Cannibalization & Incentives in Venture Financing

Stefan Arping

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: This paper considers the effects of strategic substitutabilities on performance and incentives in venture capital financing. The analysis points to a subtle link between two pivotal roles of venture capitalists: (i) monitoring ventures and setting performance incentives, and (ii) coordinating and shaping the product market strategies of ventures operating in similar product spaces. When strategic substitutabilities are strong, the VC's role is to soften potentially too aggressive product market strategies. In contrast, small strategic substitutabilities can lead to more aggressive performance incentives. This is because they enhance the VC's commitment to weed out losers, which strengthens entrepreneurial incentives and results in overall efficiency gains. We discuss our findings in light of case study evidence from the venture capital industry.

Keywords: venture capital; strategic substitutabilities; incentives (search for similar items in EconPapers)
JEL-codes: G24 G3 L1 L2 L4 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2002-03, Revised 2002-05
New Economics Papers: this item is included in nep-ent
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http://www.hec.unil.ch/deep/textes/02.07bis.pdf (application/pdf)

Related works:
Working Paper: Cannibalization & Incentives in Venture Financing (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:02.07

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