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EMBRACING THE SHARKS; THE IMPACT OF INFORMATION DISCLOSURE ON CVC INVESTMENTS. Ali Mohammadi Royal Institute of Technology ( KTH) Pooyan Khashabi Ludwig-Maximilians-Universität (LMU ) The Institute for Management and Planning Studies (IMPS) Tehran, August 31st 2016. Introduction.
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EMBRACING THE SHARKS;THE IMPACT OF INFORMATION DISCLOSURE ON CVC INVESTMENTS Ali Mohammadi Royal Institute of Technology (KTH) Pooyan Khashabi Ludwig-Maximilians-Universität (LMU) The Institute for Management and Planning Studies (IMPS) Tehran, August 31st 2016
Introduction • Financial resources are extremely essential to navigate tech startup from infancy to profitability. A popular option venture capitals (VCs)
Introduction • Financial resources are extremely essential to navigate tech startup from infancy to profitability. A popular option venture capitals (VCs) • Independent VCs: financial resources and advice • Corporate VCs: financial resources, industry endorsement, relevant human capital & complementary assets. • One would expect CVC to be a more attractive option compared to IVC. • The above has not been observed in business venturing. Some scholars have suggested the misappropriation concern as a potential reason (swimming with sharks syndrome).
Swimming With Sharks: The Misappropriation Concern “Our (external) investment strategy of the last few years is an explicit acknowledgment that Microsoft has no great lock on innovative ideas.” Greg Maffei, CFO of Microsoft (Taptich, 1998) “Microsoft was the one large company in the world I really feared. I did not like the idea of giving them early warning of what we were up to.” Charles Ferguson, founder of Vermeer Technologies Inc. (Ferguson, 1999)
This Study • Does misappropriation concern impact the business venturing? How? • How does information disclosure (hold up) affect CVC investment?
Glimpse of Results • Swimming with sharks concern matters through information hold-up. • Informational disclosure of startups’ technology increases: • Likelihood of CVC-startup match • Hazard rate of CVC-startup match • Size of CVC- startup deal • The above results are more pronounced where information assymetry is more sever.
Venture Capital Investors IVC CVC Provides funding and additional services. Contracts a porportion of fututre generated profit. Strategic objective, window to new technology(Benson and Ziedonis, 2009; Dushnitsky and Lenox, 2006) Even more important compared to startups’ financial return (Alter and Bachsbaum, 2000, Siegel and MacMillan, 1988; Yost and Devlin, 1993). Swimming with sharks syndrome. • Provides funding. • Contracts a proportion of future generated profit. • Financial objective, startups’ financial return. • No conflict of interest. • Information advantage
American Inventor’s Protection Act (AIPA) 1999 • Prior to AIPA (1999), patent information was publicly disclosed, only after the patent was granted. • Submarin patenting (Graham and Hegde, 2015) • AIPA required all the patent applications filed in the US to be laid open for public inspection, 18 monthsafter the initial filing date – i.e. even if the patent was not granted.
American Inventor’s Protection Act (AIPA) 1999 Informationdisclosed From Hegde & Luo. 2016
American Inventor’s Protection Act (AIPA) 1999 • Just the first office action for a patent application will take more than 17 months on average, and each patent would go through an average of 2.5 office actions for the final decision . • Total patent pendencyis around 35-40 months (USPTO Online Data Dashboard, 2015).
AIPA: Who was impacted? Different Industries • Transparentvs. Non-transparent industries (Cohen et al., 2000) • Patents are financially significant, because the process of generating rent through them is transparent thorough patent information. • patent filing happens primarily for value appropriation motives (e.g. biotech). • Patent information in transparentindustries is relevant for rent appropriation and could be misappropriated by CVCs (Heeley, Matusik and Jain, 2007) . • AIPA impacts transparent industries. Different VC Investors • Startups are more comfortablesharing their key technological information with VCs compared to CVCs(Dushnitsky and Lenox, 2006) • AIPA impacts CVCs.
CVC investment and AIPA • Supply side(CVC): • The information asymmetry reduces much more for CVC compared to IVC. • Demand side effect (startup): • Refraining from the collaboration with CVCs would no longer protect the startup’s technology. • Non-funding corporates would also access their technological information. • It would be a more beneficial for a startup to collaborate with CVCs to protect the technology with CVCs complementary resources.
Data • Venture capital investment in US between 1995- 2006 (VentureXpert). • At least one VC or CVC in round of investment • Exclude all investments in non-high tech. • 38,286 rounds of investment in 14,418 startups.
Variables • Dependet variable: • CVC deal dummy (matching) • Hazard of CVC deal (match timing) • Round size (quality of start-up) • Independent Variables: • AIPA (after 2000) • Transparent (“Biotechnology/ Medical/ Health/ Life Science”) vs. Other • Transparent1 (“Biotechnology”) vs. (“Software”) • Controls: • Syndication size, #venture per startup, successful exit, stock market, location, year & industry FE, etc.
Model specification • Deal_CVCij= β0+ β1 AIPAt+ β2Transparenti+β3Transparenti×AIPAt+βZijt + Yt+ εijt • Clustered errors around startup.
Placebo test: fake shock • Fake shock: after 1999 (instead of 2000)
UK Venturing Sample • Similar treatment & control group for startups in UK.
Conclusion • The results shows that an exogenous shock in disclosure information increases likelihood, Hazard, and size of CVC-startup match. • Our findings confirm a strong impact of misappropriation concern on the investor-startup relation through information hold-up channel. • Evidence for the positive impact of the shock on startups’ resource access. • Future direction: • Optimality of the shock? • Startups making mistake?
