Samuele Murtinu: How Low Time Preference Elevates the Investment Returns of Family Corporate Venture Capital

Economics For Business

Family businesses play a major role in the US economy. According to the Conway Center, family businesses comprise 90% of the business ventures in the US, generate 62% of the employment in the nation, and deliver 64% of US GDP.

And, they’re good at venture capital. Samuele Murtinu, Professor of Law, Economics, and Governance at Utrecht University, visits the Economics For Business podcast to share the findings and insights (see Mises.org/E4B_140_PDF) from his very recent analysis of venture capital databases.

Key Takeaways and Actionable Insights Corporate venture capital is a special animal.

There are many types of venture capital. Professor Murtinu focused first on the distinction between traditional or independent venture capital (IVC) and corporate venture capital (CVC). Independent venture capital funds are structured with a general partner in the operational, decision-making role, and investors in the role of limited partner.

Corporate venture capital funds are fully owned and managed by their parent corporation. The CEO or CFO of the corporation typically appoints a corporate venture capital manager, who selects targets, conducts due diligence and so on from a subordinate position in the corporate hierarchy.

The important difference between IVC and CVC lies in objectives and goals. IVC goals are purely financial — the highest capital gain in the shortest possible time. CVC funds often have strategic goals in addition to, or substituting for, financial goals. These strategic goals might include augmenting internal R&D capabilities and performance, and accessing new technologies and new innovations, or entering new markets.

Another form of CVC licenses patented technologies to startups in cases where the corporate firm does not have the capacity to exploit the IP, but can oversee the implementation at the startup with a view to further future investment or acquisition. This is the method of Microsoft’s IP Ventures arm, for example.

Typically, IVC investments are easy to measure against financial performance benchmarks or targets. CVC’s strategic investments are harder to measure. Goals such as technology integration are too non-specific to measure, and normal VC guardrails like specified duration of investments are not typically in place and so can’t be used as benchmarks. On the other hand, CVC investments often expand beyond the financial into strategic support via corporate assets such as brand, sales and distribution channels and systems.

Corporate venture capital out-performs traditional venture capital in overall economic performance.

Professor Murtinu’s performance metric in his data analysis was total factor productivity — performance over and above what’s attributable to the additions to capital and labor inputs. IVC’s performance for its investments was measured in the +40% range, and CVC’s was measured at roughly +50%. IVC performs better in the short term, while CVC performs better in the longer term. This difference reflects the lower time preference of CVC. It extends to IPO’s: corporate venture capital funds stay longer in the equity capital of their portfolio companies in comparison to independent venture capital.

Family CVC is another animal again — and even higher performing than non-family CVC.

Professor Murtinu separated out family-owned firms (based on a percentage of equity held) with corporate venture capital funds for analysis. Some of his findings include:

They prefer to maintain longer and more stable involvement in the companies in which they invest.They prefer to maintain control over time (as opposed to exiting for financial gain).They look to gains beyond purely financial returns, including technology acquisition / integration into the parent company and/or learning new processes.They are more likely to syndicate with other investors, for purposes of portfolio risk mitigation.They target venture investments that are “close to home” both in geographic terms and in terms of industries closely related to their core business.

The resultant outcomes are superior: a higher likelihood of successful exits (IPO or sale to another entity), and a greater long term value effect on the sold company after the IPO or exit. Further, there is evidence from the data of a higher innovation effect for Family CVC holdings, as measured by the post-exit value of the patent portfolio held by the ventures.

Family CVC is resilient in economic downturns. During the last economic downturn, family CVC invested at double the amount of corporate venture capital, reflecting family businesses’ preference for long-term investing and for control.

The lower time preference of family businesses and family CVC is crucial for the achievement of superior financial performance, especially in the longer term.

Family CVC’s lower time preference and longer investment time horizons result in beneficial effects. Ownership in the venture companies is more stable, and the value effect after IPO (when family CVC stability continues because these funds stay in the post-IPO company longer) is significant.

Professor Murtinu relates this phenomenon to Austrian economics. The longer time horizon permits a closer relationship between investor and entrepreneur — it develops over time — and their subjective judgment about the future state become more aligned. Frictions and information asymmetries are reduced, and a shared view of the future emerges. This stability can scale up to the industry level and national level when there are more family CVC funds at work. Instead of pursuing unicorns and gazelles, an environment more conducive to duration and resilience is created.

Additional Resources

"Types of Venture Capital" (PDF): Mises.org/E4B_140_PDF

"Families In Corporate Venture Capital" by Samuele Murtinu, Mario Daniele Amore, and Valerio Pelucco (PDF): Mises.org/E4B_140_Paper