A theory of strategic venture investing

Hellmann, Thomas (2002) A theory of strategic venture investing. Journal of Financial Economics, 64 (2). pp. 285-314.

Abstract

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.

Item Type: Article
Keywords: Venture capital; Strategic investing; Contracts; Valuation; finance
Subject(s): Finance
Date Deposited: 14 May 2015 14:11
Last Modified: 27 Feb 2017 10:42
Funders: N/A
URI: http://eureka.sbs.ox.ac.uk/id/eprint/5325

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