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The Impact of Rounds of Venture Capital Funding on the Growth Strategy of Startups

  • Foster, George

    (Stanford U)

  • Gupta, Mahendra

    (Washington U, St Louis)

  • Davila, Antonio

    (Stanford U)

Registered author(s):

    This paper examines the dynamic role of financial resources-available through rounds of venture capital financing-on the growth strategies of startups. We investigate three different roles and their evolution over time. 1) We examine whether financial resources constrain the growth of startups and whether rounds of funding unbind this constrain. 2) We investigate the role of financial resources beyond mere commodities and as determinants of the growth strategy of startups. 3) We explore their role as signaling mechanisms within the company. Our results indicate that the importance of these roles change over the life of startups. We find that financial resources significantly constraint the growth of young high-growth companies in the early part of their lives. However, this role is much less relevant in the later rounds of funding. Our results further suggest that the amount of funding is unrelated to subsequent growth in early rounds of funding. This result is consistent with venture capital firms perceiving these rounds as real options in a high-uncertainty environment and not as funding a particular growth strategy. In contrast, we find that in later rounds, the amount of funding is associated with subsequent growth. This result indicates that the amount of funding shapes the future growth strategy of the company and that venture capital firms affect the growth strategies of startups through the funds that they provide. Relevant to the signaling mechanism argument, we find that employee turnover decreases around the venture funding events.

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    Paper provided by Stanford University, Graduate School of Business in its series Research Papers with number 1727.

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    Date of creation: Nov 2001
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    Handle: RePEc:ecl:stabus:1727
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    1. Hellmann, Thomas F. & Puri, Manju, 2000. "Venture Capital and the Professionalization of Start-up Firms: Empirical Evidence," Research Papers 1661, Stanford University, Graduate School of Business.
    2. Macmillan, Ian C. & Kulow, David M. & Khoylian, Roubina, 1989. "Venture capitalists' involvement in their investments: Extent and performance," Journal of Business Venturing, Elsevier, vol. 4(1), pages 27-47, January.
    3. Hall, John & Hofer, Charles W., 1993. "Venture capitalists' decision criteria in new venture evaluation," Journal of Business Venturing, Elsevier, vol. 8(1), pages 25-42, January.
    4. Baron, James N & Burton, M Diane & Hannan, Michael T, 1996. "The Road Taken: Origins and Evolution of Employment Systems in Emerging Companies," Industrial and Corporate Change, Oxford University Press, vol. 5(2), pages 239-75.
    5. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
    6. Lerner, Josh, 1995. " Venture Capitalists and the Oversight of Private Firms," Journal of Finance, American Finance Association, vol. 50(1), pages 301-18, March.
    7. Sapienza, Harry J. & Manigart, Sophie & Vermeir, Wim, 1996. "Venture capitalist governance and value added in four countries," Journal of Business Venturing, Elsevier, vol. 11(6), pages 439-469, November.
    8. Mitchell A. Petersen & Raghuram G. Rajan, 1994. "The Effect of Credit Market Competition on Lending Relationships," NBER Working Papers 4921, National Bureau of Economic Research, Inc.
    9. Gupta, Anil K. & Sapienza, Harry J., 1992. "Determinants of venture capital firms' preferences regarding the industry diversity and geographic scope of their investments," Journal of Business Venturing, Elsevier, vol. 7(5), pages 347-362, September.
    10. Chandler, Gaylen N. & Jansen, Erik, 1992. "The founder's self-assessed competence and venture performance," Journal of Business Venturing, Elsevier, vol. 7(3), pages 223-236, May.
    11. Sahlman, William A., 1990. "The structure and governance of venture-capital organizations," Journal of Financial Economics, Elsevier, vol. 27(2), pages 473-521, October.
    12. Megginson, William L & Weiss, Kathleen A, 1991. " Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
    13. Gorman, Michael & Sahlman, William A., 1989. "What do venture capitalists do?," Journal of Business Venturing, Elsevier, vol. 4(4), pages 231-248, July.
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