Do Corporate Venture Capitalists Add Value to Startup Firms? Evidence from IPOs and Acquisitions of VC-Backed Companies

Abstract

Do corporate venture capitalists (CVCs) add value to startup companies? We present evidence that they do, but under one condition: when the startups have a strategic fit with the parent corporations of CVCs. We show that CVCs provide a variety of services and support that appear to suit the specific needs of startups operating in different industries. We find that startups with CVC backing obtain higher valuations at the IPO than those without, and that the higher valuations concentrate in startups that have a strategic fit with CVC parent corporations. This positive effect of strategic CVC backing is robust to correcting for the endogeneity of CVC backing, is not driven by the superior project selection ability of CVCs, is over and beyond the effect of general corporate alliances, and is not reversed in the long run. We also find that CVC-backed targets receive higher takeover premiums in acquisitions, again only when there is a strategic relation between the targets and the CVC parents. Overall, our findings support the conclusion that CVCs can add value when they make strategically oriented investments in entrepreneurial companies.

Keywords: Corporate venture capital, Value added, Initial public offering, Mergers and Acquisitions

JEL Classification: G24, G32, G34