Limitations to inter-organizational knowledge acquisition: The paradox of corporate venture capital

Scholars and business professionals advocate inter-organizational partnerships as a key strategy for knowledge acquisition. My dissertation explores the limitations to such strategy by studying the conditions under which partnerships with innovative firms do not materialize. In the context of Corporate Venture Capital (i.e., equity investment in entrepreneurial ventures by established corporations), I argue that many investment relationships between a corporation and an entrepreneur are not formed because the corporation is not interested in investing unless the entrepreneur discloses her invention, and the entrepreneur is wary of doing so, fearing imitation. I conjecture that the corporate investor is likely to exploit entrepreneurial disclosure when (1) the entrepreneurial invention is a potential substitute of corporate products, and (2) corporate business units manage the investment activity. Under these conditions the entrepreneur is least likely to disclose information and consequently the probability of an investment relationship decreases. An empirical study of venture capital investments in U.S. ventures during the 1990s yields consistent results. I draw on these empirical patterns and develop a formal model. A signaling model is presented where an entrepreneur partially discloses her invention to an Independent Venture Capitalists (IVC) and a Corporate Venture Capital (CVC) investor. The entrepreneur opts for the investor that is associated with the highest ex-ante expected payoffs (i.e., payoff net of losses due to potential imitation). The empirical findings and theoretical model underscore a paradox of corporate venture capital: the actions that aid the corporation to assess and benefit from CVC activity (which would be the recommendation if one were to ignore entrepreneurs' actions) inhibit an investment relationship with an innovative venture. For example, many corporations view CVC activities as an early alert system. They seek a window on novel and potentially substitutable entrepreneurial inventions. My dissertation shows that entrepreneurs who hold such inventions are paradoxically the least likely to seek CVC backing. Moreover, a tight structure, which serves as an effective means of assimilating an entrepreneurial invention once an investment has been made, is found to deter quality entrepreneurs in the first place, hence reducing CVC overall effectiveness.