Exploration and Resource Commitments in Unequal Partnerships: An Examination of Corporate Venture Capital Investments
While established firms' relationships with external ventures may have significant strategic benefits, the realization of such benefits is fraught with considerable uncertainty. The real options and interorganizational learning literatures present an interesting trade-off for established firms regarding commitment of resources in a partnership. This study seeks to enhance our understanding of how firms manage these trade-offs when committing resources to external venturing initiatives. We examine the magnitude of resources initially committed by an established firm to an external venturing partnership in the context of corporate venture capital (CVC) investments. While a real options approach suggests that resource commitments should be lowered in the presence of uncertainty regarding realization of benefits, the interorganizational literature emphasizes that resource commitments may be essential for building quality relationships that expedite learning. Corporate investors, who invest in new ventures in order to gain strategic benefits, face higher uncertainty when their investment objectives involve greater exploration. However, greater exploration also increases investors' need to learn from their portfolio ventures. We, therefore, predicted that the degree of exploration would have a U-shaped relationship with the investor's resource commitment in a venture. We also expected that factors that serve to decrease the investor's uncertainty, i.e., investor experience diversity and venture affiliation to prominent venture capitalists, would moderate the U-shaped relationship between exploration and resource commitment. The predictions of the study are tested on a sample of 248 initial investments in private ventures made by incumbent firms in the computer, semiconductor, and telecommunications industries between 1996 and 2000. We find some support for our hypotheses. This study contributes to the external venturing literature on CVC investments by examining the determinants of the magnitude of resource commitment to new ventures, and integrates real options perspective, which advocates low resource commitments under uncertainty, with the organizational learning literature, which argues for greater resource commitment to secure partner cooperation. The results of this study reveal interesting insights into how CVC investors manage individual investments to generate strategic benefits.