Corporate venture capital investment relationships from the perspective of technology-oriented start-ups

Abstract

The last few decades have witnessed the catalysing role of entrepreneurial ventures developing disruptive and cutting-edge technological inventions –both with a significant commercial applicability and promising economic upside. By nature, however, start-ups lack resources, managerial expertise and network access, and are therefore more likely to reach their full potential when supported by VCs, who impart their knowledge and provide vital resources in addition to financing. Independent VCs offer a variety of value-adding services, particularly helpful for early-stage establishment activities, but if start-ups are to “cross the chasm” in the long-run and scale their venture from ideas and inventions to sustainable business models, corporate VCs can give their portfolio firms access to unique services that capitalize on corporate resources, extending their services beyond those provided by other professionalized investors. On the other, for young technology ventures, these relationships are a double-edged sword, as these partners are simultaneously the most valuable and (potentially) the most dangerous partners. Researchers so far have suggested significant limitations and impediments to the success of interorganizational equity alliances. This study joins the nascent stream of the CVC literature that takes the perspective of young technological entrepreneurial ventures (Eisenhardt et al., 2008) and extends it in several ways. By following a qualitative research method, an extensive literature review and fourteen expert interviews were conducted and analysed. The aim of this study is to provide a holistic overview of critical factors influencing a start-ups willingness to enter a CVC investment relationship with an established corporation and challenge the paradoxes of corporate venture capital identified by researchers so far. Four major motivations of start-ups to accept CVC funding were identified, namely financial resource need, scalability, endorsement and a potential exit strategy if acquired by the parent corporation. Investment relationships with corporate investors, however, involve a significant trade-off. As concerns, an indirect intellectual property misappropriation, strategic corporate control, limited growth assistance and a negative signalling to the VC market were identified. Safeguards may be divided into three subcategories, namely attributes of the corporate, attributes of the start-up and intersection between the corporate and the start-up. As safeguards with the strongest empirical support, we can highlight a diverse investor syndicate, conducting thorough due diligence on the CVC investor, and previous VC experience as to develop forecasting ability and sensitivity in identifying potential threats.