There is no significant relationship between CVC investment and higher financial performance for startups — but they do bring benefits to both parties overall, a new research paper has found.
Researchers at the University of Augsburg carried out a meta-analysis of 32 studies on CVC outcomes, finding that while there is a strong win-win relationship for corporations and startups in terms of strategic outcomes and overall performance, there is no evidence that CVC investment is linked to significantly better financial outcomes for the startup, as measured by subsequent funding opportunities and the probability of IPO.
That is not to say that there is no effect at all – the underlying studies used a range of measures such as cash returns, speed of finding follow-up investments, the changes in startup valuations and ticket sizes. While these were not negative, they were inconsistent, and the aggregated meta-analysis showed a consistent trend of strategic advantages over financial ones.
“It’s always positive for both parties,” Nikolaus Seitz, assistant professor at the University of Augsburg and co-author of the paper, told Global Corporate Venturing.
“CVC investment has an impact both on financial and strategic in a positive way, but we see a stronger effect on the strategic side. Of course, this could be biased by most of the studies focusing on strategic benefits – originally the main idea of corporate venture capital. I think the nice thing is that the majority of studies are trying to simultaneously shed light on the financial and strategic benefits and in both cases find a positive relationship.”
“This is, I think, good news. We find statistically significant, positive relationships over completely different study contexts. This is the main benefit of this meta-analysis framework, it gives you the chance to control for results even when the studies are so diverse that you usually can’t compare results.”
One of the biggest surprises Seitz and his co-authors, Patrick Haslanger and Erik Lehmann, found was the difference in the performance effect between sectors. The healthcare sector, for example, saw weaker results than markets like information and communications technology.
“We thought that, when looking at the medtech and healthcare sector, we would find that the beneficial effect is stronger for both corporates and startups relative to other sectors because it’s always resource-intensive, research-driven and takes a lot of money, but we did not,” Seitz explained.
One potential reason for this is the complexity and challenge involved in successfully developing a pharmaceutical drug – which would intuitively suggest that corporate involvement would be a huge help – compared to getting a piece of software out to market.
In addition to sectoral differences, other factors that can moderate the performance effect include timing – taking into account the difference in dynamics during and after the dotcom era – as well as geography, with regions like North America benefitting from its size, growth rate and culture of entrepreneurship.
“This is no surprise at all – there’s a very strong venture capital scene [in North America]. The institutions are much more friendly to venture capital investments.”
Generally speaking, the mutually beneficial strategic outcomes are as one would expect – for the startup it includes the reputational gain of having a corporate partner, access to their experience, network, organisational processes and all the tie and cost savings that come with it. For the corporate, startups can act as a listening post, giving insights about sector trends, new technologies and the innovation ecosystem.
The study did not find any significant evidence for the idea that startups receiving corporate investment are “swimming with sharks”, as past research has suggested, referring to the risk of adverse effects from things like lost or misappropriated intellectual property, relinquished managerial decision-making power or limited access to other potential partnerships.
In terms of managerial implications, the study does not come to major conclusions but does strike an optimistic note.
“This is more of a broad overview, trying to just aggregate in order to make a competent measure of yes or no – does [CVC investment] pay off, or no? We see it does pay off.”
