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.
