The Interaction between Product Market and Financing Strategy: The Role of Venture Capital

By Thomas HellmannManju Puri
1999| Working Paper No. 1561

Venture capital is widely believed to be an influential arrangement for the financing of new innovative companies. We examine and find empirical evidence that venture capital financing is related to product market strategies and outcomes of startups. We use a unique hand-collected database of Silicon Valley high technology start-ups, that contain both venture capital and non-venture capital backed firms, and the contains firm-specific data on initial product market strategies, subsequent financing patterns, and the time it takes a firm to bring its product to market. We find that firms that are pursuing an innovator strategy are significantly more likely and faster to obtain venture capital. The presence of a venture captialist is also associated with a significant reduction in the time taken to bring a product to market, especially for innovators. Further, firms are more likely to list obtaining venture capital as a significant milestone in the lifecycle of the company as compared to other financing events. Our results suggest significant interrelations between investor type and product market dimensions, and a potential role of venture capital for innovative companies