Hellmann, Thomas (2002) A theory of strategic venture investing. Journal of Financial Economics, 64 (2). pp. 285-314.
Some venture capital investors seek purely financial gains while others, such as corporations, also pursue strategic objectives. The paper examines a model where a strategic investor can achieve synergies, but can also face a conflict of interest with the entrepreneur. If the start-up is a complement to the strategic partner, it is optimal to obtain funding from the strategic investor. If the start-up is a mild substitute, the entrepreneur prefers an independent venture capitalist. With a strong substitute, syndication becomes optimal, such that the independent venture capitalist is the active lead investor and the strategic partner a passive co-investor. The expected returns for the entrepreneur are nonmonotonic, lowest for a mild substitute, and higher for a strong substitute as well as for a complement. The paper also explains why a strategic investor often pays a higher valuation than an independent venture capitalist.
|Keywords:||Venture capital; Strategic investing; Contracts; Valuation|
|Centre:||Faculty of Finance|
|Date Deposited:||14 May 2015 14:11|
|Last Modified:||23 Oct 2015 14:08|
Actions (login required)