Why Corporations invest in Start-ups
The Bachelor thesis of Felix Leonard Stamm and Nicolas Rix sheds light on how large corporations can gain strategic resources from investments into start-ups. Research has previously shown that most corporations do not profit financially from corporate venture capital investments, which has shed doubt on the usefulness of such activities. However, Felix and Nicolas show that corporations might not invest into start-ups for financial reasons rather than to gain new knowledge and insights about a market. What the students found was that such benefits require a relationship between the investing corporation and the start-up—otherwise investments might fall short of the expected strategic outcomes. The thesis makes an important contribution to the strategic management literature.
A lot of people associate innovation with start-ups – many cool, new ideas and concepts have indeed originated in start-ups and young firms. While established, larger corporations have their in-house R&D units, these business units often work much slower than a lean start-up that can operate with less hierarchical structures and corporate machinery behind it. So, one might be wondering how corporations can keep up with start-ups when it comes to innovation?
One answer to this question can be found in corporate venture capital (CVC). CVC investments are minority stake equity investments by large, established corporations into young, small, entrepreneurial ventures, called portfolio firms. These investments are done by designated CVC units, which often operate with a substantial amount of autonomy. While other investors (such as those you can see on Shark Tank or Dragon’s Den) are mainly interested in the financial returns of their investments, CVC units commonly operate with a different objective: they are interested in the strategic returns. While this may sound abstract at first, it simply means that they are interested in anything that can be valuable from a strategic aspect for the corporation. We set out in our Bachelor Thesis to investigate the process through which strategic value can be created for the corporations.
Almost all major corporations nowadays have CVC units, through which they attempt to get insight into start-ups, the so-called portfolio firms. The creation of strategic value (basically the generation of knowledge for the corporation) is much more complex than it sounds, though. Corporations cannot simply invest in a start-up and get immediate access to the information they are interested in – that would be theft. Our thesis builds a framework that can serve as a tool for managers to access the knowledge they want in start-ups and turn CVC investments into success stories. The key finding is, that the role of relationships has been overlooked so far and that personal relationships and mutual benefits are much more important than assumed. CVC investors should not act as ‘sharks’, but instead build an environment that facilitates voluntary knowledge sharing and a mutually beneficial relationship.