How Do Investors Shape Startups' Response to New Market Opportunities?

Abstract

Startups frequently face a dilemma: whether to redirect some of their scarce resources to pursuing an emergent opportunity, or keep those resources focused on advancing ongoing efforts. The choice can have profound implications for their growth trajectories and outcomes. We highlight the crucial, yet understudied, role that startups’ venture capital investors play in shaping this decision. We draw on the staggered release of The Cancer Genome Atlas (TCGA), a global scientific endeavor that mapped the genetic origins of a range of cancers. The release of TCGA results for a specific cancer type occasionally revealed genetic links to other cancers, exogenously presenting startups targeting the latter with an opportunity to develop therapeutic applications for the former. Using a difference-in-differences design, we find startups were most responsive to such opportunities in the immediate aftermath of a funding round, when they were least resource-constrained. Startups’ responsiveness was elevated if their investors had other portfolio companies with a presence in the potential new market, enabling a channel for access to application-specific knowledge. This knowledge access via the investor’s portfolio was especially critical to startups located outside the major geographic hubs for oncology, who have fewer alternative sources for such knowledge. However, startups’ responsiveness to new market opportunities declined when their investors had shorter time horizons. The imperative to achieve exits in the short-term appeared to lead investors to push their startups to maintain a narrower focus. In combination, these findings help advance our understanding of investors’ influence on a key element of entrepreneurial strategy.