Established companies in technology-enabled industries such as software, telecoms, pharmaceuticals and semiconductors have used corporate venture capital as a lever to access and screen technological advances, and to drive innovation outside the traditional firm boundaries.
Recent years have witnessed emergence of a new wave of corporate venturing funds that increasingly interact and compete with traditional venture capital firms in the entrepreneurial ecosystem.
This thesis examines entrepreneurs’ rationale for raising capital from corporate investors. Through the analysis of an online survey conducted with startups based in the US and founded between 2010 and 2015, we identify that startups that operate in capital-intensive industries, such as life sciences and manufacturing, raise capital from corporate investors in order to establish strategic partnership with corporates, significantly more than do startups in capital-light industries such as enterprise and consumer software.
Second, through an empirical analysis of a panel of 8,190 startups founded in the US between 2000 and 2010, this thesis shows that corporate venture capital is more beneficial to startups that operate in capital-intensive industries. Using a bivariate probit model, this thesis shows that startups backed by corporate venture capital are more likely to be acquired or go public, and that the likelihood of an exit event increases as capital-intensity of the industry magnifies, as measured by the level of fixed assets on companies’ balance sheets.
In addition, we provide empirical evidence that participation of corporate venture capital in a financing round helps a capital-intensive startup to raise further funding from reputable traditional venture capital firms.
Third, this thesis presents empirical evidence that establishing strategic collaboration between capital-intensive startups and corporate parents of venture capital firms, in forms of joint research, product development or commercialisation, is a main source of value for startups. Using data gathered on 130 corporate news announcements on strategic collaborations, this thesis shows that capital-intensive startups backed by corporate venture capital are significantly more likely to succeed when they establish strategic collaboration with corporate parents.
The final contribution of this thesis is a formal assessment of traditional venture capital firms’ investment behaviour in the presence of corporate investors. We present a game-theoretic model and identify the circumstances under which traditional venture capital firms benefit financially from corporate investors participation in financing a capital-intensive startup.
By leveraging data gathered on 8,190 startups, we apply the game-theoretic model and Monte Carlo method to simulate financial returns for a traditional venture capital firm investing in a capital-intensive startup in the pharmaceutical industry.
From entrepreneurs’ point of view, these conclusions are encouraging. A startup’s capability to raise funding from corporate investors should be viewed positively by the employees and other investors, especially for startups operating in capitalintensive industries. Therefore, founders of capital-intensive startups and their original investors should seek to attract CVC investment.
Furthermore, startups should embrace CVC investment through establishing strong operational and knowledge links with corporate parents through the three types of collaboration – co-development, licensing and joint research – that are shown to be significantly beneficial for startups.
From the point of view of traditional VCs, however, CVC investment in their portfolio startups may have a diminishing or enhancing effect on their investment return. And since these VCs’ sole investment objective is to maximise financial return, they should be cognisant of the conditions under which CVC investment might be harmful to their returns.
Specifically, as highlighted in the simulation results, CVC investment in industries where there is a low valuation multiple or there is a low investment to revenue ratio – typically capital-light industries – might diminish a tradtional VC’s return. It is important to note that early employees and founders of a startup may exhibit a similar preference, especially if they seek solely to maximise financial return rather than, for example, a boost to reputation or an enhanced likelihood of exit.