Final Summary Report (1)

Strategic alliances by venture capital firms: an empirical examination

Date published: 25 December 2009Journal of Small Business EconomicsAuthors: Wang, Wuebker, Han, EnsleyPresenter: Viktoriia-Tetiana Karhina

Strategic alliances are playing an important value added role for venture-backed companies.

2 questions:(1) May strategic alliances be used as a substitute or compliment to capital infusion?(2)How venture capital companies use alliances to mitigate different types of risk?

• VC firms are taking a very high risk.• It’s expensive for a startup to get financing through venture capital firms.• To pay off vc firms need to help with technical and managerial talent.• Being a “MENTOR.” • Goal discover new opportunities.

Another way to improve portfolio firms Engage in strategic alliances.

*Introduction*

Alliances greater valuations at the time of IPO

*Introduction cont.*

2 risks venture capital firms are facing: • Internal asymmetric information and agency problems

between venture capital companies and entrepreneur.

• External environmental risks that is beyond the control of either party (investing in new ideas, new models, technology, and uncovered markets.)

Hypothesizes:

H1: Number of Alliances Capital investment received

H2: Number of Alliances Total number of venture capital firms investing

H3:Number of marketing agreements by venture backed startups

Environmental market competition

H4: Number of technological agreements

Environmental technological instability

*Theoretical Analysis*

Q1

Q2

2 datasets are being used: Thompson Financials SDC Platform

(1) VentureXpertInformation contains:

• Number of rounds• Average funding per round• Date of first and last funding• How many companies have invested(2) Alliances

Activities on:• Date• Type• Identity• Characteristics• SIC codes of alliance partners

Sample: 2505 venture backed startupsTime: January 1992- December 2004

*Empirical Framework*

The structure of venture financing and choice of strategic alliances

Dependent var: Number of total alliance

formation.

Independent var: VC investments in logs. Total number of VC

firms involved. Company age in logs Company sales in logs Industry median Q Industry median assets

tangibility ratio Total past alliances ratio Total past alliances in

logs Munificence Complexity Dynamist

*Results*

H1 and H2 are strongly supported at 1% significance level.

External environmental risk and the choices of strategic alliancesH3 is strongly supported at 5%H4 is strongly supported at 1%

Dependent var: Number of alliances in counts:

• Marketing agreements • Technological

agreementsIndependent var: Market instability Technology instability Pre-investment marketing alliances Pre-investment technology-related alliances Company age in logsIndustry median QIndustry median assets tangibility ratio

Question #1: May strategic alliances be used as a substitute or compliment to capital infusion? Yes, alliances are substitutes for capital infusion. When having an access to more resources and networks, syndication

can also provide a way to share risk and resources leading to a higher growth of the company.

Venture Capitalist have two reasons to forge in strategic alliances:• Motive (higher valuations) • Means (professional networks)

Question #2 How venture capital companies use alliances to mitigate different types of risk? Startups are reducing firm- specific environmental risk and getting an

access to the most needed resources, by using networks of their venture capital investors.

With an increase in market competitiveness the number of marketing agreements also goes up.

With an increase in technological instability more R&D agreements are announced.

*Conclusions*

*Reference*

Wang, H., Wuebker, R. J., Han, S., & Ensley, M. D. (2012). Strategic alliances by venture capital backed firms: an empirical examination. Small Business Economics, 38(2), 179-196.