, extant studies generate conflicted results regarding whether CVC-backing can improve ventures’ innovation and growth. Future works can further explore the benefits and costs of CVC-backing, and the net effects on ventures. Finally, it is important to note that the vast majority of the articles study CVC investments by US (and, sometimes European) corporations in selected industries (e.g., pharmaceuticals, medical devices, semiconductors, telecommunication) during two decades (the 1990s and 2000s). It follows that our understanding of CVC objectives and impacts are calibrated for a particular setting. As CVC practices are undertaken by corporations in other industries (food, finance, energy, etc.) and further diffuse to other parts of the world, it is crucial that one should revisit implicit assumptions and keep an open eye for new patterns and implications.

With the growing need for digital business transformation, corporate venture capital (CVC) investors have been faced with the challenge of how to deal with this trend. Although digital business transformation and CVC are highly relevant, previous studies have investigated them separately instead of their relationships. Therefore, this research aimed to study the impact of CVC on digital business transformation to fill this research gap. Based on an exploratory research design, eleven experts from different industries were interviewed. The following results were found in this study: (1) after the CVC unit collaborated with an Open Innovation (OI) unit, the CVC activities were integrated into the decentralized OI activities, and a dedicated team in the CVC unit was responsible for OI and venture client-based OI activities, thus achieving digital OI; (2) CVC was used to pursue ambidexterity, digital exploration or exploitation; (3) CVC supported digital business transformation at the organizational, social, and technical levels, which provided an answer to the overarching research question of how CVC supported innovation processes. Theoretical implications of this study lied in enhancing the understanding between CVC and digital business transformation, thus extending the understanding of CVC organization and impact. Furthermore, this study provided practical implications and recommendations on organizing CVC and using it to achieve digital business transformation according to strategic objectives.

This paper studies corporate venture capital (CVC) units of large US corporations to learn how they make decisions across several areas: internal organization of CVC units, relationships with parent companies, CVC unit objectives, investment process and approval, deal structure, relationship with portfolio companies, compensation, and composition of CVC teams. The study is conducted by interviewing senior team members of seventy-four CVC units, representing 78% of the active CVC units of companies in the S&P 500 index. CVC units are organized in significantly more diverse ways than institutional VC firms. Unlike institutional VC firms, most CVC units do not manage committed venture funds, but instead invest from the balance sheets of their parent companies. Investment committees, in which parent company executives play a pivotal role in approving individual decisions, are common. Many corporate venture capitalists (CVCs) believe executives at their parent companies do not understand the norms of the venture space. The demographic composition of senior team members at CVC units is very different than that of their counterparts at institutional VC firms. The results raise a number of issues about the economic role of CVC units in corporate innovation.

There is growing need to understand how heterogenous organizational search behaviors manifest. This is especially critical when executed beyond organizational boundaries. Corporate venture capital (CVC), a well-established form of corporate engagement with startups, is one way in which such search is empirically implemented. Prior CVC research implicitly assumes CVC manifestations to be homogenous which limits our understanding of how and why organizations run CVC programs and to what end. Our qualitative study of five CVC units reveals that corporations manage CVC via one of two distinct pathways—order-taker or free-bird. Our two-pathway model deconstructs the core CVC processes, explains how and why the two pathways result in different outcomes, and provide indications of greater heterogeneity and hybridity within CVC designs. Our findings have implications for the advancement of CVC, external corporate venturing, and organizational search literatures.

