A University of Groningen study found that CVCs with too many co-investors performed poorly. Getting too close to partners also hurt them.

Having too many co-investors in a corporate venture capital (CVC) unit’s syndication network can be as bad for innovation performance as having too few, according to a research paper from the University of Groningen.

The paper, which looked at 58 CVC investors across 15 countries between 2002 and 2016, explores how the number and quality of co-investors a CVC has in its syndication network, as well as the depth of the relationship between them, affects the CVC’s innovation performance. Performance, in this case, was measured by the number of new drug filings approved by the US Food and Drug Administration (FDA).

Researchers confirmed an inverted U-shaped relationship between the number of potential co-investors and performance. That is to say, having more partners helps up to a point, after which it becomes detrimental to have too many.

A higher number of co-investors gives CVCs access to stronger  investment opportunities and promising ventures. Having too many partners, however, can divide focus resulting in opportunities being missed and decision-making becoming less efficient.

It is common for VCs and CVCs to form strong working relationships and go into investments together repeatedly. But deep relationships between investors is not always helpful.  Stronger ties can make CVCs more likely to follow ingrained ways of working and less likely to take up novel ideas.

Strong relationships did, however, speed up the rate at which CVCs could act on new information gleaned from portfolio companies.

High quality investment partners tended to reduce the likelihood of investment failure, because they gave CVCs higher bargaining power and lowered costs innovation costs — not really a surprise.  More surprisingly, if the co-investor was seen as much higher quality than the CVC, this could turn out to be a drawback. In the event of a conflict between investors, the startup would veer towards the needs of the investor with the highest reputation. If this was a traditional VC, which was prioritising mainly financial aims, the CVC investor with both strategic and financial goals would lose out.  Even having a strong relationship did not change this.

For CVC managers, the study suggests that everything is good in moderation. More is not always better, and although investing with big-name VCs can have benefits, they can sometimes ignore the goals of a CVC partner. Close relationships are good — but watch out they don’t stop you from exploring new ideas.

While the findings pertain specifically to the pharmaceutical industry, the authors said they should in theory apply across the board. A more diverse set of VCs, as opposed to primarily ones operating in the pharmaceutical space, which tend to have overlapping competences with the CVCs they invest with – could see different dynamics play out.