Exploration and Resource Commitments in Unequal Partnerships: An Examination of Corporate Venture Capital Investments

While established firms' relationships with external ventures may have significant strategic benefits, the realization of such benefits is fraught with considerable uncertainty. The real options and interorganizational learning literatures present an interesting trade-off for established firms regarding commitment of resources in a partnership. This study seeks to enhance our understanding of how firms manage these trade-offs when committing resources to external venturing initiatives. We examine the magnitude of resources initially committed by an established firm to an external venturing partnership in the context of corporate venture capital (CVC) investments. While a real options approach suggests that resource commitments should be lowered in the presence of uncertainty regarding realization of benefits, the interorganizational literature emphasizes that resource commitments may be essential for building quality relationships that expedite learning. Corporate investors, who invest in new ventures in order to gain strategic benefits, face higher uncertainty when their investment objectives involve greater exploration. However, greater exploration also increases investors' need to learn from their portfolio ventures. We, therefore, predicted that the degree of exploration would have a U-shaped relationship with the investor's resource commitment in a venture. We also expected that factors that serve to decrease the investor's uncertainty, i.e., investor experience diversity and venture affiliation to prominent venture capitalists, would moderate the U-shaped relationship between exploration and resource commitment. The predictions of the study are tested on a sample of 248 initial investments in private ventures made by incumbent firms in the computer, semiconductor, and telecommunications industries between 1996 and 2000. We find some support for our hypotheses. This study contributes to the external venturing literature on CVC investments by examining the determinants of the magnitude of resource commitment to new ventures, and integrates real options perspective, which advocates low resource commitments under uncertainty, with the organizational learning literature, which argues for greater resource commitment to secure partner cooperation. The results of this study reveal interesting insights into how CVC investors manage individual investments to generate strategic benefits.

Signaling and Self-regulation in Venture Capital

Giovanni Liotta

This thesis proposes three studies that provide novel empirical evidence on how different types of VCs' characteristics signal the quality of an entrepreneurial venture and influence investment strategies of funds subject to self-regulation. In the first study we aim at contributing to the ongoing debate on the different effects of reputation and status on organizational outcomes. We explore the signaling value that these two organizational attributes exert on external parties judging the quality of entrepreneurial ventures under uncertainty. Moreover, we examine whether signaling mechanisms are valuable only if the external parties are affected by high information asymmetry with the valued venture. We test our hypotheses using a sample of 1,339 U.S. clean technology ventures that received the first round of Venture Capital (VC) between the years 1990 and 2012. We look at their ability to gather supplemental financial resources for survival and growth by completing an Initial Public Offering (IPO) or an acquisition by an incumbent firm. The findings indicate that VCs' reputation - an economic attribute based on past performance - can signal a venture's quality externally, while VCs' status - a social-standing attribute - does not have signaling value. The results also show that quality signals are more relevant for public investors at IPOs than for managers of acquiring companies. The second study looks at how inter-organizational ties with reputable VCs affect valuations received by entrepreneurial ventures that go public. I propose that the signaling effect of reputable VC ties is lower when there is misalignment of strategic interests between the venture and the VCs. I consider the amount of shares sold by insiders in the initial public offering (IPO) and investors' enforcement of demand registration rights as elements indicating misalignment of interests with the venture. The hypotheses are tested on using a sample of 86 IPOs in the main U.S. stock exchanges completed by entrepreneurial ventures operating in the Clean Technology sector. The results suggest that affiliation with reputable VCs elicits a positive response by public investors. However, public markets react less favorably to ties with reputable VCs when they sell large amount of their shares in the IPO or resort to demand registration rights to force the public offering of their shares. The third study investigates organizations' use of self-regulation as form of symbolic response to normative pressure that does not necessarily entail compliance in practices. I argue that, when self-regulatory initiatives are not supported by an explicit regulatory environment, opportunistic organizations might reduce their efforts to align with the normative ideals through compliant actions and behaviors. The "walking of the talk", which is the implementation of actions that are aligned with the symbolic response, might also be discouraged by alternative means to obtain organizational legitimacy, such as through an organization's status. The hypotheses are tested on a sample of Venture Capital (VC) funds whose limited or general partners voluntarily decided to join the United Nations' Principles of Responsible Investment (UNPRI, 2006) initiative between 2006 and 2014. The results from a difference-in-differences estimation show that VC funds' likelihood to invest in clean technology companies is lower after funds' stakeholders (i.e. general or limited partners) join the UNPRI initiative. I also find that the likelihood to invest in clean technologies after self-regulation is negatively moderated by the VC fund's status.

EPFL2016

Knowledge Creation Through External Venturing: Evidence from the Telecommunications Equipment Manufacturing Industry

Anu Wadhwa

Investment in entrepreneurial ventures has gained recent popularity as a means for established firms to learn about new technologies and markets. However, the link between such corporate venture capital (CVC) investments and innovation outcomes has not been examined in detail. Using panel data from corporate investors in telecommunications equipment manufacturing, we investigated the conditions under which CVC investments affect knowledge creation for corporate investors. We found that, when investor involvement is low, number of CVC investments has an inverted U-shaped relationship with innovation performance. However, when investor involvement is high, the relationship reverses, and an increase in investments boosts innovation.

2006

Learning Objectives and Uncertainty Resolution: An Examination of the Structure of Corporate Venture Capital Relationships

Anu Wadhwa

The search for external knowledge must necessarily be accompanied by effective organizational learning. The effectiveness of learning is dependent on quite dissimilar factors based on whether the learning objective is explorative or exploitative. Moreover, different types of uncertainty become salient with these two contrasting objectives, and need to be resolved in opposite ways. In the context of Corporate Venture Capital investments, investors seeking to explore were found to structure the timing and level of investment quite differently from investors seeking to exploit. Certain attributes of the investment which the investor has little control over, moderate these relationships.

2005

Signaling and Self-regulation in Venture Capital

Giovanni Liotta

EPFL2016