Venture Capital: Innovation, Exit and Failure Tolerance

Abstract

This thesis explores various issues of venture capital (VC) investment and innovation in portfolio companies. The thesis consists of three essays to answer the following research questions: Is there any difference in innovation output between public-parent and private-parent corporate venture capital (CVC) backed IPO firms? Are innovative portfolio companies more likely to go public than be acquired? Is CVCs' failure tolerance associated with the characteristics of corporate parents? The first essay examines whether there is any difference between innovation performance in IPO firms backed by public-parent and private-parent CVCs. I find that IPO firms backed by public-parent CVCs are as innovative as those backed by private-parent CVCs. With my sample, I further confirm the finding of the previous literature that IPO firms backed by CVCs are more innovative than those backed by independent venture capitals (IVCs). Although different types of VC firms select different entrepreneurial firms in which to invest, and may have different treatment abilities, my propensity score matching analyses based on observable firm characteristics show that public-parent and private-parent CVCs have similar treatment effects on innovation in IPO firms. The second essay studies the impact of portfolio companies' pre-exit innovation on VC exit choices by comparing the innovation output of portfolio companies through different VC exits (IPOs and M&As). Using a sample of VC-backed companies in the US with their patent-based metrics (using PATSAT database), I find that more innovative companies are associated with a higher probability of exits through IPOs than through M&As. The identification strategy exploits plausible exogenous sources of variation in state R&D tax credits which affect portfolio companies' incentives to innovate and addresses the endogenous problem with two-stage least square instrumental variable models. My results are also robust to control for a variety of factors and different samples and subsamples. In conclusion, the analysis reveals that the degree of innovation is an important driver in VC exit choices. The third essay examines whether CVCs' failure tolerance is associated with characteristics of corporate parents. Using a sample of CVC-backed portfolio companies receiving their first VC investment for the period from 1980 to 2016 that ultimately failed in the US, I find that CVCs are more failure tolerant when a strategic fit exists between corporate parents and portfolio companies. I also find that CVCs with parents that are more capital constrained, that take fewer risks, that have lower corporate social responsibility (CSR) performance and that have less institutional ownership are more failure tolerant. In addition, CVCs are more failure tolerant when they have more previous investments and more foreign syndicators and when they invest in younger ventures with more capital.

Date of Award	1 Aug 2018
Original language	English
Awarding Institution	The University of Manchester
Supervisor	Susanne Espenlaub (Supervisor) & Arif Khurshed (Supervisor)