How Do Corporate Venture Capitalists Create Value for ...

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esults when industry is defined using the Fama-French industry definition. First, we find that, consistent with our hypothesis, CVCs tend to invest in younger firms at earlier rounds: the coefficients of firm age and round number are positive and significant at the 1% level. CVCs also invest in firms that require significantly larger investments (those with smaller prior investment). Second, CVCs provide funding to more capital and R&D intensive firms than IVCs. The positive and significant coefficient of industry beta suggests that CVC-backed firms come from riskier industries. These industries also tend to be more competitive as the coefficient of the Herfindahl index and market share of the largest firm in the industry are negative. We don’t find robust evidence that prior industry stock return performance or operating (sales growth) performance significantly affect CVC’s choice of portfolio firms. Finally, we find that CVC tend to invest in firms where the reputation of existing IVCs is relatively low. Since, we control for the round number of the investment, the positive coefficient of IVC reputation suggests that CVCs are not followers. Rather, they are more likely to invest in firms that lack high quality independent venture capitalists: in other words, in firms where their industry expertise will be most appreciated. In the second part of our analysis of the investment patterns of CVCs and IVCs we evaluate the match between the CVC and the entrepreneurial firm affects CVCs’ decision to invest. Specifically, we attempt to answer two questions. First, are CVCs more likely to invest in firms in an industry related to that of the CVC parent? Second, does a prior relationship with existing investors in a firm drive CVC investment in that firm? Again, we evaluate whether CVCs are followers investing in firms with familiar venture capitalists present or rather invest independent of any prior relationships. To evaluate these questions we need to observe not only the entrepreneurial firms that obtained CVC investments, but also those denied such investments. We cannot observe the latter set of firms but we do observe the firms that obtained IVC (but not CVC) financing. In our analysis we assume that those firms were also potential recipients of CVC financing. Using these two sub-sets of firms (those receiving CVC investment and those receiving only IVC investments) we conduct a probit analysis where the dependant variable is constructed as detailed in Figure 1. We match each CVC round investment with other financing rounds that occurred within one month of CVC investment date. We assume that this sub-set contains firms that 14
could have received CVC financing but did not receive it. Consequently, the dependant variable in our probit analysis is equal to one for an investment round backed by CVCs, and zero for investment rounds in firms that could have received CVC funding, but did not. In addition to firm characteristics and other control variables considered earlier, we construct two sets of variables of interest. First, to evaluate whether industry match between a CVC parent and an entrepreneurial firm drives CVC investment, we construct dummy variables that are equal to one if CVC corporate parent and the portfolio firm are in the same industry as defined by 2 digit SIC code, 3 digit SIC code, 4 digit SIC code, and Fama-French industry classification respectively. Second, to evaluate whether prior relationship with IVCs affect the investment pattern of CVCs, we construct three measures of the relationship between the investing CVC and an IVC who have already invested in the portfolio company under consideration: (i) the number of entrepreneurial firms CVC and IVC co-invested in before the round date under consideration; (ii) the number of financing rounds CVC and IVC co-invested in before the round date; and (iii) the number of years since first joint investment by the CVC and the IVC. We then aggregate these variables across all IVCs who have already invested in the portfolio firm. Table 2b reports the results of our probit analysis. We find that industry match is very important in CVC’s choice of portfolio firms. The coefficients of industry match dummies are positive and significant independent of industry classification (SIC code or Fama-French industry). Further, the coefficient of proxies of the prior relationship between CVCs and IVCs are negative, this is also the case for coefficients of the reputation of existing IVCs. This is consistent with the idea that corporate venture capitalists tend to step in when the existing IVCs lack reputation (and expertise) to evaluate the entrepreneurial firm’s product and/or technology. Overall, our results in this section suggest that the investment patterns of CVC are significantly different from that of IVCs. CVCs tend to invest in younger and riskier firms and in earlier rounds compared to IVCs. These firms tend to be in less mature industries which require significantly larger R&D and capital expenditures, and which are more competitive (have no dominant firm in the product market). CVCs are more likely to select portfolio companies in industries closely related to that of their 15
Page 1 and 2: How Do Corporate Venture Capitalist
Page 3 and 4: 1. Introduction How Do Corporate Ve
Page 5 and 6: documented that IVCs are able to cr
Page 7 and 8: control for firm industry, size, an
Page 9 and 10: Overall, our empirical findings ind
Page 11 and 12: a CVC since they represent financia
Page 13 and 14: Table 1 presents the summary statis
Page 15: We start with the probit analysis o
Page 19 and 20: firms’ industry dummies to accoun
Page 21 and 22: experience similar time from first
Page 23 and 24: acking is of higher quality (in oth
Page 25 and 26: investment IPO firms are more likel
Page 27 and 28: Panel B of Table 6a reports the res
Page 29 and 30: IPO market, CVCs are able to attrac
Page 31 and 32: Market price is CRSP stock price an
Page 33 and 34: IVC backing dummy, and the reputati
Page 35 and 36: Our findings can be summarized as f
Page 37 and 38: Lindsey, L., 2004, “The Venture C
Page 39 and 40: Table 2a Patterns of Corporate Vent
Page 41 and 42: Table 3 Amount Invested and Pricing
Page 43 and 44: Table 4b Exit Strategies for CVC Ba
Page 45 and 46: Table 5b Probability of Delisting f
Page 47 and 48: Table 6b Market Participants in CVC
Page 49 and 50: Table 7b Valuation of CVC Backed an

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