AN OPTION TO PARTNER: A DYADIC ANALYSIS OF CVC RELATIONSHIPS ANU WADHWA College of Management of Technology, Ecole Polytechnique Fédérale de Lausanne Lausanne, Switzerland COREY PHELPS University of Washington, Seattle INTRODUCTION A fundamental means by which firms explore and develop new resources and capabilities is through external initiatives such as corporate venture capital (CVC) investing, strategic alliances, and acquisitions (Keil, 2002). While acquisitions and strategic alliances have received substantial scholarly attention, research on CVC investing has only recently experienced renewed interest (Dushnitsky, 2006). CVC investments are direct minority equity investments made by established companies in privately-held entrepreneurial ventures (Dushnitsky, 2006). CVC relationships are exploratory initiatives because they establish boundary-spanning relationships with new ventures, which often pursue novel technologies and are an important source of knowledge for corporate investors (Dushnitsky & Lenox, 2005). Although firms may seek direct financial returns from their CVC investments, strategic motives typically dominate financial incentives (Dushnitsky, 2006). Due to their uncertain and exploratory nature and the limited access they provide, CVC relationships may be insufficient to realize strategic benefits. While some research shows CVC investing can increase investor performance (e.g., Dushnitsky & Lenox, 2005, 2006), other research shows CVC investments can have diminishing and negative returns to investor innovation performance (Wadhwa & Kotha, 2006). Moreover, CVC investing units often experience difficulty in facilitating the transfer of knowledge from their entrepreneurial ventures to their parent firms’ business units that can benefit from this knowledge (Henderson & Leleux, 2002). To realize the learning potential from CVC relationships and generate greater value from them, corporate investors may have to increase their involvement in their portfolio firms. One way to achieve this is through strategic alliances. Alliances differ from CVC relationships in that alliance partners mutually commit resources, beyond financial capital, to achieve a particular objective, while CVC investments entail a clear distinction between investors and users of funds and do not necessarily involve the mutual commitment of other firm resources (Dushnitsky & Lavie, 2007). While alliances offer the potential of enhanced interfirm learning (Hamel, 1991), they involve a greater degree of commitment than CVC relationships. The risk of commitment is exacerbated by the substantial uncertainty that surrounds entrepreneurial ventures. Given this tension, this paper examines the conditions under which a CVC investment between a corporate investor and a venture leads to the formation of a strategic alliance between the two firms. Research characterizes CVC investing as a flexible means of obtaining privileged access to information about future opportunities (Li & Mahoney, 2006). Research shows firms use CVC investing to identify potential alliance partners and acquisition targets (Dushnitsky, 2006), and has examined the complementarities and trade-offs between CVC and alliances (Dushnitsky & Lavie, 2007), the choice between CVC and acquisition (Tong & Li, 2007) and the effect of prior CVC relationships on acquisition performance (Benson & Ziedonis, 2009). Despite these studies, research has not investigated whether or when a CVC investment results in alliance formation. The purpose of this study is to identify and empirically test factors that influence whether