Thursday, December 7, 2017

Minimally Invasive Investment: How Ventures Interact with Investment Partners

Of the many kinds of new businesses that are created every year, researchers and policy makers have been most interested in the ones that pursue innovative technologies and market opportunities. They are the ones with the greatest impact on the world, and much effort has gone into studying what makes them innovative. But let’s take a broader view on this question. What if firms around them also affect their innovation – specifically their investment partners, firms that supply them with money and expect returns from their innovations? The answer would be especially interesting if different investment partners had different effects. And as it turns out, they do.

An article in Administrative Science Quarterly by Emily Cox Pahnke, Riitta Katila, and Kathleen Eisenhardt shows how this happens. The important difference is how each organization doing investment has people trained in specific ways, and adhering to specific norms, as a result of their recruitment and career histories. For innovative ventures, venture capital (VC) firms are special because they invest in potential – in firms that could easily fail, and usually do, but have very significant profits when they succeed. VCs are different from sources of corporate venture capital (CVC), which are investment arms of corporations. They are special because they invest in fit to the corporate strategy – firms that develop products and technologies that match so well that they can become integrated into the corporation or at least use its resources well. Then there is the third kind of special investor—government agencies. They are special because they are interested in science and technology with significant societal impact.

Pahnke, Katila, and Eisenhardt looked at what happened to ventures after receiving funding from each of these sources by examining a specific high-technology industry—medical device firms developing products for minimally invasive surgery. The results were clear. The commercially oriented VC investors were good at exactly that. Their firms launched more products after the investment but did not get more patents approved after the investment. The strategically oriented CVC partners were not good at anything that could be measured independently of their strategy. No more patents were approved, and no more products were launched. That does not mean they weren’t good investors, because they could well have selected and improved the strategic fit of their firms. The government was not good at product development, having no effect there, and appeared to harm patenting, with a reduction in patents after entering the investment. That seems bad—but it is actually unclear, because government may be interested exactly in the type of scientific development that is useful for society but hard to turn into patents that give commercial benefit.

So what is going on here? We can tell that one type of investment partner – VCs – has clear and measurable goals and is good at accomplishing them. For CVC and governments, it is harder to tell. Either they are not doing well, or their goals are not exactly what we can measure. Looks like an interesting topic for further research, because each of these investment partners places big bets on our future.

Pahnke, Emily Cox, Riitta Katila, and Kathleen M Eisenhardt.2015. "Who takes you to the dance? How partners’ institutional logics influence innovation in young firms." Administrative Science Quarterly 60(4):596-633.

No comments:

Post a Comment