Technology Analysis & Strategic Management

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When are ‘sharks’ beneficial? Corporate venture

capital investment and startup innovation
performance

Ji-Hoon Park & Zong-Tae Bae

To cite this article: Ji-Hoon Park & Zong-Tae Bae (2017): When are ‘sharks’ beneficial? Corporate
venture capital investment and startup innovation performance, Technology Analysis & Strategic
Management, DOI: 10.1080/09537325.2017.1310376

To link to this article: http://dx.doi.org/10.1080/09537325.2017.1310376

Published online: 05 Apr 2017.

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TECHNOLOGY ANALYSIS & STRATEGIC MANAGEMENT, 2017
http://dx.doi.org/10.1080/09537325.2017.1310376

When are ‘sharks’ beneficial? Corporate venture capital

investment and startup innovation performance
Ji-Hoon Park and Zong-Tae Bae
College of Business, Korea Advanced Institute of Science and Technology (KAIST), Seoul, Republic of Korea

ABSTRACT ARTICLE HISTORY

The effect of corporate venture capital (CVC) investment on startup Received 2 June 2016
innovation performance has been examined in the extant literature. Revised 9 March 2017
However, when this effect is enhanced is the important but relatively Accepted 14 March 2017
understudied question in strategy and entrepreneurship research. We
KEYWORDS
build on the idea of regarding CVC investment relationships as learning Corporate venture capital;
alliances and introduce two situational factors as boundary conditions startup innovation
on the performance effect of CVC investment. In order to handle the performance; learning
endogeneity of CVC investment, we employ propensity score matching alliance; investment timing;
and differences-in-differences techniques. Based on the sample of patent signalling
startups in the human biotechnology industry in the United States, we
find that CVC funding is beneficial for startup innovativeness when CVC
investment is established after initial independent venture capital
funding. Moreover, a startup’s patent stock before CVC funding also
influences on that effect.

1. Introduction
Innovation, by which firms create new combinations using their own (or obtained) resources, is
essential for startups in high-technology industries to create the capabilities needed for growth
(Stam and Wennberg 2009). Thus, startups need innovation to build organisational structures and
capabilities and also to make revenue-producing new combinations with limited resources. Of
those limited resources, financial ones are the most fundamental and crucial for innovation as well
as for ordinary operating activities. Studies have found that venture capital firms play an important
role as sources of financial resources for startups and heavily impact on startups’ strategy formation
and firm performance (Hellmann and Puri 2000).
Studies of the relationship between venture capital firms and startups focus on when their
relationship is established, how venture capital firms affect startup activities, and whether venture
capital firms have a positive (negative) impact on startup performance. Many scholars have investi-
gated the effect on startups of corporate venture capital (CVC) funds, minority equity investments
made by established firms in entrepreneurial ventures (Maula 2007). Although numerous scholars
examined when startups build CVC investment relationships (e.g. Dushnitsky and Lenox 2005a;
Dushnitsky and Shaver 2009; Katila, Rosenberger, and Eisenhardt 2008), the empirical research on
the performance effect of those investments on startups’ innovation had ensued in recent days
(Alvarez-Garrido and Dushnitsky 2016; Chemmanur, Loutskina, and Tian 2014; Pahnke, Katila, and
Eisenhardt 2015; Park and Steensma 2013).
This study examined the performance effect of CVC investments on startup innovation and the
boundary conditions by which that effect is enhanced. Concerning those boundary conditions, we

CONTACT Ji-Hoon Park jihoonpark@kaist.ac.kr College of Business, Korea Advanced Institute of Science and Technology
(KAIST), 85 Hoegi-ro, Dongdaemun-gu, Seoul 02455, Republic of Korea
© 2017 Informa UK Limited, trading as Taylor & Francis Group
2 J.-H. PARK AND Z.-T. BAE

investigated the moderating effect of two situational factors regarded as determinants of the CVC–
startup relationship in prior studies (Katila, Rosenberger, and Eisenhardt 2008; Park and Steensma
2013): the timing of the CVC investment and the patent stock of the startup prior to the CVC invest-
ment. Since the parent firms of CVCs and startups can learn from each other, we regard CVC invest-
ment relationships as ‘learning alliances’ (Hamel, Doz, and Prahalad 1989). Since both startups and
parent firms of CVC funds in the biotechnology industry have incentives to learn from partners
through the investment relationships, we chose the human biotechnology industry in the United
States as our empirical setting. Our results provide insights for management scholars and entrepre-
neurs seeking to understand the performance effect of CVC funding on startups.

