When an established corporation invests in a startup, it hopes to share in the startup’s innovative technological advances. But such investments can have the opposite effect, according to a new study by a researcher in the McCombs School of Business at The University of Texas at Austin.
Post-investment, startups steer away from radical new technologies. Instead, they focus on incremental advances in domains where the established company is already strong, according to the paper forthcoming and online in advance in Organization Science.
“They’re warping their technology trajectory,” said Francisco Polidoro Jr., associate management professor in the McCombs School and the lead author of the paper. “They’re diminishing the distinctiveness that made them attractive to investors in the first place.”
The larger corporation may also lose some of the return on its investment, he added. “If they’re making these investments to get a window on new technologies, that window may narrow after they form the relationship.”
Polidoro’s conclusions come from examining 132 biotechnology startups that sold equity stakes to larger corporations between 1980 and 2013, along with the companies that invested in them. He chose the sector, he notes, because it exhibits a radical break between old technologies, based on chemical compounds, and new ones, based on molecular biology and genetics.
With Wei Yang, assistant professor at George Mason University, Polidoro analyzed the patents of the startups and the corporations, before and after they partnered, and generated originality scores based on how many different technological classes were cited by the companies’ patents. Scores ranged from 0 to 1; the more citations are distributed across a higher number of classes the higher the score.
After a corporate investment, he found, startups became less technologically diverse:
- Beforehand, only 15% of startups had originality scores below 0.5 and patents more similar to those of incumbents.
- Afterward, 26% scored below that level.
Post-investment, the startups’ patents also overlapped more with those of their corporate partners. Six years later, startups cited 97% more patents from their partners’ technological domains.
What happens, Polidoro said, is that a biotech startup enters such a relationship because it needs the resources of a pharmaceutical giant to commercialize its breakthroughs. A recent example is BioNTech, which took an investment from Pfizer to help turn its messenger RNA technology into a COVID-19 vaccine.
“It’s insufficient to come up with great innovations,” he said. “They need to be developed in clinical trials. Then they need to go through regulatory approvals.”
But to take advantage of these essential resources, the startup directs its research toward products the incumbent can easily develop and market. Over time, it steers more and more into the incumbent’s technological domains, creating new products that build on old ones.
For more information about this research, read the McCombs Big Ideas feature story.