The Interaction between Product Market and Financing Strategy: The Role of Venture Capital !

Venture capital is also associated with a significant reduction
in the time to bring a product to market, especially for innovators

"Πως εμπλέκονται οι VC στην πορεία της επιχείρησης " 
 It is commonly argued that a distinguishing feature of venture capital is the close involvement of investor’s with the companies they finance,It is generally believed that venture capitalists are extensively involved in the businesses they finance, not only closely monitoring their activities, but also providing valuable support and governance. Venture capitalists are said to benefit their companies through a variety of activities such


as mentoring, strategic advice, monitoring, certification to outside stakeholders, corporate
governance, professionalization of the company and recruitment of senior management.

On the other hand, obtaining venture capital financing also has its costs. The close
involvement of the venture capitalist can be time consuming for the entrepreneurs and the
entrepreneurs can also experience a significant loss of control. Moreover, venture capital
is said to be an expensive source of capital, which in turn reflects the benefits of having an
involved investor.

2 τύποι στρατηγικής :

 Among the competitive strategies of new companies, an important
distinction is made in this literature between innovator and imitator strategies. Innovators are those firms that are the first to introduce new products or services for which no close
substitute is yet offered in the market. Imitators are also engaged in relatively new
products and technologies, but they are not the first movers in their markets, and therefore
tend to compete on aspects other than innovation.

the choice of an innovator or imitator strategy has implications for the relative importance of strategic
actions, such as the importance of being a first-mover or being quick to market.


Does the choice of a product market strategy influence the type of financing obtained by a start-up company?

This could be because innovators have a
wider set of challenges on many fronts (e.g., development of new business concepts,
product and technological innovation, and development of new markets) and the business
expertise provided by venture capitalists can be particularly helpful in addressing some of
these issues. An alternative hypothesis would be that innovators have greater difficulties
in attracting venture capital, because venture capitalists themselves are accountable to a
set of investors who prefer more easily understood products. Second, does the choice of
an investor affect outcomes in the product market? For instance, venture capitalists may
affect the time it takes a company to bring its product to market.


 One alternative would be that venture capitalists
focus the entrepreneurs on the key strategic challenges and exert influence in order to
speed up the time to market. Alternatively, venture capitalists could be more patient
investors that provide the entrepreneurs with additional breathing room, thus slowing
down time to market.

Δεδομένα - Silicon Valley 

 In a probit model, controlling for age and industry effects,
we find that innovators are more likely to be financed by venture capital than are
imitators.  In a Cox proportional hazard duration model we also find that innovators
obtain venture capital earlier in the life cycle than do imitators.  In a duration  model with time varying covariates that keeps track of when a company obtains venture capital, we find that the presence of venture capital is associated with faster time to market. This effect is particularly strong for innovators but statistically insignificant for imitators.

First, we ask whether firms themselves considered obtaining venture

capital important

In all cases, we find that after controlling for these effects, venture capital is still
associated with a faster time to market, particularly for innovators, suggesting that
selection based on these aspects is not driving the results. Finally, we ask why imitators
obtain venture capital, given that there are also costs associated with venture capital, as
discussed above. We find that venture capital is associated with significantly greater
amounts of external financing for imitators, but not for innovators. This result suggests
that venture capital can play different roles in different companies. For imitators the
provision of funds may be the more important aspect of venture capital, whereas for
innovators, the product market dimension can be more important.

        VC OR ANGELS ? 

VC : Venture capitalists are full-time professional investors who invest for their partnership
funds. Venture capitalists tend to follow the technology and market developments in their
area of expertise closely, in order to stay in the deal flow and to be able to make an
informed investment decision [Fenn, Liang and Prowse (1995)]. Before making an
investment, they carefully scrutinize the founders and their business concepts [Fried and
Hisrich (1994), Garmaise (1999)]. When making the investment, they bring financial
expertise to structuring the deal and setting appropriate incentive and compensation
systems [Sahlman (1988, 1990), Kaplan and Stromberg (1999)]. After the initial
investment, venture capitalists tend to be very active in the process of raising additional
funds for their portfolio companies [Gorman and Sahlman (1989)]. They also
continuously monitor their companies both formally through participation at the board
level and informally [Rosenstein (1988), Lerner (1995)]. As monitors and through their
access to private information, like banks, they can help provide certification to outside
stakeholders [James (1987), Puri (1996, 1999), The Economist (1997)]. They can
provide valuable mentoring and strategic advice for the entrepreneurs and they frequently
assist companies in providing business contacts and recruiting senior managers [Bygrave
and Timmons (1992)]. They tend to play an important role in corporate governance,
frequently replacing the original founder as CEO [Hellmann (1998)]. Finally, they often
take an active role in guiding the exit decision, such as influencing a company’s initial
public offering [Lerner (1994), Gompers (1995)].

Angels :The main alternatives to venture capital financing are so-called “angels” (i.e., private
individuals), corporations, banks, government, and self-financing. Sahlman (1990)
emphasizes the high-powered incentives of venture capitalists and their high degree of
specialization to the financing of young companies, often within only a very limited
number of industry segments. Angel investors are independently wealthy individuals who
diversify part of their wealth by investing in young companies. Typically, they do not have
any staff for supervising their investments and tend to rely on their pre-existing networks
to find new deals. Although there is considerable heterogeneity within the angel
community, many exercise some other position as their main professional activity [Fenn,
Liang and Prowse (1998), Benjamin and Sandles (1998)]. Corporations also invest in
entrepreneurial companies, either as part of an organized venture capital fund, or on an adhoc
basis. In addition to seeking financial gains, they frequently also pursue strategic
objectives. Hellmann (1998) shows that entrepreneurs may be quite reluctant to receive
funding from corporations if there are potential conflicts of interest. More generally, while
a corporate investor may in principle be in a good position to add value to an
entrepreneurial company, incentive problems and bureaucracy are frequently believed to
limit the usefulness of a corporate investor [Gompers and Lerner (1998), Block and
McMillan (1993)]. Commercial banks are an infrequent provider of funding to
entrepreneurial companies. Apart from occasional loan commitments, banks sometimes
engage in venture capital investments through wholly-owned subsidiaries. Regulatory
constraints tend to make banks more conservative investors [Fiet and Fraser (1994),
Hellmann (1997)]. Some investment banks also make venture capital investments,
typically with an eye on future transactions, such as underwriting the IPO [Tkacs (1998),
Puri (1996, 1999), and Gompers and Lerner (1997) also examine the potential conflict of
interest when investors are also underwriters]. Government financing is entirely passive
by nature and consists mainly of grants [Lerner (1996)].

Οι υποθέσεις
In particular, we distinguish between
ex-ante strategy prior to financing, the financing itself, and the ex-post product market
outcome. Thus, we examine the interrelationship of the ex-ante strategy (innovator or
imitator) and the type of financing (venture capital or other) on the one hand, and the
interrelationship of the type of financing and subsequent product market outcomes (in
particular time to market) on the other.

Our first null hypothesis is that the type of financing is independent of product market
strategy, i.e., there is no relationship between the ex-ante strategy and the type of
financing of a start-up company.

The first alternative is that venture capitalists prefer to invest in innovator companies, because they
have a comparative advantage in identifying and then assisting innovator companies. In
particular, their business experience may be particular helpful to sort through the greater
ambiguity that surrounds an innovator company. A second alternative is that venture
capitalists, being accountable to their own investors, may prefer to invest in imitator
companies, for which the business concepts are easier to comprehend and communicate.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=173655