Strategic alliances by venture capital backed firms: an empirical examination

Abstract

A growing body of literature examines the formation of strategic alliances as an important valueadded role provided by venture capital firms. This paper contributes to this literature by examining two related questions: whether venture capital firms use strategic alliances as a substitute or compliment to capital infusion, and how venture capital firms use alliances to mitigate different types of risk. Results from 2505 venture-backed startups reveal that venture capital firms treat alliance formation as a substitute for capital infusion and that the breadth of the network of syndication partners investing in the startup increases the number of its strategic alliances. We also find intentionality in alliance formation. Specifically, firms operating in industry environments characterized by technical risk are more likely to form alliances with partners capable of mitigating technical risks, and firms operating in environments characterized by market risk are more likely to form alliances with partners capable of mitigating market risk. Our findings lend additional support to the perspective that alliances represent an important mechanism through which venture capital firms add value to their portfolio companies.

The Globalization of Innovation and Entrepreneurial Talent

“…Mounting evidence suggests that US venture capital firms do not adapt investment or syndication patterns to account for the increased risk in cross-border deals. What is unclear is whether this is due to lack of interest (Haemmig, 2003), more intensive screening and due diligence processes, as suggested by Guler and McGahan (2006) changes in contracting activity (Cumming, 2008), the opening of a branch office to facilitate local monitoring (Wright et al, 2005) or the development of capabilities (such as alliances or partnerships) or organizational forms (like franchises) that mitigate the risks associated with cross-border investment in new ways (Wuebker, 2009). For those in the business of scholarly investigation of venture capital, what we currently think we know about investment, monitoring, and value-added activity may need to be reconsidered, extended, reworked, and ultimately integrated with the broader literatures and theoretical perspectives.…”

“…Through this work we have gained significant insight into how venture capital firms raise the funds they invest (Gompers, 1996) screen prospective projects (MacMillan et al, 1985;Shepherd & Zacharakis, 1999) make investments (Gompers, 1995;Hellmann & Puri, 2002), and exit portfolio firms (Brau et al, 2003;Lerner, 1994). And we have a clear picture of the venture capitalist as an active investor who assumes a monitoring role for the innovative entrepreneurial firm (Lerner, 1995;Sapienza et al, 1994) and uses specialized knowledge to add value to their portfolio firms (Gifford, 1997;Hsu, 2004Hsu, , 2006Sapienza et al, 1996;Wang et al, 2009).…”

The Capital Gains Tax: A Curse but Also a Blessing for Venture Capital Investment

“…Nevertheless, these start‐ups could contribute to innovation and become growth companies. Therefore, the provision of venture capital to young and innovative companies is often desired from a political point of view (del Palacio, Zhang, and Sole ; Popov and Roosenboom ; Wang et al ). Since monitoring costs can hardly be influenced, governments try to use different policy measures to increase the returns of venture capital investments (Bonini and Alkan ).…”

Specialization and performance: Evidence from Chinese venture capital funds

“…VC funds usually take a series of strategies to decrease risk. Wang et al (2012) [12] studied the following issues: Was strategic alliance considered as an alternative or supplement of capital integration in terms of VC funds? How VC funds use strategic alliance to reduce risk?…”