The Role of Corporate Venture Capital for Family Firms
Since the early 2000s, the venture capital (VC) industry has been a major driving force behind innovation, providing much-needed funding to startups and emerging businesses. While independent VC firms have historically been the primary source of such financing, corporations have increasingly taken an active role through Corporate Venture Capital (CVC). Unlike traditional VCs, which focus on short-term financial returns, CVCs often aim to create strategic synergies between startups and their parent companies.
A new study by Mario Daniele Amore (Department of Management and Technology, Bocconi), Samuele Murtinu (Utrecht University), and Valerio Pelucco (LUISS Business School) and published in the Journal of Banking and Finance sheds light on an underappreciated yet major player in this landscape: family-owned firms. Their research reveals that nearly 30% of all CVC deals in the U.S. from 2000 to 2017 originated from family-controlled businesses, a phenomenon that has largely gone unnoticed in existing studies.
Family firms’ unique approach to venture capital
Family-owned firms engage in CVC investments differently compared with non-family firms. They have a stronger tendency to syndicate their investments, meaning they partner with other investors, often reputable ones, to minimize risk. This cautious investment approach prioritizes long-term stability over short-term speculation. Additionally, family-led CVCs prefer to invest in startups that are geographically closer and operate in industries related to their own. This strategy reduces information asymmetry and allows them to leverage their existing industry expertise, increasing the likelihood of successful investments.
Another key distinction is their preference for high-quality founders. The study finds that family CVCs, particularly those led by family CEOs, tend to invest in ventures with founders who have strong academic and entrepreneurial backgrounds, such as Ivy League degrees or prior startup experience. As a result, startups backed by family CVCs demonstrate a higher likelihood of successful exits, whether through IPOs or acquisitions. Even after accounting for factors such as syndication, venture experience, and investor reputation, family CVC-backed companies consistently outperform their non-family-backed counterparts.
The underlying reasons for peculiar investment strategies
The unique investment strategies of family CVCs can be explained through several theoretical perspectives. One primary factor is risk aversion combined with a long-term orientation. Unlike non-family firms that often have more diversified shareholders, family firms typically concentrate their wealth in their businesses. This makes them more cautious and inclined toward conservative investment strategies. Additionally, the concept of “Socio-Emotional Wealth” plays a significant role, as family firms place a high value on reputation, community ties, and legacy. Their preference for local and industry-related investments may stem from a desire to strengthen long-term relationships and maintain their standing in the business ecosystem.
Moreover, family firms often possess well-established networks within their industries. These relationships allow them to collaborate with top-tier investors and syndicate more effectively than their non-family counterparts. The ability to work with reputable partners further enhances their capacity to make strategic and successful investments.
Implications for entrepreneurs and policymakers
Entrepreneurs seeking funding from family-controlled CVCs could reap benefits beyond financial backing alone. These investors bring industry expertise, local knowledge, and valuable networks that can significantly enhance a startup’s chances of success. Additionally, policymakers and business strategists should recognize the influence of family firms in the entrepreneurial finance landscape. Encouraging family-led CVC investments could stimulate regional innovation and economic growth, particularly in sectors where these firms have deep-rooted expertise.