2. Theoretical background and hypotheses

2.1. Types and roles of venture capital firms
Since startups are under severe resource constrains, financing for innovation greatly influences their
scaling up and improvements in organisational productivities. Thus, startups seek to raise financial
resources in various ways, such as through angel investments, venture capital investments, and
initial public offerings (IPO).
Venture capital funding is startups’ representative mean of obtaining financial resources through
relationships with established firms. Venture capital firms can be roughly categorised into two types:
independent venture capital (IVC) firms and CVC firms. IVC fund consists of a private partnership
using financing from relatively large institutions, such as pension funds, which invest in high-risk
and high-return startups (Sahlman 1990) and usually support startups’ strategic and operational plan-
ning processes and provide them with financial resources (Hellmann and Puri 2002). CVC fund is an
equity investment in startups by established firms for corporate venturing (Sharma and Chrisman
1999) and is established as corporate investment vehicles in firms or independent investment
funds (Dushnitsky and Lenox 2006). Their parent firms provide financial resources for CVCs to
invest and exert influence on their investment decisions (Gompers and Lerner 2000).
Parent firms operate CVCs to achieve the firms’ strategic objectives, while IVC firms aim to realise
financial gains (Benson and Ziedonis 2009; Dushnitsky and Shaver 2009; Maula 2007). The CVCs’ stra-
tegic objectives are learning, finding strategic alternatives, and exploiting the parent firms’ existing
resources.
In this study, we mainly focus on the influence of CVCs, rather than IVCs, since a CVC’s parent firm
can provide more various resources beyond those that IVCs can provide, such as research labora-
tories, manufacturing facilities, and technological knowledge as a result of mutual learning
between a CVC’s parent firm and a startup.

2.2. Startups’ strategic alliances with established firms through CVC investment
relationship
The investments of CVCs influence startups as well as their parent firms. At first, CVC investments can
accelerate their parent firms’ innovation. Prior research revealed that CVC investments increase the
parent firms’ innovation rate (Dushnitsky and Lenox 2005b) and also facilitate knowledge creation
in parent firms (Wadhwa and Kotha 2006). In addition, it is shown that CVC investments are associ-
ated with the firm value of parent firms (Dushnitsky and Lenox 2006) and those investments seem to
have an effect on parent firms’ financial performance (Allen and Hevert 2007).
Studies have also found that startups can benefit from CVC funding. A CVC investment relation-
ship provides startups with the parent firms’ knowledge of technologies and markets as well as finan-
cial resources, manufacturing facilities, research laboratories, and various kinds of complementary
assets such as legal support for patent applications (Dushnitsky and Lenox 2005a; Katila, Rosenberger,
and Eisenhardt 2008).
 TECHNOLOGY ANALYSIS & STRATEGIC MANAGEMENT 3

However, the parent firms’ and startups’ strategic objectives may conflict since the objective of
CVC funds is maximising the firm value of the parent organisation (Zahra and Allen 2007). For
example, parent firms may try to misappropriate investees’ intellectual properties through CVC
investment relationships (Alvarez and Barney 2001). Thus, CVC investment is a double-edged sword
for startups, and they face a demanding tension when seeking alliances with CVCs (Katila, Rosenber-
ger, and Eisenhardt 2008). Startups can obtain various kinds of resources from the parent firms of
CVCs, but they may simultaneously be exposed to the risk of having resources misappropriated by
parent firms behaving as ‘sharks’.
Although many researchers examined the determinants of CVC investment relationships (e.g.
Diestre and Rajagopalan 2012; Hallen, Katila, and Rosenberger 2014; Katila, Rosenberger, and Eisen-
hardt 2008), the empirical research on the effect of those investments on startups’ innovation per-
formance had proceeded recently (Alvarez-Garrido and Dushnitsky 2016; Chemmanur, Loutskina,
and Tian 2014; Pahnke, Katila, and Eisenhardt 2015; Park and Steensma 2012, 2013). However,
these studies did not address much about when CVC funding is more beneficial to startups. Although
several boundary conditions for CVC funding benefits were examined in previous studies, their find-
ings are limited. First, these studies cannot fully explain the consequences of startups’ partner selec-
tions, one of the key issues in this research stream (Diestre and Rajagopalan 2012; Katila, Rosenberger,
and Eisenhardt 2008). Second, although some studies examined the effect of CVC funding on start-
ups’ innovation performance, few of the boundary conditions of that effect have been investigated.
We, therefore, analyse not only the performance effect of CVC funding per se but also the mod-
erating effects of some of the factors that have not yet been considered but that have significant
impacts on the formation of CVC investment relationships.

