Patient VCs vs. Deep-Pocketed Incumbents: VC Financing Strategies in the Presence of Competitive Threats
with Peter Pham and Jason Zein
Staged financing allows venture capitalists (VCs) to mitigate agency concerns, but also exposes their portfolio firms to competitive threats from industry incumbents. We examine how this tension affects the dynamics of VC financing. Employing a novel textual analysis to match startups to their public competitors, we find that the presence of cashed-up public competitors forces VCs to adopt a more “patient” staging strategy, involving larger financing round sizes, longer duration between rounds, fewer rounds to exit, and a weaker sensitivity between firm performance and round valuation. This reduced staging intensity is substituted by more intensive monitoring, more downside protection clauses, and the involvement of larger VC funds, with more specialized experience, who can credibly signal their on-going financing commitments. We use the Tax Cuts and Jobs Act a shock to the financial strengths of public firms to enhance the identification of these effects.
Work in progress
Allocation of Human Resources in Venture Capital Investments (with Ron Masulis, Peter Pham and Jason Zein)
Political Connections and Incumbent’s Restrictive Innovation