Corporations and the financing of innovation: The corporate venturing experience

During the past forty years, the media and academics have frequently maligned corporate investments in venture capital and highlighted visible failures. Many corporations' best ideas have languished, whether because of internal resistance or an inability to execute on the initial insight. In other cases, more nimble companies, often venture-backed start-ups, have turned corporations' innovative ideas into commercial successes. So how can companies best stimulate innovation in a corporate setting and replicate the success of the venture capital industry? ; This article explores the history, structure, and performance of corporate venture programs in the United States over the past forty years. The study shows that the U.S. corporate venture capital market has gone through three waves of activity that track the overall independent venture capital market. ; The author's analysis, using detailed microlevel data, finds that corporate venture investments are increasingly made in related industries. In addition, contrary to previous assumptions, corporate venture capital investments have, on average, been more successful than independent venture capital investments. This success is exclusively associated with strategic corporate venture investments. This study concludes that corporations appear to be learning many of the best practices from the independent venture capital sector.Venture capital ; Productivity ; Technology ; Economic development

Conflict of Interest in the Issuance of Public Securities: Evidence from Venture Capital

In this paper we investigate potential conflicts of interest in the issuance of public securities in a setting analogous to a universal bank, i.e., the underwriting of initial public offerings by investment banks that hold equity in a firm through a venture capital subsidiary. We contrast two hypotheses. Under anticipate the conflict. The suggests that investment banks are able to utilize superior information when they underwrite securities. The evidence supports the rational discounting hypothesis. Initial public offerings that are underwritten by affiliated investment banks perform as well or better than issues of firms in which none of the investment banks held a prior equity position. Investors do, however, require a greater discount at the offering to compensate for potential adverse selection. We also provide evidence that investment bank-affiliated venture firms address the potential conflict by investing in and subsequently underwriting less information-sensitive issues. Our evidence provides no support for the prohibitions on universal banking instituted by the Glass-Steagall Act of 1933.

What Drives Venture Capital Fundraising?

We examine the determinants of venture capital fundraising in the U.S. over the past twenty-five years. We study industry aggregate, state-level, and firm-specific fundraising to determine if macroeconomic, regulatory, or performance factors affect venture capital activity. We find that shifts in demand for venture capital appear to have a positive and important impact on commitments to new venture capital funds. Commitments by taxable and tax-exempt investors seem equally sensitive to changes in capital gains tax rates that decreases in capital gains tax rates increase the demand for venture capital as more workers are incented to become entrepreneurs. Aggregate and state level venture fundraising are positively affected by easing of pension investment restrictions as well as industrial and academic R&D expenditures. Fund performance and reputation also lead to greater fundraising by venture organizations.

The Really Long-Run Performance of Initial Public Offerings: The Pre-NASDAQ Evidence

Financial economists in recent years have closely examined and intensely debated the performance of initial public offerings using data after the formation of NASDAQ. The paper seeks to shed light on this controversy by undertaking a large, out-of-sample study: we examine the performance for up to five years after listing of nearly 3,661 initial public offerings in the United States from 1935 to 1972. The sample displays some evidence of underperformance when event-time buy-and-hold abnormal returns are used. The underperformance disappears, however, when cumulative abnormal returns are utilized. A calendar-time analysis also shows that over the entire sample period i.e., from 1935 to 1976 IPOs return as much as the market. Finally, the intercepts in CAPM and Fama-French three-factor regressions are insignificantly different from zero suggesting no abnormal performance.

Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures, 1986-1999

This paper examines the factors that lead to the creation of venture capital backed start-ups, a process we term entrepreneurial spawning.' We contrast two alternative views of the spawning process. In one view, employees of established firms are trained and conditioned to be entrepreneurs by being exposed to the entrepreneurial process and by working in a network of entrepreneurs and venture capitalists. Alternatively, individuals become entrepreneurs because the large bureaucratic companies for which they work are reluctant to fund their entrepreneurial ideas. Controlling for a firm's size, patent portfolio and industry, we find that the most prolific spawning firms were public companies located in Silicon Valley and Massachusetts that were themselves once venture capital backed. Less diversified firms are also more likely to spawn new firms. Spawning levels for these firms rise as their sales growth declines. Firms based in Silicon Valley and Massachusetts and originally backed by venture capitalists are more likely to spawn firms only peripherally related to their core businesses. Overall, these findings appear to be more consistent with the view that entrepreneurial learning and networks are important factors in the creation of venture capital backed firms.

Institutions, Capital Constraints and Entrepreneurial Firm Dynamics: Evidence from Europe

We explore the impact of the institutional environment on the nature of entrepreneurial activity across Europe. Political, legal, and regulatory variables that have been shown to impact capital market development influence entrepreneurial activity in the emerging markets of Europe, but not in the more mature economies of Europe. Greater fairness and greater protection of property rights increase entry rates, reduce exit rates, and lower average firm size. Additionally, these same factors also associated with increased industrial vintage a size-weighted measure of age and reduced skewness in firm-size distributions. The results suggest that capital constraints induced by these institutional factors impact both entry and the ability of firms to transition and grow, particularly in lesser-developed markets.