Strategic venture capital investing by corporations: A framework for structuring and valuing corporate venture capital programs

Corporate venture capital plays an increasingly important role in the competitive strategy of corporations. It has fluctuated strongly over time and varies widely across firms and industries. I study how firms can best structure their corporate venture capital programs to maximize the long-term contribution of corporate venture capital to their competitive advantage. I explain strategic motivations for corporate venture capital in the current economic context and build on concepts from principal-agent theory and transaction cost theory to analyze the effect that different organizational structures have on the risk and agency problems in the relationship between the corporate investor and entrepreneurial firms.; I propose and test a framework for structuring corporate venture capital programs within the context of a firm's strategic investment goals and the strength of intellectual property rights in its relationship with entrepreneurial firms. I predict that firms choose the investment channel, the targeted investment stage and the degree of involvement in managing the entrepreneurial firm, in response to the strategic investment goal and the strength of intellectual property rights.; I present a framework for valuing corporate venture capital programs that provides additional insights into the effect of program structure on the potential financial and strategic benefits derived from corporate venture capital investments. I argue that synergistic effects among the portfolio companies and options on future strategic moves constitute a significant source of value.; I collect data on 120 U.S. corporate venture capital investors. The empirical results show that the type of strategic investment goal and the strength of intellectual property rights in the relationship between the corporate investor and entrepreneurial firms are key determinants of the structure underlying corporate venture capital programs. I find that when the corporation's strategic investment goal and the strength of intellectual property rights indicate strong potential for opportunistic behavior by the corporation towards the entrepreneurial firm, corporations structure their corporate venture capital programs in a way that would increase entrepreneurial firms' trust, such as by investing through independent venture capital firms, or investing in later stage entrepreneurial firms. The results imply that corporations could benefit from increased collaboration with independent venture capital firms.