This article addresses solutions for contractual hazards in the formation and operation of collaborations with start-ups. We suggest that venture capitalists (VCs) may serve as a mechanism to mitigate contractual hazards and act as a substitute for equity sharing in joint ventures. This article is to our knowledge the first to address the impact of VC on governance decisions for start-ups. We analyse 5405 bilateral collaborations from the SDC database for the period 2009–2014 and find that VC-backed firms are less likely to share equity in collaborations. In a subset of 564 VC-backed firms, start-ups are less likely to choose a joint venture as a governance structure in comparison with established firms. When firms are backed by a larger number of VCs, they are also less likely to share equity in a collaboration. This article improves our understanding of the effect of VC on governance decisions in inter-firm relations and presents evidence of a trade-off between joint venture equity and VC equity in the formation of collaborations. It also shows that this trade-off becomes even more substantial when syndication of VCs is present.
This is a preview of subscription content, log in to check access.
Buy single article
Instant access to the full article PDF.
Price includes VAT for USA
Subscribe to journal
Immediate online access to all issues from 2019. Subscription will auto renew annually.
This is the net price. Taxes to be calculated in checkout.
Wang et al. (2012) allow for a variable period between the time venture capital funding is received and the time collaborations are formed, with a minimum of 4 years for the final year. We have opted for a period of four years between venture capital funding and collaborations formed to exclude a timebias in the VC effect on governance choice.
In model 2, the analysis is at the level of the VC-backed firm (and not at the level of the alliance as in model 1).
The results can be obtained from the authors.
We did not test the relation for the continents Africa, Australia and South America, because of the limited number of observations for collaborations in these continents.
Baum, J. A. C., & Silverman, B. S. (2004). Picking winners or building them? Alliance, intellectual, and human capital as selection criteria in venture financing and performance of biotechnology startups. Journal of Business Venturing, 19(3), 411–436.
Beamish, P. W., & Banks, J. C. (1987). Equity joint ventures and the theory of the multinational enterprise. Journal of International Business Studies, 18(2), 1–16.
Brander, J. A., Amit, R., & Antweiler, W. (2002). Venture capital syndication: Improved venture selection vs. the value-added hypothesis. Journal of Economics & Management Strategy, 11(3), 423–452.
Bygrave, W. D. (1987). Syndicated investments by venture capital firms: A networking perspective. Journal of Business Venturing, 2(2), 139–154.
Cai, H. (2003). A theory of joint asset ownership. The Rand Journal of Economics, 34(1), 63–77.
Chang, S. J. (2004). Venture capital financing, strategic alliances, and the initial public offerings of internet startups. Journal of Business Venturing, 19(5), 721–741.
Colombo, M. G., & Grilli, L. (2010). On growth drivers of high-tech start-ups: Exploring the role of founders’ human capital and venture capital. Journal of Business Venturing, 25(6), 610–626.
Colombo, M. G., Grilli, L., & Piva, E. (2006). In search of complementary assets: The determinants of alliance formation of high-tech start-ups. Research Policy, 35(8), 1166–1199.
Combs, J. G., & Ketchen, D. J, Jr. (1999). Explaining interfirm cooperation and performance: Toward a reconciliation of predictions from the resource-based view and organizational economics. Strategic Management Journal, 20, 867–888.
Das, T. K., & Teng, B.-S. (2000). A resource-based theory of strategic alliances. Journal of Management, 26(1), 31–61.
Dasgupta, S., & Tao, Z. (1998). Contractual incompleteness and the optimality of equity joint ventures. Journal of Economic Behavior & Organization, 37(4), 391–413.
Eisenhardt, K. M., & Schoonhoven, C. B. (1996). Resource-based view of strategic alliance formation: Strategic and social effects in entrepreneurial firms. Organization Science, 7(2), 136–150.
Ferrary, M. (2010). Syndication of venture capital investment: The art of resource pooling. Entrepreneurship Theory and Practice, 34(5), 885–907.
Gans, J. S., Hsu, D. H., & Stern, S. (2002). When does start-up innovation spur the gale of creative destruction? RAND Journal of Economics, 33, 571–586.
Gans, J. S., & Stern, S. (2003). The product market and the market for “ideas”: Commercialization strategies for technology entrepreneurs. Research Policy, 32(2), 333–350.
Gulati, R. (1995). Social structure and alliance formation patterns: A longitudinal analysis. Administrative Science Quarterly, 40(4), 619–652.