Corporate strategies have always been an important part of the Finance literature. Firms and corporations constantly update their strategies and adopt new ways to combat the ever-changing market dynamics and reap benefits from various corporate activities. My thesis includes three essays that span over different strategies adopted by corporations and corporate boards to mitigate issues resulting from corporate deals, competition, and regulations. In the first essay, I examine if targets of serial acquirers retain or hire a specific type of financial advisors. Using pairwise matching between target firms and potential financial advisors, I find that 41% of firms targeted by serial acquirers use the financial advisor of a previous target of the same acquirer. After controlling for prior relations and reputation, I find that targets hire these advisors with a significantly higher likelihood than others. These targets earn higher returns and can complete deals sooner. On the other hand, serial acquirers suffer from lower returns. The results suggest that targets adopting this strategy of hiring "repeated advisors" gain an information advantage. The "repeated advisors" collect knowledge about the acquirers from prior deal negotiations and can transfer this information to the later targets. The results also provide a potential explanation for why serial acquirers perform poorly in their later deals. The second essay (with Sungjoung Kwon) studies the choices of corporate venturing by public corporations. While existing literature on corporate venture capital (CVC) primarily focuses on investments through CVC units, corporations frequently make investments in startups directly. We document that between 2000 and 2019, approximately 42% of deals made by U.S. public firms were through direct investments, and 90% of public firms with CVC units also made direct investments in startups. The agency hypothesis predicts that managers use direct investments to entrench themselves. In contrast, the organizational friction hypothesis posits that firms rely on direct investments to address immediate strategic goals. Our findings provide strong support for the organization friction hypothesis. Firms directly invest in startups whose operations are highly correlated with theirs and which are less likely to be potential investment targets of their CVC units. Using a difference-in-differences design around the introduction of Amazon Elastic Computer Cloud, we find that firms increase direct investments (but not investments through their CVC units) when the entry of startups increases. Overall, our findings shed light on choices of corporate venturing under different firm strategies. The final essay investigates the effects of merger objection lawsuits on acquirers and deal outcomes. In recent years these lawsuits have significantly increased in numbers, and a majority of them usually settle with the addition of more information to the proxy statements and substantive attorney fees. Since these settlements do not benefit the shareholders, most merger litigations are deemed as frivolous lawsuits in recent years. In response to this, in January 2016, Delaware Chancery Court introduced In re Trulia ruling, which states that the court will dismiss all lawsuits leading to "disclosure-only" settlements. This phenomenon lowered the massive volume of merger lawsuits faced by firms. Using this quasi-natural shock to the settlements of litigations, I find that acquirers incorporated in the states that adopted this ruling perform more acquisitions post-2016 and complete deals faster. I also find that such deals do not result in negative acquirer returns or higher offer premiums. Overall, the results indicate that this ruling provided some relief for the acquirers from the nuisance of the frivolous lawsuits.

Corporations are confronted with challenges adjusting to changing technologies and markets. Seeking innovations externally through open innovation is a possible approach to go beyond the internal development of innovations. One practice of open innovation to assimilate external knowledge is corporate venture capital (CVC), meaning minority investments in entrepreneurial ventures by incumbent firms, whereby the objectives of CVC investments might be purely financial or may pursue strategic goals. CVC has been identified as a possible approach to ambidexterity, since investments in new ventures can allow to explore new technologies and markets, or to improve internal exploitative capabilities. Although literature on the potential strategic benefits of CVC is abundantly available, a systematic conceptualization of strategic objectives is lacking. Therefore, this paper examines strategic objectives of CVC and seeks to enrich, extend and conceptualize existing research through a theoretical framework. The conceptual foundation of this study embeds CVC in the ambidexterity literature, and clusters objectives of CVC investments in view of an ambidextrous organization and the degree of autonomy given to CVC units. The strategic objectives that can be pursued through CVC investments are (a) strengthening the core business, (b) leveraging the ecosystem, and (c) exploring new markets and technologies. This study concludes with a comprehensive overview of the strategic objectives that can be pursued by CVC, illustrates the barriers and limitations of CVC investments, and discusses the role of autonomy and ambidexterity with respect to the individual strategic objectives. Hereby, CVC is identified as a powerful approach to engage in open innovation practices, since it allows one to pursue a range of different strategic objectives through tapping into external knowledge held by new ventures. Often considered an approach for exploring new technologies through external knowledge acquisition, CVC is also identified as an open innovation approach that allows organizations to increase their internal exploitation capabilities.

Leveraging smart capital through corporate venture capital: A typology of value creation for new venture firms

Separating corporate venture capital (CVC) unit from its parent company has become the prevailing view in the structural design of CVC programs. However, such a separation may come at a cost. We draw on institutional view, arguing that the CVC program’s structural independence may incur its concern for lack of legitimacy in the eyes of the parent. To mitigate the risk of illegitimacy, an external CVC unit will decrease exploratory investment in unfamiliar industries and concentrate in the industry that the parent firm operates in. The negative relationship between structural independence and exploratory investment is further contingent on the CVC unit’s experience of exits via IPO, the parent firm’s number of subsidiaries and the regional collectivism where unit is located. The analysis of an unbalanced panel of 363 CVC programs in China from 2007 to 2019 provides empirical supports for our arguments.

Corporate venture capital (CVC) is increasingly viewed as an important mechanism for external R&D that can help fuel innovation, growth, and strategic renewal opportunities for established firms. However, despite the popularity of CVC units, the conditions prompting decision-makers to adopt and retain such units are not well understood. In this study, we examine when and why firms pursue CVC units to tap external markets for new ideas and technologies. We draw insights from the behavioral theory of the firm to argue that innovation performance relative to aspirations is a crucial driver of its decision to pursue CVC units, and we test our arguments by examining both the adoption and termination of CVC units for a sample of firms in the information technology sector during the period 1992–2003. Results show that a firm is more likely to adopt and less likely to terminate a CVC unit when its innovation performance is closets to its aspiration levels. Furthermore, innovation performance relative to social rather than historical aspirations is a better predictor of CVC adoption and termination. This study contributes to the technology entrepreneurship literature by demonstrating that managerial aspirations for innovation-related goals are an important driver of CVC initiatives within firms.

