A theory of strategic venture investing

Some venture capital investors seek purely financial gains while others, such as corporations, also pursue strategic objectives. The paper examines a model where a strategic investor can achieve synergies, but can also face a conflict of interest with the entrepreneur. If the start-up is a complemen...

Full description

Saved in:
Bibliographic Details
Published in:Journal of financial economics 2002-05, Vol.64 (2), p.285-314
Main Author: Hellmann, Thomas
Format: Article
Language:English
Subjects:
Contracts
Investment
Strategic investing
Studies
Valuation
Venture capital
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Some venture capital investors seek purely financial gains while others, such as corporations, also pursue strategic objectives. The paper examines a model where a strategic investor can achieve synergies, but can also face a conflict of interest with the entrepreneur. If the start-up is a complement to the strategic partner, it is optimal to obtain funding from the strategic investor. If the start-up is a mild substitute, the entrepreneur prefers an independent venture capitalist. With a strong substitute, syndication becomes optimal, such that the independent venture capitalist is the active lead investor and the strategic partner a passive co-investor. The expected returns for the entrepreneur are nonmonotonic, lowest for a mild substitute, and higher for a strong substitute as well as for a complement. The paper also explains why a strategic investor often pays a higher valuation than an independent venture capitalist.
ISSN:0304-405X
1879-2774
DOI:10.1016/S0304-405X(02)00078-8