Technology spillovers and capital gains

What are the total returns from corporate venturing activities? How can we adequately measure and assess their impact? In addition to financial returns, corporate venturers primarily pursue various types of strategic returns such us technology spillovers from the innovative high-tech ventures in which they invest. While capital gains are realised through initial public offerings (IPOs), trade sales and other types of liquidation events. Technology and knowledge spillovers result from the exposure and access to technologies, products and business models.

Such benefits are generally hard to measure, estimate or distinguish from the overall performance of corporate investors. A recent working paper by Kang of Adelphi University and Nanda of Rutgers University addresses this issue. The authors directly examine “the technology spillovers and capital gains created by corporate venture investments, the relation between these two forms of return, and contextual factors that impact this relationship”. Specifically, they study these issues in the context of the biopharmaceutical industry, an environment where the genomics revolution has spurred collaboration between big pharmaceutical companies and biotechnology based research firms.

“The results are consistent with the notion that capital gains are not usually pursued independent of technological benefits in corporate venturing investments.” The results show a positive relationship between capital gains and technology spillovers, which indicate that strategic objectives to enhance technology and knowledge spillovers are positively correlated with financial returns. More precisely the results show how “this positive relationship is enhanced when investments are made in post-IPO and technologically diversified portfolio firms”.

The significant growth of corporate venturing units, rising from about 650 to about 1,100 teams around the world over the past five years indicates that it becomes a core tool in innovation management. Definition and measurement of success factors are the most critical factors in launching and running a successful corporate venturing unit. This challenge intensifies as units shift their emphasis from purely financial to innovation-related goals, especially after the dot.com crash. General developments, such as shorter technology product life cycles and the fragmentation of knowledge, further challenged traditional processes. In addition, the needs in emerging and frontier markets are changing the way value is perceived and the solution and price points required are often significantly different from solutions in more mature markets.

Consultancy Trommsdorff & Drüner in Berlin has done an eight-country study on corporate venturing in which performance is approximated by a function of continuity and activity, since financial returns are frequently disclosed and do not represent the entire strategic value. To control for differences in industries, the sample was segmented by investment focus resulting in two clusters – media and information and communications technology (ICT) and industry and consumer products and services (ICPS). The media and ICT cluster is characterised by a larger deviation of activity and continuity and more venturing experience. Top performers are above the respective industry averages, while under–performers are below the average, based on a regression analysis. The questionnaire was based on a large number of focus interviews among corporate venturing units and independent venture capitalists. In addition, an adapted version of the online survey was conducted among almost 100 independent venture capitalists. The results focused on three key areas for associated success factors in the strategic set-up, investment process, and internal collaboration.

One of the striking results indicates that 75% of corporate venturing underperformers against only 22% of the top performers regard the definition and measurement of “success factors” as a major challenge. See more details and explanations in the following graphs.

Reference

Kang, HD, and Nanda, V (2014) Technology spillovers and capital gains in corporate venture capital: evidence from the biopharmaceutical industry. Available at SSRN: http://dx.doi.org/10.2139/ssrn.2429504

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