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How different kinds of funding partners affect startups’ ability to innovate

Technology startups do not innovate in a vacuum. They are influenced by the type of funding partners they take on, according to research by Emily Cox Pahnke, an associate professor of management and organization and the Lawrence P. Hughes Endowed Professor of Innovation and Entrepreneurship at the University of Washington Foster School of Business.

Pahnke discusses her findings on the topic in a National Science Foundation “wireside chat” on the topic of “Innovation to Impact.” She is joined in the conversation by Josh Lerner, the Jacob H. Schiff Professor of Investment Banking at Harvard Business School.

Basing commentary on her 2015 Administrative Science Quarterly study set in the minimally invasive surgical device industry, Pahnke finds that venture capital firms, corporate venture funds and government venture funds all provide necessary resources to a new venture—but their institutional logistics differ dramatically in the translation of resources to innovation.

Venture capitalists tend to foster the most innovation in young firms. They do this by building a close advisor relationship with a venture, setting more motivating milestones and a brisker pace, better understanding the commercialization process and being willing to use power and influence to strengthen patenting and aggressively push innovation.

Corporate venture capital, on the other hand, tends to be much less effective. Corporations, despite their vast resources, tend to have a dispersed structure of strategic goal setting that makes it difficult to offer the dedicated and directed resources that really help a startup innovate. Plus, they often view corporate venture funds as scouts who support corporate growth (rather than the growth of the new ventures themselves).

And government funding, while perhaps easiest to access and cheapest to acquire, does not come with the kind of oversight, advising and incentives that VCs offer.

“Ties with the US government may even impede technical innovation,” Pahnke says, “meaning that, ironically for entrepreneurs, the least-expensive funding with the fewest strings attached may be the most limiting for long-term innovation success.”

Who Takes You to the Dance? How Partners’ Institutional Logistics Influence Innovation in Young Firms,” is the work of Emily Cox Pahnke and Riitta Katila and Kathleen M. Eisenhardt of Stanford University.