Economics Job Candidate Seminar

Abstract: This paper studies the strategic interactions between incumbents and startups by examining how Corporate Venture Capital (CVC) investments affect startup exit and innovation outcomes. Using an instrumental variable approach based on plausibly exogenous cash flow shocks from parent companies, I find that CVC involvement generally reduces the likelihood of startup failure and increases the chances of achieving an IPO rather than an acquisition. These findings indicate that incumbents, through CVC investments, likely provide valuable resources and strategic support. However, such benefits diminish–or even reverse–when CVCs exert excessive control by being dominant investors in a specific industry or by investing in early-stage startups, potentially stifling competition and raising anti-competitive concerns. Additionally, my analysis reveals consistent effects on startup innovation: CVC investments in early-stage startups reduce their disruptive innovations related to the CVC parent's market, while CVC investments in late-stage startups boost complementary innovations and innovations in CVC-unrelated areas. These nuanced outcomes highlight the need for entrepreneurs and regulators to carefully consider the implications of CVCs' influence on startups.