Do Venture Capitalists Affect Commercialization Strategies at Start-ups?

I empirically study the effect of venture capital (VC) on product development and commercialization strategy of start-up organizations. In doing so, I segment entrant commercialization strategies into two camps according to competitive effect: to “cooperate” is to license-out technology or be acquired, while to “compete” is to develop technology independently. Building on the work of Gans, Hsu, and Stern (2000) on the drivers of entrant commercialization strategy, this paper examines the direct and indirect effects of VC on product development and competition. I start with two important determinants of start-up commercialization strategy: (1) the entrant’s relative investment cost of acquiring and controlling complementary assets needed to successfully commercialize its innovation, and (2) the entrant’s ability to effectively protect its intellectual property. I then test a novel sample of 118 technology-based projects divided almost evenly between two mechanisms of entrepreneurial finance. These two mechanisms differ in institutional detail in ways that allow a quasi-experiment of the effect of VC on start-up commercialization strategy. The U.S. Small Business Innovative Research (SBIR) program provides a grant to R&D without taking equity in a start-up or changing the corporate governance of project development. In contrast, VCs take an equity stake and participate in corporate governance in exchange for capital. Neither of these financing mechanisms, however, alters the underlying complementary asset or intellectual property regime associated with the project. Two main findings about the commercialization strategy and product market effects of venture capital emerge: (1) VCbacking skews commercialization strategies across industries toward cooperating, and (2) VCs make their portfolio firms more sensitive to the business environment.