How Do Corporate Venture Capitalists Create Value for ...

Overall, our empirical findings indicate that there are two ways in which CVCs uniquely create value
for entrepreneurial firms. First, CVC create product market value by investing significant amounts in
younger and riskier firms involving pioneering technologies: since many such firms would not have
received private equity financing from IVCs, these firms may not have been able to grow and mature
without CVC funding. Second, CVCs seem to play an important role in signaling the true value of firms
backed by them to three different constituencies: first, to IVCs, prompting them to co-invest in these firms
pre-IPO; second, to various financial market players such as underwriters, institutional investors, and
analysts, allowing them to access the equity market at an earlier stage in their life-cycle compared to firms
backed by IVCs alone; and third, directly to IPO market investors, allowing CVC-backed firms to obtain
higher market valuation for these IPOs (in combination with the increased participation by various
reputable market players) compared to the valuation of firms backed by IVCs alone. In summary, we find
that CVCs create significant value for entrepreneurial firms and their shareholders in the above two ways.
The rest of the paper is organized as follows. Section 2 discusses the related literature. Section 3
discusses the data and sample selection. Sections 4 though 8 present our empirical tests and results. We
conclude the paper and discuss the results in Section 9.
2. Related Literature
The empirical literature on corporate venture capital is relatively small. 5 An important paper in this
literature is Gompers and Lerner (2000), who study how the organizational and compensation structure in
CVC-backed firms affect their performance. 6 They find that CVC-backed firms are more likely to go
public compared to IVC backed firms. Further, they find that this result is particularly strong if there is a
strategic fit between a CVC-parent and the entrepreneurial firm backed by it. Coles, Hertzel, and
Santhanakrishnan (2002) also study the impact of complementarities on the likelihood of a successful exit
5 See Hellman (2002) for a theoretical model of corporate venture investing. His model predicts that CVCs will invest in and
provide product market support for start-up with greater strategic fit with the CVC’s corporate parent.
6 See also Gompers (2002), who explores a detailed history of corporate venture investments over the part twenty years. He
documents that corporate venture capital investments tend to have higher success rates (in terms going public) than the
investments on independent venture capital firms.
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