Venture Capital Beyond the Financial Crisis: How Corporate Venturing Boosts New Entrepreneurial Clusters (and Assists Governments in Their Innovation Efforts)

Abstract

In his book, 'Boulevard of Broken Dreams: Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed - and What to Do about It,' Harvard Business School Professor, Josh Lerner, explains that governments can only play a limited role in spurring innovation and entrepreneurship. Government initiatives are usually characterized by poor design and a lack of understanding for the venture capital process. He argues that governments better limit their role as catalysts by: (1) ensuring that the economic environment is conducive to entrepreneurial activity; and (2) providing direct investments. In this paper, we investigate the recent examples of governments that have followed either one of these suggestions. Relying on standard measures of success, we find that the participation of multinationals plays a crucial role in realizing the success of these initiatives. In the aftermath of the financial crisis, there is a world-wide revival of corporate venturing activities. We can now see that, insofar as it operates through corporate venture capital investments, the venture capital market is getting its magic back - and that when corporations participate in the process, it gives both strategic and financial benefits to the parties involved, such as governments, traditional venture capitalists, and entrepreneurs. The paper shows a shift in the fundamental nature of corporate venture capital and provides an account of the governance structures and contractual characteristics that encourage successful alliances between corporations and venture capital funds and their portfolio companies.