Entrepreneurial Firm’s Corporate Governance and R&D Investment Strategy: The Effects of Corporate Venture Capital Ownership, Founder Incumbency, and Their Interaction

Every organization is subject to a host of external and internal forces that shape their activities and performance. Moreover, these forces are intimately interrelated. In the context of young entrepreneurial ventures in technology-intensive industries, R&D investment strategy is likely one immediate facet affected by these forces because investment in R&D is inherently a high-risk, high-return strategy that requires constant support from shareholders and top managers. Thus, understanding the corporate governance-related mechanisms underlying the R&D investment strategy of technology-based entrepreneurial ventures is important because R&D investment is both a significant source of product innovation and a strategic resource-allocation decision made by the governing body of the venture, which likely reflects the sharp conflict of interests among key stakeholders (e.g., priority of innovation vs. commercialization). To shed light on such corporate governance-related mechanisms, we focus on the most significant stakeholders in these young entrepreneurial ventures – venture capital (VC) firms, corporate venture capital (CVC) firms, and founders. We gain insight from the technology entrepreneurship literature to present our theoretical argument and to form testable hypotheses and articulate the organizational mechanisms underlying the effects of CVC ownership, founder incumbency, and their interaction on VC-financed entrepreneurial venture’s R&D investment strategy. We argue that CVC ownership and founder incumbency positively affect entrepreneurial firms’ R&D investment and, more importantly, that the CVC ownership effect is effectively amplified when the founder is an incumbent top manager because founders utilize knowledge spillover more effectively than professional agent-managers do. Our empirical analysis supports our hypotheses while addressing potential endogeneity concerns.