2.3. CVC investment relationship as learning alliance

Prior scholarship has revealed that CVCs act as a window to new technologies for their parent firms
and seek to learn novel technologies and knowledge (Benson and Ziedonis 2009; Dushnitsky and
Lenox 2005a). In this investment relationship, startups can also learn from the parent firms of
CVCs (Dushnitsky and Shaver 2009). Hence, we can regard this relationship as a ‘learning alliance’
(Hamel 1991; Hamel, Doz, and Prahalad 1989) since CVCs’ parent firms and startups can learn from
each other, which is a kind of mutual learning. Hamel (1991) claimed that participants of this learning
alliance can improve their capabilities through inter-partner learning. This kind of learning alliance is
known to accelerate participants’ capability development and mitigate the uncertainties of exploiting
external knowledge (Lane and Lubatkin 1998). Thus, we infer that startup innovation will be affected
by alliances with CVCs through mutual learning between CVCs’ parent firms and startups.
Empirical evidence indicates the positive performance effect of CVCs on startups’ innovation (e.g.
Alvarez-Garrido and Dushnitsky 2016). The key logical basis of this finding is that CVCs differ from IVCs
in many ways, such as the objectives and horizons of their investments, their capabilities, their avail-
able complementary assets, and the mutual learning that exists between the parent firm of CVCs and
the startup (Bertoni, Colombo, and Grilli 2013; Dushnitsky and Shaver 2009). Since we can regard a
CVC investment relationship as a learning alliance, startups can be expected to improve their inno-
vation performance by obtaining additional resources (e.g. technological knowledge) conducive to
innovation from the CVCs’ parent firms. Hence, we propose the following:
Hypothesis 1: CVC-backed startups exhibit higher innovation performance than IVC-backed startups.

However, the beneficial effect of CVC investment can be enhanced or mitigated by some situa-
tional factors due to the strategic tension between CVC firms and startups. As mentioned above,
parent firms mainly use CVC investment as a strategic tool for identifying new technologies or exter-
nal research and development (R&D) (Sykes 1990). Thus, the strategic objectives of CVC funds can be
in conflict with startups and CVC funds may expropriate the outcomes of startups’ innovation activi-
ties (Dushnitsky and Shaver 2009; Katila, Rosenberger, and Eisenhardt 2008).
4 J.-H. PARK AND Z.-T. BAE

In this study, we consider two situational factors which are related to the strategic tension
between CVC funds and startups. One is the investment timing of CVC funding, which is considered
as a defence mechanism for startups (Katila, Rosenberger, and Eisenhardt 2008). The other is the
patent stock of startups before CVC funding, which can be a potential bargaining tool for startups
in the formation of CVC investment relationships (Adegbesan and Higgins 2011).

2.4. The influence of investment timing on CVC investment relationships

If a CVC investment relationship can be regarded as a learning alliance, we can infer that the for-
mation of CVC investments later will be more beneficial to startups.
As suggested by prior studies, startups’ technology tends to be more mature later (Sahlman 1990);
it is thus expected that their understanding of their own technologies is also more advanced by then.
In other words, they might know the kinds of additional technological knowledge needed to accom-
plish innovation more effectively. According to prior literature, firms’ innovation process entails a
resource-intensive search for new commercially exploitable combinations of knowledge (Stuart
and Podolny 1996), leading them to collaborate with and draw knowledge from many outside
actors (Laursen and Salter 2006). Thus, startups can boost their innovation more by forming CVC
investment relationships later since they can gain more suitable and valuable additional technologi-
cal knowledge from the CVCs’ parent firms, making their innovation more effective. We thus propose
the following:
Hypothesis 2: The benefit of CVC funding to startup innovation performance is greater when a CVC investment
relationship is established later.

2.5. Patent stock as a bargaining ability in CVC investment relationships

Prior scholarship has suggested that patent stocks can signal the quality of their owner firms to the
market (Long 2002). In startup financing, the patent stock can indicate the owner firm’s innovative
capabilities to outside investors since ‘the quality of young companies often cannot be observed
directly’ (Stuart, Hoang, and Hybels 1999, 317).
Given the signalling effect of patent stocks, we expect that startups with them will benefit more
from CVC funding than will those without them.
As we regard the CVC investment relationship as a learning alliance, startups’ alliance with CVC
funds is also a kind of strategic alliance, a voluntary arrangement ‘between firms involving exchange,
sharing, or co-development of products, technologies, or services’ (Gulati 1998, 293). Since strategic
alliances involve more than two participants, how much of the value created in a focal alliance can be
appropriated is a key issue (Coff 1999). After Lippman and Rumelt (2003), the bargaining perspective
was applied to the strategic factor market (SFM) theory (Barney 1986) by Adegbesan (2009), in which
acquiring firms exhibit heterogeneous complementarity to target resources. Adegbesan (2009) for-
mally suggested that, all other things being equal, the amount of value an acquirer can appropriate
hinges on the joint effects of the relative scarcity, relative complementarity, and relative bargaining
ability.
If we regard the entrepreneurial financing market as an SFM, the parent firms of CVCs can be seen
as firms seeking to acquire valuable resources and startups can be regarded as resource (i.e. novel
technology) providers. Since CVC funds are used as a window on new technologies by parent
firms, it is enormously important for them to assess the quality of potential partners such as startups.
In this situation, CVCs will prefer startups with patents since they do signal of their innovative capa-
bilities through them (Hsu and Ziedonis 2013). Therefore, a startup with patents will appropriate more
of the value created in a focal alliance than will a startup without patents when a CVC investment
relationship is established because of its relatively strong bargaining ability. In the same vein, Adeg-
besan and Higgins (2011) empirically proved that biotechnology firms with patents maintain more
 TECHNOLOGY ANALYSIS & STRATEGIC MANAGEMENT 5

