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

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  • J.E. 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.
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Suggested Citation

  • J.E. de Bettignies & Gilles Chemla, 2003. "Corporate Venture Capital: The Upside of Failure and Competition for Talent," THEMA Working Papers 2003-45, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  • Handle: RePEc:ema:worpap:2003-45
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    File URL: http://www.u-cergy.fr/IMG/documents//2003-45Chemla.pdf
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    References listed on IDEAS

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    1. Thomas Hellmann, 2007. "When Do Employees Become Entrepreneurs?," Management Science, INFORMS, vol. 53(6), pages 919-933, June.
    2. 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.
    3. Jean-Etienne de Bettignies, 2008. "Financing the Entrepreneurial Venture," Management Science, INFORMS, vol. 54(1), pages 151-166, January.
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    Cited by:

    1. Hirsch, Julia & Walz, Uwe, 2006. "Why do contracts differ between VC types? Market segmentation versus corporate governance varieties," CFS Working Paper Series 2006/12, Center for Financial Studies (CFS).
    2. Pascal François & Georges Hübner, 2010. "A Portfolio Approach to Venture Capital Financing," Cahiers de recherche 1046, CIRPEE.

    More about this item

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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