Entrepreneurs and venture capitalists make investment decisions and choose the length of their involvement in a start-up to maximize the chances of success and the value of their ventures. Among other effects, these crucial decisions (investment amount, duration and exit routes, IPO or acquisition) in the lives of start-ups can be influenced by the type of venture capital funds: independent venture capital (IVC) and corporate venture capital (CVC) funds.
Unlike IVC funds, which are limited partnerships, CVC funds are subsidiaries of corporations. Such difference in the organizational structure leads to different fund characteristics. Whereas the sole objective of an IVC fund is to actualize a financial return on capital, CVC programs also care about strategic returns, such as the development of new, related business. Compared with CVC fund managers, the historical success is more important to IVC fund managers to raise additional funds. As a result, CVC fund managers are less concerned about quick exits than IVC fund managers. Because of the above-mentioned differences between CVC and IVC funds, we are interested in whether CVC- and IVC-backed start-ups would choose different investment, duration and exit strategies.
There exist conflicting evidence on the exit routes chosen by successful CVC- and IVC-backed startups in the literature. Some papers suggest that because of the CVC funds’ strategic returns, CVC-backed start-ups are more likely to exit through an acquisition than IVC-backed start-ups (Riyanto and Schwienbacher, 2006; Cumming, 2008). Other studies claim that CVC-backed start-ups exit more frequently through the IPO market than IVC-backed start-ups do (Gompers and Lerner, 2000; Chemmanur and Loutskina, 2008). In our paper, instead of focusing directly on a start-up’s decision concerning exit, we look at the direct influence of the nature of the VC on the level of investment and on the duration and identify the impact of these two channels on the exit decision.
Bing Guo, David Pérez Castrillo and Yun Lou have proposed a simple model that has been recently published in the Journal of Economics and Management Strategy. This model accounts for the high level of uncertainty regarding the returns from an investment in a start-up, the existence of private information in the hands of insiders, and the discount rates captures the characteristics of different venture capital funds. These authors test the main results of the theoretical model using data of U.S. start-ups from 1980 to 2004. Both theoretical predictions and empirical study indicate that CVC-backed start-ups receive larger investment levels and have longer durations before their exit than start-ups that only receive IVC financing. Moreover, these two consequences of the presence of CVC funds in the start-ups have opposite impacts on the likelihood of an IPO exit: the larger investment level increases the likelihood of an IPO exit whereas the longer duration increases the probability of an exit through acquisition. Once these effects are considered, the type of the VC fund has no significant influence on the exit decision.
Bing Guo is Associate Professor at UC3M Business Department