Entrepreneurial finance meets organizational reality: comparing investment practices and performance of corporate and independent venture capitalists
Article first published online: 8 MAR 2010
Copyright © 2010 John Wiley & Sons, Ltd.
Strategic Management Journal
Volume 31, Issue 9, pages 990–1017, September 2010
How to Cite
Dushnitsky, G. and Shapira, Z. (2010), Entrepreneurial finance meets organizational reality: comparing investment practices and performance of corporate and independent venture capitalists. Strat. Mgmt. J., 31: 990–1017. doi: 10.1002/smj.851
- Issue published online: 6 JUL 2010
- Article first published online: 8 MAR 2010
- Manuscript Revised: 18 FEB 2010
- Manuscript Received: 20 AUG 2007
- Kauffman Junior Faculty Fellowship
- principal-agent framework;
- corporate entrepreneurship;
- venture capital
This paper investigates the effect of compensation of corporate personnel on their investment in new technologies. We focus on a specific corporate activity, namely corporate venture capital (CVC), describing minority equity investment by established-firms in entrepreneurial ventures. The setting offers an opportunity to compare corporate investors to investment experts, the independent venture capitalists (IVCs). On average, we observe a performance gap between corporate investors and their independent counterparts. Interestingly, the performance gap is sensitive to CVCs' compensation scheme: it is the largest when CVC personnel are awarded performance pay. Not only do we study the association between incentives and performance but we also document a direct relationship between incentives and the actions managers undertake. For example, we observe disparity between the number of participants in venture capital syndicates that involve a corporate investor, and those that consist solely of IVCs. The disparity shrinks substantially, however, for a subset of CVCs that compensate their personnel using performance pay. We find a parallel pattern when analyzing the relationship between compensation and another investment practice, staging of investment. To conclude, the paper investigates the three elements of the principal-agent framework, thus providing direct evidence that compensation schemes (incentives) shape investment practices (managerial action), and ultimately investors' outcome (performance). Copyright © 2010 John Wiley & Sons, Ltd.