The Darkside of Corporate Venture Capital:A Theoretical Framework

Key Points

Investment in startups by corporate venture capital can lead to idea misappropriation, especially under weak intellectual property rights.
Startups tend to avoid investors with valuable complementary assets when investment amount is low relative to project value.
The model underscores how private benefits for investors, like learning opportunities, can mitigate misappropriation risks.
Balancing investor benefits with protection strategies is essential for successful startup-investor partnerships.

Abstract

This paper develops a theoretical model where a startup seeks financing from an investor in order to develop an idea into a commercial project. Investors that possess valuable complementary assets can contribute the most to the success of the startup but also have the strongest incentives to misappropriate the idea. The startup chooses not to contract with such investors when (i) IPRs and other protection mechanisms are weak, and (ii) the initial upfront investment is limited relative to the value of the project. Large private benefits to the investor, e.g., in the form of learning benefits, decrease misappropriation incentives and result in better matches between startups and investors

The Darkside of Corporate Venture Capital:A Theoretical Framework

Key Points

Abstract

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