Startups’ co-innovation outcomes depend on venture capitalist type, study finds

LAWRENCE — Venture capitalists are professional investors who fund startups in exchange for equity stakes. But it’s not just the amount of money they provide that can determine success.

“The impact that investors have on startups’ innovative outcomes also depends on the type of those investors,” said Kaushik Gala, assistant professor of management & entrepreneurship at the University of Kansas.

That aspect is explored in his new article titled “Social and knowledge brokerage by venture capitalists and co-patenting by portfolio startups.” It finds that independent venture capitalists (IVCs) tend to trigger more frequent, less impactful but more novel co-inventing outcomes by their portfolio startups. On the other hand, corporate venture capitalists (CVCs) tend to trigger less frequent, more impactful but less novel inventive outcomes. The article is published in Venture Capital.

“You can think of independent venture capitalists like mutual funds, but instead of investing money in shares of public companies, they invest money in privately held startups,” said Gala, who cowrote the article with Haemin Dennis Park of the University of Texas at Dallas and Michael Howard of Iowa State University.

“Corporate VCs are also investors, but they are usually the investment arm of a large corporation. So imagine Intel having Intel Capital or Google having Google Ventures. They have two interests: One is, of course, trying to make money. But more importantly is they strategically invest in startups as a way to create value for the parent company.”

Gala said that it’s hard to quantify which VC is “better” for a startup.

“If you take money from an independent venture capitalist, they’re motivated to help you by making connections and bringing you references to customers,” he said.

“With corporate VCs, like Intel Capital, they are going to largely invest in companies that have something to do with Intel’s business. So if you’re a startup operating in an industry which has nothing to do with Intel, then that’s not an option for you.”

The CVCs’ investment strategy is instead going to be driven by the agenda of the parent company, Gala said. Therefore they may have not only more constraints on what they can and cannot invest in, but they may also want a bigger say in some aspects of the startup.

Much of this is influenced by the type of industry involved.

“If I start a restaurant, there probably won’t be any corporate VCs. But if I start a semiconductor or AI company, there might be corporate VCs,” he said.

Among his most surprising findings, Gala discovered that if two startups have a common IVC, they are more likely to co-patent than if they have a common CVC.

“We also found if you have an IVC who has invested in two startups, their innovations are more likely to be novel but less impactful, whereas the opposite is true if two startups have a common CVC,” he said.

In this study, Gala and his co-authors focused on the semiconductor industry. They collected data on 677 startups that received funding from several IVCs and CVCs during 2000-2014. Using additional data from the U.S. Patent and Trademark Office, they conducted a dyadic analysis between pairs of all possible startups to predict the likelihood of co-patenting and its subsequent effect on the novelty and impact of co-innovations by startup firms.

They determined novelty through cooperative patent classification (CPC) codes. If a patent featured at least a pair of CPC codes that had never before been seen together, that was considered novel. Impact was determined by whether and how often somebody else cited the patent once it was published (which is called a forward citation).

“I hope this paper motivates future research to not just look at startup investors as a broad bucket but to separate out the types of investors when looking at co-innovation outcomes,” said Gala, whose entrepreneurship research typically focuses on star performers, digital platforms and performance distributions.

“Especially in a complex technological world, nobody really innovates in isolation. People collaborate with each other; innovations build on top of prior work.”

From a practical point of view, Gala suggests another takeaway for those entrepreneurs thinking of launching a startup.

“When a corporate VC invests in a startup, our findings suggest that they are less likely to connect their investee to other companies in their portfolio. This implies that founders of CVC investees should proactively reach out to other investees of the same investor,” he said.

“On the other hand, if a startup gets money from an independent VC, they may be coming up with novel innovations through collaboration with fellow investees, but are these patents really going to be impactful?”