‘pie-sharing’ (PS) control rights – which confer ownership and control over activities and intermediate
outputs that directly affect the allocation of the value created by an alliance – than do those without
patents.
In summary, startups with patents will have a relative bargaining advantage in CVC investment
relationships. Thus, they will enhance their innovation processes more than will those without
patent stocks because the amount of the value (i.e. technological knowledge) created in CVC alliances
that the startups can appropriate will be much larger. Consequently, we propose the following:
Hypothesis 3: The benefit of CVC funding to startup innovation performance is greater when a startup had
patents before a CVC investment relationship is established.

3. Methods
3.1. Research setting and sample
Our sample consists of VC-funded biotechnology startups in the United States found through the
Thomson One database. We used the database to gather all available VC transaction data in our
research periods.
The biotechnology industry in the United States is an ideal research setting for our tests. First, it is
one of the largest VC investment sectors in the United States (National Venture Capital Association
2014). Second, CVC investment relationships with startups are commonly observed in the biotechnol-
ogy industry (Diestre and Rajagopalan 2012; Katila, Rosenberger, and Eisenhardt 2008). Third, based
on the characteristics of the industry, we can regard CVC investment relationships as learning alli-
ances in accordance with our assumption. Startups are regarded as a major source of innovation
in this industry (Rothaermel and Thursby 2007; Zucker, Darby, and Armstrong 2002). Thus, startups
as well as parent firms of CVCs need to learn from partners for their innovation activities through
CVC investment relationships. Finally, we measure startup innovation performance by the number
of patent applications, and the biotechnology sector, in which patenting is especially important to
the appropriation of innovation (e.g. Levin et al. 1987), is thus a suitable context for examining
how VC funds influence the innovation performance of startups.
The sample consists of startups in the human biotechnology industry (Standard Industrial Classi-
fication codes 2833–2836; Aggarwal and Hsu 2014), constrained by their treatment year because of
the availability of the Harvard Patent Network Dataverse (Li et al. 2014) used to construct the depen-
dent variable (i.e. the number of patent applications). We excluded startups that had no information
about the amount of the investments in a certain round or were bankrupted or merged. For startups
that went public, we included only those that did not go public until three years after first receiving
CVC funding because we investigated the performance effect of CVC funding three years after the
initial CVC funding. The final sample consisted of 762 VC-backed biotechnology startups.

3.2. Empirical approaches: propensity score matching method and differences-in-

differences approach
The main concern in evaluating the performance effect of CVC funding is constructing a reliable com-
parison sample group. Unfortunately, it is not possible to observe counterfactual cases in most social
science research, including our own. It is also assumed that the formation of a CVC investment
relationship is endogenous (Diestre and Rajagopalan 2012; Katila, Rosenberger, and Eisenhardt
2008). Thus, we address this empirical issue by using propensity score matching (Rosenbaum and
Rubin 1983), recently introduced to management studies (e.g. Chang, Chung, and Moon 2013;
Chang and Shim 2015). This method can approximate randomisation by balancing observable charac-
teristics and identifying the proper control group (Becker and Ichino 2002). Also, the method is
known to estimate the unbiased causal effect under the assumption of ignorability (Rosenbaum
and Rubin 1983). In our study, the treatment group, CVC-backed startups, consists of startups that
6 J.-H. PARK AND Z.-T. BAE

either received CVC funding as their first VC investment or initially received IVC funding and entered a
CVC investment relationship later. And we consider IVC-backed startups as the control group, which
consists of startups that received only IVC funding in our sample period.
To construct the treatment and control groups, we calculated the propensity score as the pre-
dicted probability of treatment (i.e. whether the startup received CVC funding or not). We calculated
the propensity score with variables used as indicators of the formation of CVC investment relation-
ships in previous studies: the startup’s age, the cumulative number of patents the startup has
applied for, the number of VC funds the startup has received, and the total amount of all investment
types, including VC funds. We also included industry fixed effects using four-digit industry codes and
year fixed effects in the prediction model for CVC funding. We then matched the startups in the CVC-
backed group with the comparable startups in the IVC-backed group using the teffects psmatch
command in STATA 13.1 According to Dehejia and Wahba (2002), it is important to evaluate how
well the matching samples are balanced. We thus conducted balancing tests to ensure that the start-
ups in both groups were not statistically different from each other.
With these matching samples, we employed the difference-in-differences approach to compare
the innovation performances of the two groups. The difference-in-differences method allows us to
eliminate the effects of firm-specific unobservable characteristics across periods. We compared inno-
vation performance changes between the treatment and control groups from the year of the first CVC
funding (i.e. the treatment period t) through to three years afterwards. We adopted the formula of the
average treatment effect on the treated (ATT), where the subscript k represents each consecutive year
after the first CVC funding, similar to Chang and Shim (2015) (see below). We then employed a simple
t-test to verify the statistical significance of the accumulated difference between the treatment and
control groups:
1

