The Company They Keep: Innovation Returns To Corporate Venture Capital In The Medical Device Industry, Entrepreneurial Clinicians, and Competitive Coinvestors

Abstract

Corporate venture capitalists (CVC) invest in entrepreneurial startups for financial and strategic goals. CVCs may use direct equity investment to stimulate innovation that is appropriable by the investing firms. At the same time, CVC is also used for strategic goals which may include blocking competitors or gaining a window on competitor’s technology. In this paper, I analyze corporate venture capital (CVC) investment and innovation performance in the medical device industry. I provide project level evidence that CVC investment is associated with the production of knowledge by the startup that is appropriated by the investing firm. In a given industry, CVCs share a common pool of potential startups in which to invest. Empirically, the likelihood of production of relevant knowledge by the startup is greater if the founder is an entrepreneurial clinician as opposed to a non-clinician background. At the same time, the likelihood of production of relevant knowledge for the investing CVC is diminished if multiple CVCs (competitive CVCs) coinvest in the same startup firm. The suppression of innovation performance is pronounced in higher rounds of investment. This paper makes significant contributions to our understanding of project level dynamics and the innovation returns to CVC. This paper also contributes to our understanding of innovation in the medical device industry and the significance of entrepreneurial physicians (clinicians) as the founding entrepreneur.