Corporate Venture Capital and the Acquisition of Entrepreneurial Firms.

Abstract

This dissertation uses quantitative and qualitative methods to examine the “direct” (e.g. the effect when acquiring portfolio companies) and “indirect” (the effect on all startups the firm acquires) impact of corporate venture capital investments and the acquisition of technology startups by established firms. In the first study, I examine the acquisition of startups by 61 top CVC investors between 1987 and 2003. I find evidence that established firms use external venturing programs as a mechanism for identifying and monitoring potential acquisition targets. The strategic investors in my sample had a prior equity investment in one of every five startups they acquired in this 16-year period. Interestingly, I find that firms are more likely to destroy value acquiring startups from within their CVC portfolio (e.g. “trying before they buy”) than when acquiring startups outright. I then explore several alternate explanations for these puzzling results. Overall, the evidence suggests that value-destroying takeovers of portfolio companies stem from managerial overconfidence or agency problems at the CVC program level. I supplement the quantitative analysis with interviews with CVC managers, independent VCs, and entrepreneurs. While many of the managers I spoke with agreed that acquisitions of portfolio companies ended up destroying value, several of them made comments like, “even if we overpay for the startups we invest in first and then acquire, it is still worth it to us to stay connected to the community of startups and venture capitalists.” I explore this potential for spillover benefits in the second empirical study. Specifically, I examine the extent to which CVC investments provide information flows that can improve the firm’s acquisition performance more generally. I find that CVC investments do in fact provide a boost to acquisition performance relative to non-investors; however, this advantage dissipates quickly and is subject to diminishing returns. Contrary to my expectations, however, I do not find that acquisition returns are higher when firms’ portfolio companies are concentrated in the same industries as the startups they acquired. Instead, investments in startups in IT and life science industries increase acquisition returns (when acquiring startups in IT) by roughly the same magnitude.PhDBusiness AdministrationUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/77886/1/bensond_1.pd