ATTk = (Innovation PerformanceTreated
t+k − Innovation PerformanceControl
t+k )
n
1

− (Innovation PerformanceTreated
t − Innovation PerformanceControl
t ).
n
We then empirically tested our main hypothesis, concerning the performance effect of CVC
funding on startup innovation, by using these empirical approaches.
For the two other hypotheses about the boundary conditions of the CVC funding effect, we inves-
tigated whether the performance effect of CVC funding would be stronger in the corresponding sub-
groups. To construct the subgroup used to test the second hypothesis, we limited our treatment
group to the startups that did not receive CVC funding as their first VC funding. The treatment
group used for the third hypothesis consisted of the startups which applied for at least one patent
until the year previous to their first CVC funding (i.e. t−1).

3.3. Measures
We used the number of patents the startup applied for, a common measure of innovation outcomes
(e.g. Aggarwal and Hsu 2014; Chemmanur, Loutskina, and Tian 2014), as our measure of innovation
performance. As the biotechnology industry is technology-intensive, innovation has a significant
meaning for it, and, as startups have a strong desire to boost their innovation outcomes, patents
are a good measure of innovation in this industry (Rothaermel and Thursby 2007; Stuart, Hoang,
and Hybels 1999; Zucker, Darby, and Armstrong 2002). To construct this dependent variable, we
merged our dataset from the Thomson One database with the Harvard Patent Network Dataverse
(Li et al. 2014). The Harvard Patent Network Dataverse holds information only on patents granted
up to 2010. Thus, we restricted our sample by excluding startups whose treatment year is after
2004 because the average patent allowance lag is about 3 years (Gans, Hsu, and Stern 2008).
We included indicators to predict whether the startup would receive CVC funding with reference
to the related literature (e.g. Chemmanur, Loutskina, and Tian 2014; Park and Steensma 2012). First,
 TECHNOLOGY ANALYSIS & STRATEGIC MANAGEMENT 7

we added firm age to control for the maturity effect of the startups on the formation of the CVC
investment relationship (Kazanjian and Drazin 1990). We also included several variables that reflect
a startup’s quality. To reflect technological quality (i.e. potential competency), the cumulative
number of patents the startup applied for was included because the patent stock can signal startups’
quality to investors prior to receiving VC funding (Hsu and Ziedonis 2013; Stuart, Hoang, and Hybels
1999). We also added two other ex-post proxies for startups’ overall quality: the number of VC funds
the startup received, the total amount of all investment types the startup obtained, and whether the
startup was funded by programmes which are affiliated with the government.
To calculate propensity scores, we lagged the variable of the cumulative number of startups’
patents by one year to clarify causal relationships.

4. Results
Table 1 provides the descriptive statistics and pairwise correlations of the variables included in the
probit analysis of CVC funding.
Table 2 displays the results of the probit model for the formation of a CVC investment relationship.
As Table 2 shows, the startup’s age has a negative relationship with the formation of a CVC invest-
ment relationship (r = −0.045, p < .01), indicating that the older the startup is, the less likely it is to
receive funding from a CVC. The number of VC investors who invested in the startup has a signifi-
cantly positive relationship with CVC investment (r = 0.072, p < .01), and the startup’s experiences
of receiving funding from government-affiliated programmes also have a positive relationship
with CVC funding (r = 0.829, p < .01). These results suggest that the higher the overall quality
of the startup, the more likely it is to receive CVC funding. However, the patent stock of the
startup until the year previous to CVC funding are negatively associated with the formation of the
CVC investment relationship, but it is not statistically significant. Using the results of the probit
models in Table 2, we calculated the propensity scores for the formation of the CVC investment
relationship to compose control groups for the innovation performance comparison after receiving
CVC funding.
Table 3 displays the results of the performance comparison between the CVC-backed and corre-
sponding IVC-backed startups. As seen in the summary results of the hotelling tests in the last row of
Table 3(a,b,c), the matching samples were verified as being well balanced. Table 3(a) displays the
results of the difference-in-differences estimates (i.e. ATTs) of the innovation performance for the
whole sample. This matching procedure generated 149 matches (N = 298) for CVC-backed startups.
The results show that there is no significant difference between the two groups within three years
after CVC funding. Thus, we found no support for Hypothesis 1. This result is somewhat intriguing
because previous studies showed that CVC funding has a positive effect on investees’ innovation
(e.g. Alvarez-Garrido and Dushnitsky 2016; Park and Steensma 2013). We discuss later the impli-
cations of this result along with the empirical results of two other hypotheses.

