Job Market Paper

Scholars and business professionals advocate inter-organizational partnerships as a key strategy for knowledge acquisition. This paper explores the limitations to such strategy by studying the conditions under which partnerships with innovative firms do not materialize. In the context of Corporate Venture Capital (i.e., equity investment in entrepreneurial ventures by established corporations), I advance that many investment relationships between a corporation and an entrepreneur are not formed because the corporation is not interested in investing unless the entrepreneur discloses her innovation, and the entrepreneur is wary of doing so, fearing imitation. I conjecture that the corporate investor is likely to exploit entrepreneurial disclosure when (1) the entrepreneurial innovation is a potential substitute of corporate products, and (2) corporate business units manage the investment activity. Under these conditions the entrepreneur is least likely to disclose information and consequently the probability of an investment relationship decreases. An empirical study of venture capital investments in U.S. ventures during the 1990s yields consistent results. The findings underscore a paradox of corporate venture capital. For example, corporations often view their investment activity as an early alert system, providing a window on novel and potentially substituting entrepreneurial technologies, however the results suggest that such entrepreneurs are least likely to seek corporate funding.