Acquisitions of Corporate Venture Capital Portfolio Companies

Corporate venture capitalists often invest in start-up companies to identify the right businesses to purchase later. In fact, according to David Benson of Brigham Young University and Rosemarie Ziedonis of the University of Oregon, 20 percent of acquisitions made by the companies with the largest corporate venture capital operations were in businesses that their venture capital arms had previously invested.

Benson and Ziedonis find a surprising pattern in these purchases. In a forthcoming article in Journal of Financial Economics, they report that when companies purchased startups in their venture capital portfolios, shareholder value was typically reduced by $63 million.

This didn’t happen when the companies bought businesses in which they had not invested. In these acquisitions, shareholder value typically increased by $8.5 million.

Why was shareholder value reduced when the companies purchased startups in their corporate venture capital portfolios? The authors examined whether the acquirers overbid because of competition, problems in firm governance or excessive CEO self-confidence, and didn’t find evidence to support any of these explanations.

Instead, the authors found that corporate venture capital programs housed in separate organizations tended not to experience a loss of shareholder value in their portfolio company acquisitions, but those programs housed within the main organization did. This pattern suggests that the explanation for the decline in shareholder value lies in the accuracy of the investors’ evaluations of the target companies.

Benson and Ziedonis found that the valuations of portfolio companies by autonomous corporate venturing units were less biased than those of internally housed programs and the autonomous operations did a better job monitoring investments. The authors attribute the superior approach of the more independent units to their greater exposure to deal flow and deeper finance experience.

In short, this research suggests that corporations seeking to acquire start-ups in which they make corporate venture capital investments should consider setting up their venture capital operations as independent business units.


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

4 Reactions
  1. Thanks Scott – great stuff as always!

  2. Shane,
    I always have to make sure I can spend time reading and re-reading your posts because they are always chockfull of useful nuggets. But they are heavy lifting for an early monday morning reading schedule! I’ll be curious to see how many VC types chime in!

  3. There’s a wake-up call for the VCs.

  4. Scott,

    I would think that the loss/gain of shareholder value is determined by the sales price of the company.

    If the investing/buying corporation can decrease shareholder value by paying less at the buyout – why wouldn’t they?

    Seems as if the VC’s that do a straight buyout pay a premium to the shareholders if shareholder value increases.