Venture Capitalists vs. Deep-Pocketed Incumbents: Startup Financing Strategies in the Presence of Competitive Threats

Abstract

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