Venture Capitalists vs. Deep-Pocketed Incumbents: Startup Financing Strategies in the Presence of Competitive Threats
72 Pages Posted: 13 Aug 2023 Last revised: 15 Sep 2023
Date Written: August 11, 2023
We examine how venture capitalists (VCs) adapt their financing strategies to support startups competing against deep-pocketed incumbents. Employing textual analysis to identify a startup's potential competitors, we show that when competitors are cash-rich, VCs deploy a financing strategy characterized by less conditionality, observed through larger, less frequent funding rounds, that are less contingent on short-term performance. This strategy requires VCs to rely more on continuous monitoring and liquidation protections and is restricted to larger funds with specialized experience. Our results suggest that, as incumbents have gained greater financial power, VCs serve as a counter-balancing force to sustain business dynamism.
Keywords: Venture Capital, Product Market Competition, Kill Zone, Blitzscaling
JEL Classification: G24, L26, L10
Suggested Citation: Suggested Citation