Working Paper: CEPR ID: DP4139
Authors: Jean Etienne de Bettignies; Gilles Chemla
Abstract: We consider the motives for a firm to engage in corporate venturing. We argue that in case of failure of a new venture, corporate venture capitalists (CVC) have a strategic advantage relative to traditional venture capitalists (VC) in creating rents after rehiring or refinancing the entrepreneurs. Hence, corporate venturing induces the would-be entrepreneur to exert an effort that is higher than within the corporation, but lower than under traditional venture capital financing. Ceteris paribus, the entrepreneur ends up with fewer shares and less control under CVC financing than under traditional VC financing. Competition from venture capitalists increases corporate venturing activity, the salaries of potential entrepreneurs, and total economic output. Our results are consistent with the observed pro-cyclicality of corporate venture capital activity with venture capital activity.
Keywords: competition; corporate venture capitalist; entrepreneur; failure; manager; venture capitalist
JEL Codes: G24; G32; M12; M13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CVC (A30) | rents (R21) |
| competition (L13) | corporate venturing (L26) |
| salaries (M52) | effort (D29) |
| CVC (A30) | entrepreneurial effort (L26) |
| CVC (A30) | total returns (G12) |