I began my doctoral work in management after a long career as a new product development engineering executive and soon became struck by the lack of research into how entrepreneurs benefited from corporate venture capital investments.
This lack of research insight exacerbated the concerns in the research literature that corporate investors are inhibited from making valuable investments due to entrepreneur fears of investor appropriation of their valuable technology. These issues resonated with my experience of negotiating with entrepreneurs to enter cooperative projects with the corporations I represented. I had found my dissertation topic and set out to investigate the antecedents and moderators that will act on a corporate venture capital investment relationship to result in a mutually satisfactory conclusion to that relationship, either by acquisition of an entrepreneurial firm by a corporate investor or by initial public offering (IPO).
My research utilised both quantitative analysis of patent citations and qualitative interviews with entrepreneurs and corporate investors to investigate the success of a corporate venture capital investment from the viewpoint of the entrepreneurial firm receiving the investment. The existing research literature overwhelmingly views this construct from the viewpoint of the corporate investor by defining a successful investment as one from which the investor has harnessed multiple benefits. My work investigated the outcome of corporate venture capital investments that are likely to be viewed as a success by the entrepreneurial firm founder, either an exit from the firm by acquisition or an IPO. The effect of relative learning between the entrepreneurial firm and the corporate investor was studied with the expectation that an entrepreneurial firm that learns from the corporate investor will increase in value and be more likely to achieve an attractive exit by either acquisition or IPO.
Relative learning between the firms was studied by tracking the citation of one firm’s previous art by the other firm in successful patent applications after the initiation of a corporate venture capital investment. The relationship between entrepreneurial firm learning and attractive exists were tested by logit and least squares regression methods. Surprisingly, considering the existing research literature, the flow of technological knowledge from the entrepreneurial firm to the corporate investor was found to be negligible while entrepreneurial firm learning from the corporate investor was found to be significant.
This unanticipated entrepreneurial firm learning paints a significantly different picture of the corporate venture capital relationship than that portrayed in the existing research literature. The entrepreneurial firm does not appear to be a passive partner wary of a corporate investor that will “exploit the information, imitate the invention, and leave the entrepreneur empty-handed”¹. The evidence that learning by the entrepreneurial firm is more common than learning by the corporate investor calls into question the idea that corporate venture capital investments are “instrumental in harvesting innovation from these entrepreneurial ventures”².
The results of this study argue for a model of entrepreneurs that not only effectively defends their core technology from appropriation but aggressively transfers technological knowledge from the corporate investor. Additionally, the results establish that entrepreneurial firm learning mediates the relationship between a corporate venture capital investment and an exit by IPO.
The findings of this study lead to the conclusion that a corporate venture capital relationship is not driven by knowledge appropriation by the corporate investor. In fact, the flow of technological knowledge in the opposite direction is more common and can be demonstrated to increase the likelihood of a corporate venture capital investment resulting in the highly positive outcome of an IPO for the entrepreneurial firm.
The phenomenon that emerges from this work is twofold. First, entrepreneurial firms appear proactively to protect their valuable knowhow after accepting a corporate venture capital investment rather than simply avoiding the investment and thus eliminating not only the threat of appropriation but the benefits of the strategic and marketing insights that accompany a corporate investor. Second, some entrepreneurial firms have learned how to prevent technological spillover from themselves to their investor while learning from that corporate investor. This underlying phenomenology does not appear to be reflected in the existing research literature and is deserving of further investigation. The effect of entrepreneurial firm learning on the likelihood of an IPO exit suggests that future work investigate the phenomena of learning by the venture firm.
Notes
1 Dushnitsky, G, & Shaver, JM (2009). Limitations to interorganizational knowledge acquisition: the paradox of corporate venture capital. Strategic Management Journal, 30(10), 1045-64.
2 Dushnitsky, G, & Lenox, MJ (2005). When do incumbents learn from entrepreneurial ventures? Corporate venture capital and investing firm innovation rates. Research Policy, 34(5), 615-39.