The Impact of Rounds of Venture Capital Funding on the Growth Strategy of Startups

George Foster, Mahendra Gupta and Antonio Davila
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George Foster: Stanford U
Mahendra Gupta: Washington U, St Louis
Antonio Davila: Stanford U

Research Papers from Stanford University, Graduate School of Business

Abstract: This paper examines the dynamic role of financial resources-available through rounds of venture capital financing-on the growth strategies of startups. We investigate three different roles and their evolution over time. 1) We examine whether financial resources constrain the growth of startups and whether rounds of funding unbind this constrain. 2) We investigate the role of financial resources beyond mere commodities and as determinants of the growth strategy of startups. 3) We explore their role as signaling mechanisms within the company. Our results indicate that the importance of these roles change over the life of startups. We find that financial resources significantly constraint the growth of young high-growth companies in the early part of their lives. However, this role is much less relevant in the later rounds of funding. Our results further suggest that the amount of funding is unrelated to subsequent growth in early rounds of funding. This result is consistent with venture capital firms perceiving these rounds as real options in a high-uncertainty environment and not as funding a particular growth strategy. In contrast, we find that in later rounds, the amount of funding is associated with subsequent growth. This result indicates that the amount of funding shapes the future growth strategy of the company and that venture capital firms affect the growth strategies of startups through the funds that they provide. Relevant to the signaling mechanism argument, we find that employee turnover decreases around the venture funding events.

Date: 2001-11
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