Patient VCs vs. Deep-Pocketed Incumbents: VC Financing Strategies in the Presence of Competitive Threats

Abstract

Staged financing allows venture capitalists (VCs) to mitigate agency concerns, but also exposes their portfolio _rms to competitive threats from industry incumbents. We examine how this tension affects the dynamics of VC financing. Employing a novel textual analysis to match start-ups to their public competitors, we find that the presence of cashed-up public competitors forces VCs to adopt a more "patient" staging strategy, involving larger financing round sizes, longer duration between rounds, fewer rounds to exit, and a weaker sensitivity between _rm performance and round valuation. This reduced staging intensity is substituted by more intensive monitoring, more downside protection clauses, and the involvement of larger VC funds who can credibly signal their on-going financing commitments. We use the Great Financial Crisis as a shock to the financial strength of public _rms to enhance the identification of these effects.