Investing in Innovative Middle-Market Companies: Taking Innovation Capabilities into Account to Enrich Private Equity Investment Strategies

• Main Authors: Parpaleix, Laure-Anne, Levillain, Kevin, Segrestin, Blanche
• Other Authors: Centre de Gestion Scientifique i3 (CGS i3), Mines Paris - PSL (École nationale supérieure des mines de Paris), Université Paris Sciences et Lettres (PSL)-Université Paris Sciences et Lettres (PSL)-Institut interdisciplinaire de l’innovation (I3), Centre National de la Recherche Scientifique (CNRS)-Centre National de la Recherche Scientifique (CNRS)
• Format: Conference Object
• Language: English
• Published: HAL CCSD 2017
• Subjects: private equity; economic growth; innovation management; [SHS.GESTION]Humanities and Social Sciences/Business administration; Iceland
• Online Access: https://minesparis-psl.hal.science/hal-01496269

International audience Designing efficient investment strategies in innovative firms is a recurring public and private concern. Extensive research has been conducted on venture capital funds, known for being specialized in financing innovative firms. As a result, researchers identified criteria supporting portfolio strategies and valuation methods which do not explicitly take into innovation capabilities account due to the lack of historical perspective for young firms. When it comes to investing in larger ventures like middle-market companies, firm’s historical capabilities should be valuable assets to assess its potential. The objective of this research is therefore to characterize the role of innovation capabilities in private equity investors’ strategy and explore how investors can design strategies that help support innovative outputs. A multiple cases study conducted with a French investment fund shows that new valuation criteria are needed to fully explain investment decision. While usual valuation method are based on an extrapolation of past performance over the next few years covered by the investment deal, a new one can be modelled based on an assessment of transformation on the technological, market and ecosystem spaces of the financed companies. Adapting innovation management literature frameworks to middle-market companies should enrich descriptors on which investors can base their decision, help design investment strategies that generate new value spaces and secure these strategies beyond the selection stage.