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Studies Suggest Companies Learn From the Startup Firms in Which They Invest

Companies benefit most when they use their corporate venture capital funds "to harness novel technology" developed by startups, not to seek a huge return on investment.

Companies enjoy far greater success when they invest corporate venture capital in startup firms for strategic reasons rather than for narrow financial returns, according to a new series of reports by professors at Duke University and the Wharton School of the University of Pennsylvania.

In a three-part series of research papers, Michael Lenox, a management professor at Duke's Fuqua School of Business, and Gary Dushnitsky, a management professor at the Wharton School, analyzed nearly 2,300 publicly traded technology firms over a 25-year period. They found that companies benefit the most when they use their corporate venture capital (CVC) funds "to harness novel technology" developed by startups, not to seek a huge return on investment.

The research cites Dell, Microsoft and Cisco as examples of the many companies that have invested millions of dollars in venture capital over the last decade. The studies examine the extent to which venture capital investments by such established companies have actually created value for them. The papers specifically focus on how companies can boost their value through technology-oriented investments that supplement their own innovative efforts.

In the lead article of the November 2006 Journal of Business Venturing, titled "When Does Corporate Venture Capital Investment Create Firm Value?," the authors propose that CVC funds have generally produced mixed results because of differences in investment approaches. Some companies look only for direct financial returns on investment while others seek indirect strategic benefits as well. Lenox and Dushnitsky found that for most companies the best investments are those that advance their overall technology strategy.

In the first paper of the series, "When Do Incumbents Learn from Entrepreneurial Ventures?" (published in the June 2005 issue of the journal Research Policy), the researchers found companies that strategically invest corporate venture capital realize increases in their innovation rates and, in particular, their patenting output. These increases are more pronounced in industries with weaker intellectual property protection and in firms with a tradition of research and development (R&D) spending and innovation. In particular, companies in the devices, semiconductor and computer sectors score when they invest in firms trying out new technologies.

The other paper, "When Do Firms Undertake R&D by Investing in New Ventures?" (published in the October 2005 issue of Strategic Management Journal), focuses on the factors that spur established companies to boost their innovative efforts by investing in fresh startups. The research suggests large companies that invest in new ventures pursuing technologies related, but not identical, to their own stand to gain the most from CVC investments. In addition, CVC investments occur more frequently in industries with weak intellectual property protection and high technological ferment. Plus, the greater a company's financial assets, the more likely it is to pursue venture capital investments.

"This research clearly shows that often the greatest benefit of CVC investment is to provide a window into novel technologies that ultimately helps advance the corporation's overall technology strategy," Lenox said.