Entrepreneurial Finance Meets Organizational Reality: Comparing Investment Practices And Performance Of Corporate And Independent Venture Capitalists

Gary Dushnitsky and Zur Shapira

This paper investigates the effect of compensation of corporate personnel on their investment innew technologies. We focus on a specific corporate activity, namely corporate venture capital(CVC), describing minority equity investment by established-firms in entrepreneurial ventures.The setting offers an opportunity to compare corporate investors to investment experts, theindependent venture capitalists (IVCs). On average, we observe a performance gap betweencorporate investors and their independent counterparts. Interestingly, the performance gap issensitive to CVCs' compensation scheme: it is the largest when CVC personnel are awardedperformance pay. Not only do we study the association between incentives and performancebut we also document a direct relationship between incentives and the actions managersundertake. For example, we observe disparity between the number of participants in venturecapital syndicates that involve a corporate investor, and those that consist solely of IVCs. Thedisparity shrinks substantially, however, for a subset of CVCs that compensate their personnelusing performance pay. We find a parallel pattern when analyzing the relationship betweencompensation and another investment practice, staging of investment. To conclude, the paperinvestigates the three elements of the principal-agent framework, thus providing direct evidencethat compensation schemes (incentives) shape investment practices (managerial action), andultimately investors¡¦ outcome (performance).

August, 2011
Published in: 
Strategic Management Journal, 31: 990–1017 (2010)