Abstract
A growing body of literature examines the formation of strategic alliances as an important value-added 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.
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Notes
We perform group mean tests to ensure that our sample companies are not significantly different from those companies dropped out because of missing accounting information.
The authors gratefully acknowledge Dushnitsky and Shaver for their generous contribution of a conversion table linking VEIC codes and SIC codes.
We code R&D agreement, cross licensing agreement, and technology transfer agreements as technology-related alliances.
See Dess and Beard (1984) for a detailed discussion of methodological issues.
For the sake of brevity, we only report our results based on the geographic complexity measured by the number of firms.
We use industry median ratios to avoid a highly skewed distribution. We also use industry average ratios as a robustness check, and our main results do not change materially.
We thank an anonymous referee for pointing out this possibility and for encouraging us to correct for the endogenity problem.
For the sake of brevity, results based on clustered standard errors are not reported here, but they are available upon request.
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Wang, H., Wuebker, R.J., Han, S. et al. Strategic alliances by venture capital backed firms: an empirical examination. Small Bus Econ 38, 179–196 (2012). https://doi.org/10.1007/s11187-009-9247-x
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DOI: https://doi.org/10.1007/s11187-009-9247-x