Winner of the DRUID Steven Klepper Award for Best Young Scholar Paper 2018

DRUID18, Copenhagen, June 11-13, 2018

Achieving Strategic and Financial Returns: The Challenge of Corporate Venture Capital Investors

Susanne Koster, IESE Business School, Strategic Management

Mark Lorenzen, Valentina Tartari, Susanne Koster

ABSTRACT: Why are corporate investors able to generate either strategic or financial returns separately but not both types of returns jointly? Building upon the financial contract theory, I conceptualize corporate venture capital investing as a hybrid investment model in which corporate investors gain strategic returns by commercializing a venture’s knowledge, and financial returns by exiting the investment through an IPO or an acquisition by another firm. The model predicts a negative relationship between the strategic and financial returns. Corporate investors may exit an investment that does not generate a strategic return and keep an investment in the portfolio when exiting an investment leads to a loss of access to the venture. Using a sample of 18 corporate investors in the chemical industry that invested in 567 ventures, I find a negative correlation between the probability that an investment generates a knowledge transfer from the venture to the corporate investor and the probability to exit an investment. An investment that generates a knowledge transfer negatively affects the odds of exiting versus keeping the investment in the CVC portfolio. The technological distance between the venture and the corporate investor, the size of the syndicate, and the mode of exit (IPO or acquisition) affect the trade-off between exiting and keeping the investment in the CVC portfolio.