Corporate venture capital as a means of radical innovation: Relational fit, social capital, and knowledge transfer

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Abstract

The authors begin with an elaboration of a new theoretical concept: “relational fit”, which consists of social capital and knowledge relatedness. They continue with an empirical analysis of the influence that “relational fit” between German corporate venture capital units (CVCs) and their innovative portfolio companies (PCs) has on knowledge transfer and knowledge creation in the CVC–PC dyad and subsequently on the PC's organizational performance. PC success is found to have dual significance for the corporation: high returns for the CVC unit and strategic potential for radical innovation. Integrating two hitherto neglected aspects of social capital – “conative fit” and “affective fit” – into their framework of “relational fit” the authors extend social capital theory. By combining the latter with the knowledge-based view of the firm they thereby demonstrate the interrelatedness and combined importance of the two concepts. Hence, “relational fit,” proves to facilitate knowledge transfer and creation, which enhance organizational performance.

Introduction

To gain sustainable competitive advantage, corporations strive for radical innovation, that is, changes with a high degree of innovativeness in several dimensions. “They may be based on a totally new technological principle allowing a significant leap in performance; they satisfy new needs, create new markets, redefine whole industries and change existing value chains” (Salomo et al., 2004, p. 2; Salomo, 2003). O’Connor and McDermott (2004) suggest that “radical innovations are projects which are distinguished not only by the promise of reward they offer, … but also by the risk and uncertainty that accompanies [sic] their potential outcome” (p. 11).

One way for corporations to achieve such radical innovation and subsequently competitive advantage is by leveraging interorganizational relationships to acquire, transfer, exploit, and explore external knowledge from young technology-based firms (Keil, 2000). Corporate venture capital units (CVCs), which invest in highly innovative new ventures, constitute one form of interorganizational relationship. Because of the technological innovativeness of such ventures, they are characterized by uncertainty, risk, potential high growth rates, and outstanding potential for technological breakthrough. They provide the strategic opportunity to develop new business units (Keil, 2000, Weber and Dierkes, 2002, Weber and Weber, 2005) and to gain large market share as well as supernormal returns.

From the knowledge-based perspective, knowledge is also a source of sustainable competitive advantage (Grant, 1996, Kogut and Zander, 1992, Spender, 1996). Generating and transferring knowledge is particularly important for innovation-driven corporates and technology-based ventures because such companies demand a continuous regeneration of knowledge (Lane and Lubatkin, 1998). Research has also shown that additionally acquired, relevant knowledge sharpens an organization's ability to gain competitive advantage (Autio and Sapienza, 2001, Grant, 1996, Mohrman et al., 2003, Yli-Renko et al., 2001)—an antecedent of improved organizational performance.

Other dimensions promoting successful knowledge acquisition or transfer are knowledge relatedness (Lane and Lubatkin, 1998), and knowledge-sharing routines (Dyer and Singh, 1998). Knowledge relatedness means that an organization's existing knowledge is related to the new knowledge to be assimilated (Grant, 1996). Knowledge relatedness thereby describes the degree of similarity and compatibility of knowledge between two individuals or organizations (Scholl, 1992, Scholl, 2003). Lane and Lubatkin (1998) show that a firm's capacity to recognize, assimilate, and exploit external knowledge partly depends on the similarity between the exchange partners’ knowledge bases, organizational systems, and dominant logics.

Another factor shown to be critical to the success of technology-based firms is social capital (Yli-Renko et al., 2001). Social capital in a relationship enables the partners to tap into each other's knowledge resources and thereby increase the depth and efficiency of mutual knowledge exchange, which is considered a predominantly social process (Kogut and Zander, 1992).

These factors influencing knowledge acquisition and transfer are analyzed and discussed separately in the literature. We argue, however, that both the level of social capital embedded in the relationships (Yli-Renko et al., 2001) and their knowledge relatedness (Lane and Lubatkin, 1998) affect the degree to which CVCs and portfolio companies (PCs) can use their respective partners’ external knowledge (resources and networks) and learn with those partners. Hence, effective knowledge acquisition and transfer requires social capital and knowledge relatedness alike.How these combined factors, which we refer to as “relational fit,” affect the interorganizational knowledge transfer between CVC and PC, and ultimately the performance of PCs, has not yet been investigated and empirically tested. Given the high number of CVCs dropping out of the market (Gompers and Lerner, 1998, Weber, 2005) we analyse the relational-fit factors triggering the combined success or failure of CVC and PC (Fig. 1).

In this article we extend social capital theory by explaining two hitherto unconsidered aspects of social capital: “conative fit” (the partners’ intention and willingness to cooperate) and “affective fit” (the functional compatibility of emotions between two or more individuals or small groups; see Scholl, 2003). Second, we combine social capital theory with the knowledge-based view of the firm and thereby demonstrate the interrelatedness and combined importance of the two concepts.

The unit of analysis of this article is the exchange relationship between the CVC and its PCs. We use qualitative information from different CVC–PC relationships to provide initial exploratory evidence for our conceptual model of relational fit as an antecedent of knowledge transfer and creation.

Section snippets

Literature review and theoretical framework—relational fit

Who is the right partner to achieve radical innovation in a CVC–PC relationship? Though seemingly straightforward, this key question all but defies quick answers, partly because some aspects important for answering it have not yet received due attention. The related discussion in CVC research touches on strategic fit (Thornhill and Amit, 2000), the relatedness of activities (Sorrentino and Williams, 1995), and structural congruence (Sykes, 1986), but relational aspects between the partners are

Organizational performance

The performance of any organization is eventually affected by its ability to establish and preserve its competitive advantage. A company's success at this task depends on multiple factors. In addition to overall market conditions, management, marketing and sales strategy, operational efficiency, and the like, radical innovation assisted by outstanding technology is one way to outperform competitors. The organizational performance of new ventures largely depends on their ability to innovate and

Sample and research design

We tested the hypotheses by using data from qualitative interviews. We questioned 12 investment professionals of 7 selected CVCs in Germany. Because the interviewed CVCs all had more than one PC in their portfolio, they provided information about 20 PCs and the relationship to these PCs. Our sample included only investments into seed-stage and early-stage companies. Additionally, the selection of the considered relationship was guided by the explicit inclusion of at least one badly performing,

Relational fit

Expecting high correlations between these variables, we first checked whether social capital, including social networks, conative fit, affective fit, norms, and trust were closely interrelated with knowledge relatedness. Indeed, we found that the four variables of the relational dimension of social capital were highly correlated, the lowest correlation being r = .42 between norms and trust and the highest being r = .68 between affective fit and trust (see Table 1). The structural dimension of

Discussion and conclusion

Corporations striving for radical innovation use CVC units as a means to explore the resources of new technology companies for their own radical innovation purposes. This study demonstrates that “relational fit” is a new construct comprising social capital and knowledge relatedness. The data also show that “relational fit” between CVCs and PCs is highly correlated with knowledge transfer and partially correlated with organizational performance. Because regression analysis would be inappropriate

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