Comparison of corporate venture capital and independent venture capital through information asymmetries

Abstract

Growth ventures play a vital part in economic revival as developers and producers of novel services and technologies. An integral part of the growth venture process is venture capital. A field in which information asymmetries are severe and the issues of moral hazard and adverse selection can be utilized to scrutinize the competitive advantages of different types of investors. This thesis is a literature review researching how corporate venture capital (CVC) compares with a more traditional source of venture financing, independent venture capital (IVC) through information asymmetries.

Previous research on the topic has remained scarce and scattered. This can be seen through contradictory results within the previous studies. This thesis seeks to argue that the research is insufficient, and the contradictory results in previous research may be explained through the uniform grouping of different type of CVCs. In essence, CVCs should be divided into different groups based on their strategic objectives. These groups tend to face different types of information asymmetries leading to divergent competitive advantages. This aspect has largely gone unnoticed by the previous literature.

Based on the empirical evidence, it is proposed that CVCs and IVCs play complementary roles in growth venture financing. Compared to their IVC counterparts, CVCs tend to invest in more mature growth ventures and provide diverse support services to their portfolio companies. In continuation, their problems of information asymmetries towards growth ventures tend to be more severe, causing the potential dealflow to be more limited. However, due to the lack of applicable studies, the specific hypothesis that uniform grouping of CVCs has caused the contradictory results between previous studies is left indefinite.

Based on the evaluation of previous literature, this thesis casts a doubt on the public operations to fund growth ventures. Only highly skilled and specialized venture capitalists tend to be efficient within their work, which questions the effectiveness of any public initiatives within the field.