Table 1. Descriptive statistics and correlations.

Variables Mean sd Min Max 1 2 3 4 5 6
1. CVC Funding 0.195 0.396 0 1 1.00
2. Firm age (t) 4.206 6.338 1 91 −0.079* 1.00
3. Cumulative number of patents (until 2.179 26.411 0 595 −0.018 0.023 1.00
t-1)
4. Number of VC investors (t) 4.342 3.321 1 24 0.196 −0.073* −0.002 1.00
5. Total amount of all kinds of 8.235 14.950 0.017 225 0.116* 0.186* −0.015 0.276* 1.00
investments (Mil) (t)
6. Funding from government-affiliated 0.027 0.163 0 1 0.139* 0.002 −0.009 0.103* 0.027 1.00
programmes (t)
Note: N = 762.
∗Correlation coefficient is statistically significant at the 5% level.
8 J.-H. PARK AND Z.-T. BAE

Table 2. Probit model of CVC funding.

Dependent variable: CVC funding
Firm age (t) −0.045∗∗∗
(0.017)
Cumulative number of patents (until t−1) −0.004
(0.004)
Number of VC investors (t) 0.072∗∗∗
(0.018)
Total amount of all kinds of investments (Mil) (t) 0.006
(0.004)
Funding from government-affiliated programmes (t) 0.829∗∗∗
(0.304)
Time gaps between first IVC funding and first CVC fundinga Included
Year fixed effects Included
Industry fixed effects Included
McFadden’s pseudo R 2 0.144
Log likelihood 107.54∗∗∗
Observations 742b
Notes: Standard errors are in parentheses.
a
We include samples in the treatment groups that received CVC funding after receiving IVC funding first.
b
When estimating the probit models, we had to drop some observations because the observations in several periods predicted
failure (i.e. not-CVC-funded) perfectly.
∗p < .10, ∗∗p < .05, ∗∗∗p < .01. Two-tailed tests.

Next, we investigated whether the performance effect of CVC funding on startup innovation
depends on the factors expected to have substantial impacts on the formation of CVC investment
relationships, as proposed in Hypotheses 2 and 3. Table 3(b) shows that startups that received
CVC funding later have positive ATTs for all three periods. This result is consistent with Hypothesis

Table 3. Innovation performance of CVC-backed startups and IVC-backed startups.

(a) CVC-backed startups: Whole sample (Hypothesis 1)
Variables: Innovation performance Whole sample
Year t t+1 t+2 t+3
CVC-backed startups 0.563 0.798 0.865 0.939
IVC-backed startups 0.228 0.476 0.697 0.966
ATT −0.013 −0.167 −0.362
S.E. 0.154 0.219 0.315
# Matches 149 149 149
Hotelling test for balancing F-value = 0.392 P > F = 0.853
(b) CVC funding timing (Hypothesis 2)
IVC funding as the first VC funding and
Variables: Innovation performance CVC funding as a first VC funding CVC funding later
Year t t+1 t+2 t+3 t t+1 t+2 t+3
CVC-backed startups 0.361 0.361 0.425 0.446 0.925 1.574 1.555 1.814
IVC-backed startups 0.170 0.553 0.425 0.638 1.092 0.944 0.925 1.129
ATT −0.382 −0.234 −0.382 0.796* 0.796* 0.851*
S.E. 0.271 0.195 0.244 0.410 0.436 0.438
# Matches 94 94 94 54 54 54
Hotelling test for balancing F-value = 1.038 P > F = 0.396 F-value = 0.891 P > F = 0.489
(c) Patent stocks before CVC funding (Hypothesis 3)
Variables: Innovation performance Without patent stocks With patent stocks
Year t t+1 t+2 t+3 t t+1 t+2 t+3
CVC-backed startups 0.135 0.423 0.593 0.677 2.193 2.225 1.903 1.935
IVC-backed startups 0.220 0.415 0.788 0.830 0.935 1.645 0.741 0.580
ATT 0.093 −0.110 −0.067 −0.677 −0.096 0.096
S.E. 0.117 0.171 0.185 0.661 0.742 0.610
# Matches 118 118 118 31 31 31
Hotelling test for balancing F-value = 1.486 P > F = 0.207 F-value = 0.355 P > F = 0.876
∗p < .10, ∗∗p < .05, ∗∗∗p < .01. Two-tailed tests.
 TECHNOLOGY ANALYSIS & STRATEGIC MANAGEMENT 9

2, suggesting that the benefit of CVC funding to startup innovation is enhanced only when startups
receive CVC funding later. As Table 3(c) shows, ATTs are insignificant in both matched subsamples.
This result does not confirm Hypothesis 3, which predicts that startups with patents before CVC
funding will benefit more from CVC investment relationships.