When acting as an intermediary, corporate venture capital (CVC) units must balance two different institutional settings: the rigid corporate world and the advancing startup ecosystem. As a result, CVC units are faced with multiple voids that influence their organizational orientation toward one environment. This study employs text analysis on a unique sample of 22 CVC dyads to introduce a novel empirical way of measuring isomorphic variation over time. Following a mixed-method approach, the quantitative results are used to shed light on potential drivers of isomorphism, compiled by semi-structured interviews. The findings demonstrate that the degree of isomorphism is not only determined by decisions made during the initial phase of a CVC unit but also from mimetic processes that occur within the life span of such investment vehicles. The study thereby contributes to the ongoing academic discussion by elucidating potential drivers of isomorphism and provides researchers with a novel way to measure isomorphic tendencies based on organizational text excerpts.

This study addresses the emergence of social liabilities by taking a social network perspective on a hitherto unexplored intra and interorganizational network configuration: the corporate venture capital (CVC) triad (CVC unit, corporate business unit, and portfolio company). We investigate social capital and social liability resulting from network formation and trans-formation and assess their impact on interorganizational knowledge transfer and creation. Examining 12 CVC triads in Germany, we identify new antecedents of social liability, show that social capital can initially facilitate knowledge transfer and creation, and that structural and personal lock-ins may eventually turn that capital into a liability. We make key theoretical contributions to social networks and CVC literature.

Compared with new ventures, established firms are difficult to flexibly respond to external environment changes because of their low efficiency in internal innovation activities. With increasing environment uncertainty, the trajectory of technology innovation becomes more and more unpredictable, and corporate venture capital（CVC）has become an important strategic method to incumbents for acquiring innovation resources from new ventures, and rises rapidly in practice. CVC could help incumbents to configure technology real options more effectively through investing a variety of new ventures, thereby enabling them to explore innovation opportunities in much more wide areas. Researches have provided considerable empirical evidence in the positive effect of CVC investment on incumbents’ innovation performance, but there still lacks direct evidence in the effects of CVC real option attributes on investor firms’ technological innovation performance. Therefore, we carry out an empirical research based on real options and organizational learning theories to answer following questions: first, could CVC investment improve investor firms’ technological innovation performance under higher uncertain environment? second, could internal innovation input enhance the positive effect of CVC investment on investor firms’ technological innovation performance? We employ the data of 376 listed firms from Shanghai and Shenzhen stock markets which have made CVC investment from 2001 to 2014, and analyze them with negative binomial regressions. The results indicate that:（1）there is a significant inverted U-shaped relationship between the number of CVC investment and investor firms’ technological innovation performance;（2）environment uncertainty has a significant positive moderating effect on the relationship between CVC investment and investor firms’ technological innovation performance;（3）the internal technology innovation input also has a significant positive moderating effect on the relationship between CVC investment and investor firms’ technological innovation performance. Our further analysis of moderating effect shows that, under high environment uncertainty or high level of internal innovation input, the apex of inverted U-shaped curve shifts to right, and the curve becomes steeper, confirming our hypotheses. We also have ran following robust checks. First, we replace the number of three types of patents with the number of invention patents as the dependent variable, as invention is usually more innovative compared with utility model and appearance design. The results are similar to former regressions. Second, considering that the time lag effect of CVC investment on technology innovation might vary with temporal changes, we replace the dependent variable with 2, 3, and 4 years lag patent numbers respectively, and get similar results too. This paper might contribute to the fields of CVC research and real option theory in following issues: firstly, it provides direct empirical evidence for the relationship between CVC’s real option attributes and investor firms’ technological innovation performance. In terms of the relationship between CVC’s real option attributes and investor firms’ innovation performance, there are many theoretical analyses but little direct empirical evidence. This paper provides direct empirical evidence with the data drawn from China’s listed companies. Secondly, it reveals the complementation effect between external innovation resources acquired from CVC investment and firms’ internal resources input in technological innovation. This finding also indicates that within low innovation input group, the increase in the number of CVC investment actually suppresses investor firms’ innovation performance. It shows that the value of real options depends on not only external factors such as environment uncertainty and investment irreversibility, but also the support from firm internal related resources. However, our research also has limitations: first, we use technology human resources to measure technological innovation input because many listed firms do not disclose R&D expenditures. Second, the value of technological innovation depends on not only its technological advancement, but also the extent to which a firm could successfully commercialize it. Future researches may attain new knowledge through using new commercialized products/services to measure technological innovation performance.