From Pitch to Portfolio: The Role of Startup Accelerators in Reshaping Corporate VC Strategy
Overview: In a paper titled, “Startup Accelerators, Information Asymmetry, and Corporate Venture Capital Investments,” NYU Stern Professor Raveesh Mayya and co-author Professor Peng Huang (University of Maryland) explore how the presence of startup accelerators reshapes Corporate Venture Capital (CVC) investment patterns.
Why study this now: Originating in the 1960s, CVC investments have grown significantly in recent years and account for nearly a fourth of all U.S. venture deals. Unlike independent VC firms which focus solely on financial returns, Corporate VCs, typically setup as the VC investment arm of established corporations, balance financial and strategic objectives. One of the strategic objectives is seeking early exposure to emerging technologies which may disrupt mature industries and unseat well-established players.
The strategic objective of CVCs is best achieved by investing in a diverse startup space, including portfolio companies that are moderately distant from the business of a CVC’s parent company because they bring novel knowledge to the table. However, there is a lack of information about early-stage startups that may aid venture capitalists in their decision making, a major challenge that prevents CVCs from investing in a truly diversified portfolio. The recent emergence of startup accelerators, programs designed to provide mentorship, funding, and networking to early-stage startups and quickly propel them towards success, has shown promise to help CVCs mitigate the information barriers.
What the study found: The authors show that after a startup accelerator enters a region, CVCs tend to increase their investments in startups that are dissimilar to their parent company's core business. Interestingly, this effect is almost entirely driven by CVCs whose parent corporation belongs to an IT-using industry (like Exxon) rather than those whose parent belongs to an IT-producing industry (like Microsoft). The study also identifies two main ways accelerators contribute to this change:
- Mentorship and training: Accelerators offer guidance and development, helping startups better communicate their value proposition.
- Quality signals: Accelerators essentially provide a “stamp of approval,” signaling that a startup has been vetted and possesses high potential.
What does this change: Historically, CVCs often stuck to less risky ventures whose business is highly aligned with their own due to limited information. However, accelerators can help cut through information barriers by their rigorous screening, mentorship, and signals of quality. The resulting high-quality information allows CVCs to move capital into unfamiliar and novel technologies which are crucial for strategic growth. In this regard, accelerators particularly benefit companies in traditional industries undergoing digital transformation, assisting them venture into the digital technology space that they would otherwise lack specialized expertise evaluating.
Key insight: “These results provide a more comprehensive understanding of startup accelerators’ impact on the entrepreneurial ecosystem. Beyond attracting more venture investments to the region, as shown in earlier studies, the entry of startup accelerators significantly alters the behavioral patterns of venture investors. These behavioral changes have far reaching implications for CVCs and their parent companies.”
This paper is forthcoming in Management Science.