Corporate Venture Capital, Value Creation, and Innovation
Thomas J. Chemmanur
Boston College - Carroll School of Management
University of Virginia - Darden School of Business
Indiana University - Kelley School of Business - Department of Finance
November 5, 2013
Forthcoming, Review of Financial Studies
We analyze how corporate venture capitalists (CVCs) differ from independent venture capitalists (IVCs) in nurturing innovation in entrepreneurial firms. Using the NBER Patent Citation database, we find that CVCs help their portfolio firms achieve a higher degree of innovation productivity, as measured by their patenting, although these firms are younger, riskier, less profitable, and go public earlier compared to the entrepreneurial firms backed by IVCs. To establish causality, we use both an instrumental variable approach and a difference-in-difference approach, and show that the above baseline results are unlikely to be driven by the better selection ability on the part of CVCs. While our baseline results are based on VC-backed firms that eventually go public, we develop additional robustness tests using the entire universe of VC-backed private firms and show that our results are not driven by CVCs bringing their most innovative firms public: CVC-backed firms are more innovative regardless of their eventual exit outcomes or current investment status. Finally, we develop a simple theoretical model to analyze the mechanisms through which CVCs nurture innovation to a greater extent than IVCs, and test the implications of this model. Our analysis suggests that two possible mechanisms are CVCs’ greater tolerance for failure and greater industry specific knowledge arising from the strategic fit between the CVCs’ parent firms and the entrepreneurial firms they invest in.
Number of Pages in PDF File: 49
Keywords: Innovation, Corporate Venture Capital, Value Creation, Patents, Citations
JEL Classification: G24, G23, O31
Date posted: January 25, 2012 ; Last revised: October 28, 2014
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