Established corporations, such as Intel, Amazon, Google, or Johnson & Johnson, have played a pivotal role in startup fundraising in recent decades. Despite the surge in the volume of CVC investors and deals, there is disagreement yet on whether CVC is an effective tool to create value for investors and startups. Especially with the increased uncertainty and resource constraints imposed by the 2020 pandemic, many corporations are holding back on CVC investments while some others are charging ahead. As corporate decision makers look to prune unproductive investments, there is an even greater need to understand the performance outcomes of CVC investments.
There has been consensus that corporate investors simultaneously pursue strategic and financial returns while ventures seek to enhance their own performance in CVC investments. However, ambiguity persists in how much value CVC creates in each performance category. For example, what are the key elements of strategic performance? Does the pursuit of strategic returns compromise the potential for financial returns? What are the pros and cons for ventures who receive risk capital from established corporations?
With such open questions persisting despite numerous extant empirical studies, meta-analysis is a suitable quantitative tool to bring some order to the CVC field. Meta-analysis combines the results of multiple scientific studies that address a question and yields a weighted average of the empirical results from those studies. While single studies are prone to unsystematic sampling errors, meta-analysis provides more valid overall patterns by synthesizing from a large number of existing studies. Our paper, published in the Strategic Entrepreneurship Journal, systematically studies CVC performance outcomes in their distinctive aspects and reveals the magnitude and interdependence among these performance outcomes using meta-analysis.
Our main findings come in three sequential steps.
First, the broad domains that CVC investments mainly affect (i.e., corporate financial, corporate strategic and venture) are decomposed into more nuanced performance aspects. Involvement in CVC provides corporations with an advantageous product-market position and facilitate their technology advancement. Meanwhile, corporate investors also enjoy immediate financial returns, but these short-term monetary gains do not appear to translate into long-term firm value for the investing corporations. On the other hand, raising capital from CVC investors can be a double-edged sword for startups. Invested ventures do benefit financially and tend to experience successful exit due to the CVC provision of complementary resources, but they appear to be compromised technologically, perhaps stemming from a lack of defense against misappropriation.
Second, the magnitudes of CVC performance outcomes systematically differ across these domains. Although many studies have identified the strategic goals as primary for corporate investors, their strategic returns in general do not significantly exceed financial returns that are extracted from CVC investments. While the achieved investment returns are similar between the dual objectives of corporate investors, ventures experience a significantly lower amount of value capture than in the corporate financial and corporate strategic domains.
Third, value creation at each stage of CVC investment is interrelated to that at other stages. Once investing corporations have achieved strategic performance via stretching into new markets and technologies, it further prompts their own financial gains as well as venture performance. Counterintuitively, though, overall venture performance is likely to jeopardize corporate financial returns, arguably because the corporate investors are willing to sacrifice part of financial returns to attract ventures that promise strategic value.
Future research opportunities
Based on our synthesis and integration of extant CVC studies, several avenues have surfaced where more in-depth and focused future explorations await. Important directions include:
The causal mechanisms underlying interrelationship among different performance aspects. Meta-analysis provides an initial overview on the tradeoffs among various performance domains in the CVC investment chain, but the results are only correlational. The current literature tends to focus on one type of CVC performance at a time, leaving unaddressed questions of how different performance goals enhance or suppress each other. Meanwhile, despite the prevalence of investment syndication between CVC and independent VC, much is still unknown regarding syndicating partners’ spillover effects on focal firms’ performance.
Performance evolution across different investment stages over time. A majority of existing studies utilize a cross-sectional model to frame antecedents and outcomes of CVC investments. However, as risk capital is characterized by incremental commitments in sequential stages (e.g., Seed, Series A, Series B, etc.), it will be fruitful for corporate strategy scholars to take a longitudinal perspective of CVC. Newer datasets, such as Crunchbase and Pitch Book, have emerged with abundant information on each investment round, providing ample opportunities to examine how corporate investors periodically re-evaluate existing investments.
The costs of entrepreneurial resource mobilization. Our finding on venture performance implies that resource mobilization through CVC funding is not without cost. We thus see an opportunity for entrepreneurship scholars to explore, in rich detail, ventures’ willingness to involve corporate investors as well as their experiences and retrospective assessments.
By providing a quantitative synthesis of extant CVC studies, our meta-analysis not only clarifies the performance impact of CVC investments but also lays the groundwork for future research to unpack the nuances of CVC in entrepreneurship, strategy and related fields.
Source: Huang, P., & Madhavan, R. (2020). Dumb money or smart money? Meta‐analytically unpacking corporate venture capital. Strategic Entrepreneurship Journal. https://onlinelibrary.wiley.com/doi/epdf/10.1002/sej.1369
About the authors
Peiyuan Huang is Doctoral Candidate in Strategic Management at the University of Pittsburgh. Her research revolves around the nexus of innovation and entrepreneurship, especially in the context of corporate venture capital.
Ravi Madhavan is Professor of Business Administration at the University of Pittsburgh. His research and teaching interests focus on alliances, Mergers & Acquisitions and venture capital as strategic avenues to growth, innovation, and the development of complex capabilities.