Learning from Startups: Corporate Venture Capital and Exploratory Knowledge Creation

Corporate venture capital (CVC), direct minority equity investments made by established companies in privately held startups, has become an important strategic tool for many large companies. In particular, firms often pursue CVC investing as a way to learn about novel technologies. Although CVC investments are inherently exploratory and have been found to enhance investing firm innovation, research has yet to establish whether CVC investing leads to the development of exploratory innovations (i.e., innovations that embody knowledge that differs from knowledge used by the firm in prior innovation efforts). In this paper we explore the conditions under which CVC investments lead to the creation of exploratory knowledge by corporate investors. Building on insights from the innovation search and interorganizational learning literatures, we argue that three characteristics of an investing firm’s portfolio of startups will impact its creation of exploratory knowledge. Using longitudinal data on a panel of 40 telecommunications equipment manufacturers, we find that investing firms produce more exploratory knowledge when their portfolios include startups that are moderately diverse and that the degree to which portfolio firms have codified their knowledge enhances the effect of diversity.