Entrepreneurial Finance Meets Organizational Reality: Comparing Investment Practices and Performance of Corporate and Independent Venture Capitalists

Strategic Management Journal, Forthcoming

51 Pages Posted: 27 Aug 2009 Last revised: 13 Jan 2015

See all articles by Gary Dushnitsky

Gary Dushnitsky

London Business School; University of Pennsylvania - Management Department

Zur Shapira

Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Management and Organizational Behavior

Date Written: August 26, 2009

Abstract

This paper investigates the effect of compensation of corporate personnel on their investment in new technologies. To that end, we focus on a specific corporate activity, namely Corporate Venture Capital (CVC), describing minority equity investment by established firms in entrepreneurial ventures. The setting offers an opportunity to compare corporate investors to investment experts, the independent VCs. On average, we observe a performance gap between corporate investors and their independent counterparts. Interestingly, the performance gap is sensitive to CVCs’ compensation scheme: it is the largest when CVC personnel are awarded performance-pay (e.g., carried interest). Not only do we study the association between incentives and performance, but also we document a direct relationship between incentives and the actions managers undertake. For example, we observe disparity between the number of participants in venture capital syndicates that involve a corporate investor, and those that consist solely of independent VCs. The differences persist after controlling for numerous factors including CVC’s objectives. The disparity shrinks substantially, however, for a subset of CVC programs that compensate their personnel using performance-pay. We find a parallel pattern when analyzing the relationship between compensation and another investment practice, staging of investment. To conclude, the paper investigates the three elements of the principal-agent framework thus providing direct evidence that compensation schemes (incentives) shape investment practices (managerial action) and ultimate investors’ outcome (performance).

Keywords: Principal-Agent, Incentives, Corporate Venture Capital, Corporate Entrepreneurship

Suggested Citation

Dushnitsky, Gary and Shapira, Zur, Entrepreneurial Finance Meets Organizational Reality: Comparing Investment Practices and Performance of Corporate and Independent Venture Capitalists (August 26, 2009). Strategic Management Journal, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1462432

Gary Dushnitsky (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

HOME PAGE: http://faculty.london.edu/gdushnitsky/index.html

University of Pennsylvania - Management Department ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States

Zur Shapira

Leonard N. Stern School of Business - Department of Economics ( email )

40 West Fourth Street, 7-06
New York, NY 10012
United States

New York University (NYU) - Department of Management and Organizational Behavior ( email )

44 West 4th Street
New York, NY 10012
United States

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