Research on Corporate Venture Capital Syndication: Partner Selection, Distant Search, and Investee Performance

Abstract

The increasing importance of technology for creating and sustaining a competitive advantage, requires firms to continually innovate. Increasingly, firms have done so relying on knowledge and technologies beyond the boundaries set up by their internal R&D by employing a variety of external sourcing strategies. Among those, recently, corporate venture capital (or corporate venture capitalist

CVC), a sourcing mode seeking to identify opportunities from entrepreneurial firms has become an important strategic instrument. In certain high-tech industries, such as the biopharmaceutical and IT industries, where many innovations are introduced by entrepreneurial firms, corporations are increasingly adopting CVC into their innovation strategy. This trend is also spreading to more traditional industries such as energy and agriculture where CVC strategy is becoming more common and important. At the same time, the importance and status of the CVCs in the venture ecosystem is increasing. Entrepreneurial firms are taking into account CVCs as an important source of funding, and traditional or independent venture capitalists (IVCs) are also strengthening their relationships with CVCs.

Academic research also sought to explain the growth of CVC. Studies on technological innovation have argued that CVCs represent a promising strategic tool for innovation, and have demonstrated the effects of CVC investments on innovation performance. Further, literature on venture capital and entrepreneurial firms have included CVCs in their analysis, and investigated CVCs' characteristics, influences, and relationships with other players in the venture ecosystem. However, studies that consider and combine the perspectives of different fields of research have not yet fully developed. Prior studies have independently examined CVC investments from the perspective of their own fields, and literature dealing with CVCs from the perspective of corporations and innovation have paid little attention to CVC's syndicate investments. Further, since in practice CVC investors syndicate the vast majority of their investments, the understanding of CVC's syndicate investments could provide impactful implications for the venture industry. In that sense, a research on CVCs' syndicate investments that integrates the perspectives of innovation literature and venture capital literature could provide an additional and comprehensive view of CVC investments. Considering the interests in the extant literature and the practical significance of key aspects and processes related to CVC investments, this dissertation includes three different studies on CVC investments, namely, 'syndicate partner selection', 'parent corporate's distant search performance', and 'investee's exit performance'. Each study deals with different aspects of CVC-related decision-making and performance. Collectively, this dissertation attempts to identify key characteristics related to CVCs and their syndicate investments. By analyzing the effects of these characteristics on syndicate formation with other VCs, the search performance of the parent corporate, and on the exit performance of the investee, this dissertation increases the academic understandings of CVC investments as well as provides implications for firms on how to appropriately manage CVC investments.

Specifically, Chapter 3 examines the determinants of CVCs' partner selection in syndicate investments. As CVCs exhibit characteristics different to that of IVCs, it can be expected that they apply different criteria in their syndicate partner selection decisions. Using a sample of CVC-led syndicate investments, the empirical results verify that CVC lead investors are more likely to invite investors specialized in the investee's industry into their syndicate. At the same time, due to concerns about the control over the management of the investee, CVC lead investors are less likely to syndicate with influential investors who possess a good reputation and status. These findings suggest that CVCs choose their syndicate partners based on the complementarity of the partners while also considering possible principal-principal conflicts with the partners.

Employing the resource-based view and organizational learning perspective, Chapter 4 investigates the relationship between the distant search using CVC investments and the resulting knowledge transfer. Moreover, as means to overcome the distance and facilitate the distant search, this study investigates the moderating effects of syndicate partners and organizational structure on the knowledge transfer through CVC investments. CVC investments allow firms to take cognizance of technological trends, access novel technologies held by entrepreneurial firms, and to overcome the constraints of contextually localized search. However, the results indicate that the inverted U-shape relationship between technological distance and knowledge transfer, which had been previously observed in other external knowledge sourcing contexts, also holds true for CVC investments. To overcome these constraints in distant search, CVCs could complement their absorptive capacity through their syndicate partners, or enhance their absorptive capacity by promoting communication between the CVC unit and the staff of the parent corporate. The results of the empirical study verify a positive moderating effects of an integrated CVC unit structure on the knowledge transfer from the investees. It is confirmed, however, that increasing the number of syndicate partners has a negative influence on the knowledge transfer in CVC investments. These findings suggest that syndicate investments have different characteristics in CVC investments, and CVC might face conflicts with their syndicate partners.

Compared to traditional VCs, CVCs have different characteristics in terms of their resources and capabilities, social capital, experiences, and motives and objectives of investment. Hence, it can be expected that syndicate investments among different types of investors such as CVCs and IVCs may have varying outcomes depending on the relationship between the investors. Chapter 5 verifies how syndicate investment among different types of investors, such as CVCs and IVCs, affects the IPO performance of the investee firms. The empirical results indicate that CVCs and IVCs face increasing conflicts when they syndicate their investment with a balanced distribution of ownership. As a result, entrepreneurial firms backed by these syndicates can incur delays to their IPO exit. This result shows that syndicate investments among CVCs and IVCs are affected by conflicts originating from their different motives. Through a comprehensive approach, the study sheds light on the principal-principal conflicts among syndicate partners and contributes to the research on partner conflict and its consequences in the context of entrepreneurial finance.

Through the research outlined above, this dissertation provides three significant contributions: First, by examining CVC's syndicate investments, which, despite their increasing importance, were not prominently featured in prior literature, it complements the literature on CVCs and expands the understanding of CVC investments. Second, this dissertation reveals that the rationale behind the syndicate investments of CVCs relies more on agency theory, specifically principal-principal conflicts, rather than the resource-based view and resource complementarities. Through a comprehensive approach that integrates the CVC context with insights from diverse theories, including principal-principal conflicts, the resource-based view, and relational theory, research on CVC syndicate investments will help provide a better understanding and insights on partner selection, knowledge transfer, and overall performance. Third, this dissertation confirms that syndicate investments do affect CVC activities and resulting outcomes, and suggests that, in utilizing syndications, CVCs need to be cautious about potential conflicts with their syndicate partners. Findings from this dissertation propose that firms need to take into account the syndication in their CVC investments, and utilize it appropriately.