4.1. Additional analysis

In addition, we investigated the effect of startups’ patent stock on the performance effect of CVC
funding by dividing the sample into four groups through two conditional factors, the investment
timing of CVC and the patent stock of startups. The same empirical procedure, propensity score
matching and differences-in-differences, was applied for this additional analysis. Table 4 shows the
results of the performance comparison between the CVC-backed and corresponding IVC-backed
startups and the matching groups were in fact well balanced. Interestingly, although ATTs are par-
tially significant in subsamples, the results indicate startups with patents before CVC funding
benefit less from CVC investment relationships, which is contrary to Hypothesis 3. We discuss the
implications of these results later in the discussion section.

5. Discussion
This paper evaluates the performance effect of CVC funding on startup innovation and identifies
some of the boundary conditions by which that effect is improved. Our results show that CVC-
backed startups do not outperform in innovation, which is not consistent with the results of previous
empirical studies. We also detect that the performance effect of CVC funding on startup innovation
improves when the CVC investment relationship is established later, whereas the patent stocks of
startups have no significant influence on that effect.
As for the results of additional analysis about the effects of startups’ patent stock on the perform-
ance effect of CVC funding, we found out the contrary evidence of Hypothesis 3. In fact, the argument
of Hypothesis 3 is based on the assumption in which participants in CVC relationships tend to
compete on the value created in those relationships. However, many scholars have highlighted on
the other side of an alliance based on ‘social exchange’ perspectives such as social embeddedness

Table 4. Innovation performance of CVC-backed startups and IVC-backed startups (additional analysis).
(a) CVC funding as a first VC funding
CVC funding as a first VC funding
Variables: Innovation performance Without patent stocks With patent stocks
Year t t+1 t+2 t+3 t t+1 t+2 t+3
CVC-backed startups 0.038 0.207 0.363 0.402 1.812 1.125 0.750 0.687
IVC-backed startups 0.025 0.103 0.246 0.311 0.812 1.812 2.375 0.125
ATT 0.090 0.103 0.077 −1.687** −2.625** −0.437
S.E. 0.088 0.119 0.152 0.751 1.112 0.629
# Matches 77 77 77 77 16 16 16 16
Hotelling test for balancing F-value = 0.258 P > F = 0.904 F-value = 1.638 P > F = 0.185
(b) IVC funding as the first VC funding and CVC funding later
IVC funding as the first VC funding and CVC funding later
Variables: Innovation performance Without patent stocks With patent stocks
Year t t+1 t+2 t+3 t t+1 t+2 t+3
CVC-backed startups 0.325 0.850 0.925 1.225 2.642 3.642 3.357 3.5
IVC-backed startups 0.125 0.275 0.425 0.500 3.357 6.285 7.428 11.5
ATT 0.375 0.300 0.525 −1.928 −3.357 −7.285**
S.E. 0.244 0.335 0.383 1.771 2.007 3.458
# Matches 40 40 40 40 14 14 14 14
Hotelling test for balancing F-value = 1.380 P > F = 0.248 F-value = 1.708 P > F = 0.174
∗p < .10, ∗∗p < .05, ∗∗∗p < .01. Two-tailed tests.
10 J.-H. PARK AND Z.-T. BAE

(Granovetter 1985) and relational contracting (Macneil 1980). In the context of learning alliances,
effective knowledge transfer and learning heavily relies on the extent to which participants share
information and knowledge with each other since the essential knowledge which is to be exchanged
is usually tacit and socially embedded in specific relations (Granovetter 1985). Thus, firms have dual
incentives in a learning alliance: competing to appropriate the value created in an alliance, cooperat-
ing for mutually beneficial learning. In this respect, we can infer that although a startup with patent
stocks can maintain more control rights in learning processes in CVC relationships (Adegbesan and
Higgins 2011), the incentive of parent firms of CVCs to commit their resources might diminish in this
situation – since the amount of the value created in CVC relationships that they can appropriate may
be relatively smaller than that of those who have relationships with startups without patent stock. On
the other hand, as Table 4 shows, startups backed by IVC firms and with patent stocks before VC
funding exhibit higher innovation performance than those backed by CVC firms and patent stocks
before VC funding. Based on the dual aspects of incentives in learning alliances, we infer that startups
and IVC firms compete less and cooperate more because IVC firms have no parent firm and thus there
is little conflict of strategic objectives between startups and IVC firms. In other words, startups and IVC
firms are more likely to cooperate to create value through investment relationships rather than to
compete for the outcomes of startups’ innovation activities.

