How Do Corporate Venture Capitalists Create Value for Entrepreneurial Firms?

Abstract

We analyze how corporate venture capitalists (CVCs) create value for entrepreneurial firms backed by them and how value creation by CVCs differs from that of independent venture capitalists (IVCs). Making use of a large data set consisting of a sample of CVC-backed and IVC-backed firms (starting from their first round of investment in an entrepreneurial firm and going well into the post-IPO market), we explore three related research questions: First, do CVCs exploit their knowledge and industry expertise when choosing portfolio firms, and invest in significantly different kinds of firms compared to independent venture capitalists (IVCs)? Second, do they succeed in creating greater product market value subsequent to investment compared to IVCs? Finally, do they allow portfolio firms to access the equity markets more efficiently? Our empirical findings indicate that there are two ways in which CVCs uniquely create value for entrepreneurial firms. First, CVC create value by investing significant amounts in younger and riskier firms involving pioneering technologies: since many such firms would not have received private equity financing from IVCs, these firms may not have been able to grow and mature without CVC funding. Second, CVCs seem to play an important role in signaling the true value of firms backed by them to three different constituencies: first, to IVCs, prompting them to co-invest in these firms pre-IPO; second, to various financial market players such as underwriters, institutional investors, and analysts, allowing them to access the equity market at an earlier stage in their life-cycle compared to firms backed by IVCs alone; and third, directly to IPO market investors, allowing CVC-backed firms to obtain higher IPO market valuations compared to the valuation of firms backed by IVCs alone.