Essays on venture capital and firm growth

Abstract

The first chapter constructs a model to explain (1) the effects of VC investment on start-ups’ growth and innovation and (2) the differences between Traditional Venture Capitalists (TVC) and Corporate Venture Capitalists (CVC) in selection preferences and investment decisions. In the model, investors can obtain financial (carried interest, equity) and strategic (complementary) returns through VC investment. I also highlight other roles of start-ups’ research related activities in CVC investment, including creating more opportunities for knowledge acquisition, and reducing the investment risk. By introducing the differences in knowledge distribution and cost efficiency between CVC and TVC, the model explains why corporate investors are more tolerant, select younger start-ups, and contribute more to the innovation performance. Last, the model explains two documented puzzles, CVC investment cultivates competitors, and corporations acquire their venture portfolio start-ups with negative financial returns. This paper reveals imperative policy implications. VC benefits start-ups’ survival and growth; CVC provides valuable external finance opportunities for the younger firms.

The Second chapter constructs a model to examine the effects of the killer acquisition on firm entry, entrants' project choice, and start-up investments. In the model, start-up investors optimally search for a project with a desired level of productivity; this searching level is jointly determined by entrants’ endowments/types and incumbents’ killer acquisition strategy. The killer acquisition strategy works as a shock or information to all participants in the industry. They reap significant benefits from killer acquisition through the channel of entrants' project choice and start-up investors' actions. For potential entrants, the model predicts the killer acquisition will enhance the entry incentive and reduce the proportion of high-type projects. For start-up investors, the model predicts that killer acquisition will push some low-type investors to exit the market, reduce the investment amount, and select lower-type projects. Finally, my model highlights one crucial policy implication: post-merger activities should be carefully regulated to avoid killer acquisitions, investment reduction, and resource misallocation.

These results provide meaningful and important implications for countries regarding start-ups' survival, financial development, and the whole economic growth.