The role of innovation in venture capital and private equity investments in different investment phases

ABSTRACT

Innovation is an important value lever, especially within small- and medium-sized companies. However, little research has examined its influence within the investment process of equity investment funds – a surprising circumstance since innovation could increase an investment’s value. This study provides insights into equity investment funds’ perspective on innovation throughout the various phases of the investment process. We conducted in-depth interviews with investment professionals from 30 German-based equity investment funds. Our results show that innovation’s importance depends on the strategic orientation of the equity investment fund type. In addition, our study provides an overview of the criteria, methods, and mechanisms equity investment funds use to support innovation. We show that the emphasis of many equity investment funds on innovation during the identification of investment targets is not reflected in the measures the fund later employs to support innovation processes within the portfolio company. This indicates potential for equity investment funds to be more actively involved in the supervision and management of innovation activities of their portfolio companies.

KEYWORDS:

• Venture capital
• corporate venture capital
• private equity
• family offices
• innovation
• investment strategy

Acknowledgments

We thank the 30 equity investment funds from Germany which supported our research by allowing us to interview their investment managers. We are grateful for their trust and support. In addition, we would like to thank the two anonymous reviewers. Their suggestions and feedback greatly helped us to improve the quality of this article. We also wish to thank Elizabeth Scott Anderson, PhD, for her great proofreading service.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Notes on contributors

Cornelius Maas

Cornelius Maas completed his Bachelor’s degree in International Management at the University of Applied Sciences Ansbach in 2011. In the same year, he started his business career at a venture capital company. In parallel with his job as investment manager, he completed his Master’s degree (Master of Business Administration) at the University of Applied Sciences HFH in 2016. In May 2017, he joined HHL Leipzig Graduate School of Management, where he is currently a PhD candidate at the Stiftungsfonds Deutsche Bank Chair of Innovation Management and Entrepreneurship. His research interests are based on his job experience and include venture capital and private equity financing as well as other forms of collaboration between innovative companies and external institutions (e.g., corporate accelerators). He is concurrent with his top-class sports career.

Patrick Steinhagen

Patrick Steinhagen completed his undergraduate degree in Business Administration (Finance) at Carnegie Mellon University in 2013 with university honors. In September 2013, he joined HHL Leipzig Graduate School of Management, where he is currently a PhD candidate at the Stiftungsfonds Deutsche Bank Chair of Innovation Management and Entrepreneurship. His research interests include mergers and acquisitions and private equity financing.

Dorian Proksch

Dorian Proksch completed his Master's degree in Business Information Systems at the Technical University of Munich as top student in 2010. In September 2011, he joined HHL Leipzig Graduate School of Management. He completed his PhD in the area of the development of new technology-based firms in January 2015 with the degree summa cum laude. Currently, he holds the position of interim deputy chairholder of the Stiftungsfonds Deutsche Bank Chair of Innovation Management and Entrepreneurship at HHL Graduate School of Management. His research interests are venture capital financing, national innovation systems, and structural equation modeling.

Andreas Pinkwart

Andreas Pinkwart studied macroeconomics and business administration at the University of Münster and the University of Bonn, where he obtained his diploma in 1987 and his doctoral degree in 1991. Subsequently Professor Pinkwart ran the office of the Free Democratic Party leader of the parliamentary group in the German Bundestag from 1991 to 1994. In 1994, he became a professor of economics and business administration in Düsseldorf, later moving to the University of Siegen to accept a chair for business administration. While on a sabbatical leave from 2002 to 2011, Professor Pinkwart was a Member of the German Bundestag (2002–2005) and Minister for Innovation, Science, Research and Technology as well as Deputy Prime Minister of the state of North Rhine-Westphalia (2005–2010). From April 2011 to June 2017, Professor Pinkwart served as Dean of HHL Leipzig Graduate School of Management. Since 2011, he has been chairholder of the Stiftungsfonds Deutsche Bank Chair for Innovation Management and Entrepreneurship at HHL, being on a sabbatical leave since July 2017.  Since June 30, 2017, Prof. Pinkwart has been Minister for Economics, Innovation, Digitalization and Energy of the state of North Rhine-Westphalia.