Unlocking Value from Startups’ Ties to Established Firms: The Role of the Entrepreneurs’ Background

Sarath Balachandran, London Business School

Abstract: Evidence on whether startups benefit from corporate venture capital investment is equivocal. Research suggests that the principal impediment to value creation in these relationships for startups is the complexity of the larger organization – the varying incentive structures, layers of bureaucracy and convoluted decision-making processes that limit their access to valuable resources. I examine whether the backgrounds of the entrepreneurs may influence the ability of the startups to navigate this complexity and unlock value from these relationships. I focus in particular on experience working in an established firm in the same industry, and find that startups whose entrepreneurs have more of this type of experience are more likely to translate their CVC relationships into alliances with the established firm aimed at development or commercialization of their technologies. This effect is heightened if the established firms’ employees managing these relationships have a background in R&D, thus enabling them to connect the entrepreneurs to the critical decision makers with respect to alliance formation. However, I also find that more experience working at established firms among entrepreneurs is associated with a narrowing of the technological distance between the startup and the established firm post-investment, i.e. the startup becomes technologically more like the established firm. This effect is also heightened by the presence of investment managers from R&D backgrounds, but is alleviated if the entrepreneurs themselves have more prior founding experience. Through these findings, the study contributes to research on entrepreneurship, innovation and corporate venture capital.

Read the full working paper here (PDF).

Michelle Eckert is Marketing and Communications Coordinator for the Mack Institute, where she works to engage students, researchers, and corporate partners in opportunities for collaboration. Michelle received her B.A. in Art from Valparaiso University in 2007. Her background includes two AmeriCorps terms of service working to teach mathematics, computer literacy, and job readiness skills to out-of-school youth in Philadelphia, focusing particularly on promoting access to post-secondary education.