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Corporate Venture Capital: The Upside of Failure and Competition for Talent

  • Chemla, Gilles
  • de Bettignies, Jean-Etienne

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4139.

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Date of creation: Dec 2003
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Handle: RePEc:cpr:ceprdp:4139
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  1. Jean-Etienne de Bettignies, 2008. "Financing the Entrepreneurial Venture," Management Science, INFORMS, vol. 54(1), pages 151-166, January.
  2. Faure-Grimaud, Antoine & Gromb, Denis, 2000. "Public Trading and Private Incentives," CEPR Discussion Papers 2505, C.E.P.R. Discussion Papers.
  3. Lerner, Josh, 1995. " Venture Capitalists and the Oversight of Private Firms," Journal of Finance, American Finance Association, vol. 50(1), pages 301-18, March.
  4. Hellmann, Thomas, 2002. "A theory of strategic venture investing," Journal of Financial Economics, Elsevier, vol. 64(2), pages 285-314, May.
  5. Klaus Schmidt, 1999. "Convertible Securities and Venture Capital Finance," CESifo Working Paper Series 217, CESifo Group Munich.
  6. Chemla, Gilles & Habib, Michel Antoine & Ljungqvist, Alexander P., 2002. "An Analysis of Shareholder Agreements," CEPR Discussion Papers 3457, C.E.P.R. Discussion Papers.
  7. Lazear, Edward, 2003. "Entrepreneurship," IZA Discussion Papers 760, Institute for the Study of Labor (IZA).
  8. Paul A. Gompers, 2002. "Corporations and the financing of innovation: The corporate venturing experience," Economic Review, Federal Reserve Bank of Atlanta, issue Q4, pages 1-17.
  9. Gromb, Denis & Scharfstein, David, 2002. "Entrepreneurship in Equilibrium," CEPR Discussion Papers 3652, C.E.P.R. Discussion Papers.
  10. Thomas Hellmann, 2007. "When Do Employees Become Entrepreneurs?," Management Science, INFORMS, vol. 53(6), pages 919-933, June.
  11. Black, Bernard S. & Gilson, Ronald J., 1998. "Venture capital and the structure of capital markets: banks versus stock markets," Journal of Financial Economics, Elsevier, vol. 47(3), pages 243-277, March.
  12. Berglof, Erik, 1994. "A Control Theory of Venture Capital Finance," Journal of Law, Economics and Organization, Oxford University Press, vol. 10(2), pages 247-67, October.
  13. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
  14. Paul A. Gompers & Josh Lerner, 1998. "The Determinants of Corporate Venture Capital Successes: Organizational Structure, Incentives, and Complementarities," NBER Working Papers 6725, National Bureau of Economic Research, Inc.
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