Entrepreneurial finance meet organizational reality: Comparing investment practices by corporate and independent venture capitalists

This paper investigates the relationship between the compensation of corporate personnel and their investment in new technologies. To that end, we focus on a specific corporate activity, namely Corporate Venture Capital (CVC, describing minority equity investment by established firms in entrepreneurial ventures). The setting offers an opportunity to compare corporate practices to those of investment experts, the independent VCs. We observe disparity between the number of participants in venture capital syndicates that involve a corporate investor, and those that consist solely of independent VCs. The differences persist after controlling for numerous factors including CVC's objectives. The disparity shrinks substantially, however, for a subset of CVC programs that compensate their personnel using performance-pay (e.g. carried interest). We find a parallel pattern when analyzing the relationship between compensation and another investment practice, staging of investment. These empirical patterns provide direct evidence that compensation schemes critically shape the risk preferences of corporate personnel and hence affect the investment practices they undertake. We conjecture that the deviation from VCs' 'best practice' is due mainly to idiosyncratic corporate compensation schemes.