6. Conclusion
6.1. Theoretical implications
First, we shed light on two previously little-known entrepreneurial finance issues (Diestre and Raja-
gopalan 2012): whether CVC investments exert a positive effect on startups’ innovation performance
and how that effect is moderated by situational factors in startups’ CVC investment decisions.
Although some studies have tried to determine the performance effect of CVC funding on startup
innovation (e.g. Alvarez-Garrido and Dushnitsky 2016; Park and Steensma 2013), our research is
the first (to our knowledge) to examine not only the performance effect of CVC funding on
startup innovation per se but also the influence of situational factors, regarded as determinants of
CVC investment relationships, on that effect. Interestingly, our results show that CVC funding per
se does not have any significant effect on startup innovation, though our study sample is limited
to biotechnology startups. On the other hand, the performance effect of CVC funding on startup
innovation appears to depend on situational factors in CVC investment relationships. Hence, our
study provides implications for organisational learning and innovation research, as its results indicate
that the determinants of CVC funding may also alter CVC funding’s influence on startups’ innovation
outcomes. In addition, we empirically contribute to the literature by employing two recently intro-
duced methods, the propensity score matching and the differences-in-differences approach, to
examine the performance effect of CVC funding on startup innovation in a more rigorous manner.

6.2. Practical implications

Our study also offers implications for entrepreneurs seeking funding from CVC firms. A startup’s
decision about CVC funding has been called the ‘sharks dilemma’ (Diestre and Rajagopalan 2012;
Katila, Rosenberger, and Eisenhardt 2008) since CVC firms, the ‘sharks’, may play a dual role in invest-
ment relationships with startups: they are attractive resource providers but are likely to misappropri-
ate startups’ resources, such as valuable ideas and novel technological knowledge. This paper can
help entrepreneurs understand the benefits of CVC funding for firm innovation. Specifically, based
on the results of our study, it is recommended for entrepreneurs of startups to receive other types
of investment first (e.g. IVC funding) and CVC funding later. Also, if they are supposed to receive
investments from CVC funds, they had better receive CVC investments when they have no
patents, rather than when they have patents.
 TECHNOLOGY ANALYSIS & STRATEGIC MANAGEMENT 11

6.3. Limitations and future research directions

First, the generalisability of our findings may be limited. Although using biotechnology startups as a
sample in our research is appropriate for many reasons, our results are most meaningful for firms in
the biotechnology industry. Future research might apply our approaches to different industries, such
as the medical device industry.
Second, although we employed the propensity score matching and the differences-in-differences
approach for empirical rigour, our results have some weaknesses. Hypothesis 2 is supported on a rela-
tively low significance level (p < .10) and several analyses was implemented with the low number of
matches, 16 and 14 in Table 4(a,b), respectively. Also, the cumulative number of patents startups
applied for as an indicator of the formation of CVC investment relationships in the probit models
can be somewhat limited. For instance, we cannot tease out the differences in innovation outcomes
among startups in the case of the equal number of patents they applied for. Thus, future research
needs to consider other innovation activities or outcomes that are relevant for the CVC investors
in different stages of the commercialisation process.
Third, we cannot strongly argue that we considered all of the complexity of the CVC investment
relationship in this paper. Like previous studies (Diestre and Rajagopalan 2012; Katila, Rosenberger,
and Eisenhardt 2008; Park and Steensma 2012), we implicitly assumed that startups have substantial
discretion in selecting their funding sources in this research. However, it may be inadequate to
examine startups’ decisions on CVC funding and their effect on innovative performance unless the
complexity of CVC investment relationships is fully considered. Thus, future studies for a better under-
standing of the complex relationships between CVCs and startups are needed. Those future studies
may examine potential reasons why CVC investments do or do not enhance innovation performance
in different situations and contexts.

Note
1. In our treatment group, we have two kinds of startup, those that received CVC funding as their first VC investment
and those that received IVC funding first and then obtained CVC funding later. Thus, we estimated the propensity
scores for the two subgroups (see Table 2).

Notes on contributors
Ji-Hoon Park completed his Ph.D. in Management Engineering (Organization and Strategy Area) at Korea Advanced Insti-
tute of Science and Technology (KAIST). His research interests include technology innovation management, entrepre-
neurship, and strategic management. His work appears in peer-reviewed journals, including the Research Policy and
Technology Analysis and Strategic Management.
Zong-Tae Bae is professor at KAIST (Korea Advanced Institute of Science and Technology) College of Business.

ORCID
Ji-Hoon Park http://orcid.org/0000-0001-7075-8114

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