The Effects of Corporate Venture Capital, Founder Incumbency, and Their Interaction on Entrepreneurial Firms’ R&D Investment Strategy

Abstract

Corporate venture capital (CVC) investment has increasingly become an important source of entrepreneurial finance. Accordingly, while scholars have traditionally focused on understanding the main motivations behind CVC activity and its impact on the investing corporate firm, more recently, scholars have also started to emphasize the importance of understanding the impact of CVC investment on the investee venture. In particular, these recent studies commonly show that CVC investment has a positive effect on the venture’s innovation. While the positive link between CVC investment and the venture’s innovation output is well established in the literature, the organizational mechanisms through which this relationship unfolds within the venture remain relatively underexplored. In this study, we fill this gap in the literature by examining the effects of CVC ownership, founder incumbency, and the CVC-founder interaction on R&D investment strategies in VC-financed, technology-based entrepreneurial ventures. In doing so, we aim to provide a novel explanation of the organizational mechanisms that lead to greater investment in R&D, especially with regard to the interaction between CVC investors and founder managers. We argue that CVC ownership and founder incumbency positively affect entrepreneurial firms’ R&D investment and, more importantly, that the CVC ownership effect is effectively amplified when the founder is an incumbent top manager because of goal congruence and knowledge spillover from the CVC firm. Our empirical analysis supports our hypotheses while addressing potential endogeneity concerns. Our results also support various mechanisms by utilizing the data on CVC board membership, CVC investor heterogeneity, the founder’s technological background, and the investee venture’s industry.

Keywords: corporate venture capital, founder, R&D investment, knowledge spillover, entrepreneurship, corporate governance

JEL Classification: L26, M13, O3, M2, G3, D22