Gulati, R. (1998). Alliances and networks. Strategic Management Journal, 1(4), 293–317.
Harrigan, K. R. (1988). Joint ventures and competitive strategy. Strategic Management Journal, 9(2), 141–158.
Hellmann, T., & Puri, M. (2002). Venture capital and the professionalization of start-up firms: Empirical evidence. The Journal of Finance, 57(1), 169–197.
Hennart, J.-F. (1988). A transaction costs theory of equity joint ventures. Strategic Management Journal, 9(4), 361–374.
Hoetker, G. (2007). The use of logit and probit models in strategic management research: Critical issues. Strategic Management Journal, 28(4), 331–343.
Hopp, C. (2010). When do venture capitalists collaborate? Evidence on the driving forces of venture capital syndication. Small Business Economics, 35(4), 417–431.
Hsu, D. H. (2006). Venture capitalists and cooperative start-up commercialization strategy. Management Science, 52(2), 204–219.
Jolink, A., & Niesten, E. (2012). Recent qualitative advances on hybrid organizations: Taking stock, looking ahead. Scandinavian Journal of Management, 28(2), 149–161.
Kaplan, S. & Lerner, J. (2014). Venture capital data: Opportunities and challenges. In NBER-CRIW conference on measuring entrepreneurial businesses: Current knowledge and challenges, 2014.
Kutner, M., Nachtsheim, C., Neter, J., & Li, W. (2005). Applied linear statistical models. New York: McGrawHill.
Lafontaine, F. (1992). Agency theory and franchising: Some empirical results. RAND Journal of Economics, 23, 263–283.
Lafontaine, F., & Slade, M. (2007). Vertical integration and firm boundaries: The evidence. Journal of Economic Literature, 45, 629–685.
Lerner, J. (1994). The syndication of venture capital investments. Financial Management, 23(3), 16–27.
Lin, Z., Yang, H., & Arya, B. (2009). Alliance partners and firm performance: resource complementarity and status association. Strategic Management Journal, 30(9), 921–940.
Lindsey, L. (2008). Blurring firm boundaries: The role of venture capital in strategic alliances. The Journal of Finance, 63(3), 1137–1168.
Niesten, E., & Jolink, A. (2015). The impact of alliance management capabilities on alliance attributes and performance: A literature review. International Journal of Management Reviews, 17(1), 69–100.
Ning, Y., Wang, W., & Yu, B. (2015). The driving forces of venture capital investments. Small Business Economics, 44(2), 315–344.
Oxley, J. E. (1997). Appropriability hazards and governance in strategic alliances: A transaction cost approach. Journal of Law Economics and Organization, 13(2), 387–409.
Oxley, J. E., & Sampson, R. C. (2004). The scope and governance of international R&D alliances. Strategic Management Journal, 25, 723–749.
Park, S. H., Chen, R., & Gallagher, S. (2002). Firm resources as moderators of the relationship between market growth and strategic alliances in semiconductor start-ups. Academy of Management Journal, 45(3), 527–545.
Reuer, J. J., & Devarakonda, S. (2015). Mechanisms of hybrid governance: Administrative committees in non-equity alliances. Academy of Management Journal. doi:10.5465/amj.2012.0098.
Reuer, J. J., & Lahiri, N. (2014). Searching for alliance partners: Effects of geographic distance on the formation of R&D collaborations. Organization Science, 25(1), 283–298.
Sampson, R. C. (2004). The cost of misaligned governance in R&D alliances. The Journal of Law, Economics & Organization, 20(2), 484–526.
Sampson, R. C. (2007). R&D alliances and firm performance: The impact of technological diversity and alliance organization on innovation. Academy of Management Journal, 50(2), 364–386.
Schilling, M. A. (2009). Understanding the alliance data. Strategic Management Journal, 30, 233–260.
Stuart, T. E., Hoang, H., & Hybels, R. C. (1999). Interorganizational endorsements and the performance of entrepreneurial ventures. Administrative Science Quarterly, 44(2), 315.
Tsang, E. W. K. (2000). Transaction cost and resource-based explanations of joint ventures: A comparison and synthesis. Organization Studies, 21(1), 215–242.
Wang, H., Wuebker, R. J., Han, S., & Ensley, M. D. (2012). Strategic alliances by venture capital backed firms: An empirical examination. Small Business Economics, 38(2), 179–196.
Williamson, O. E. (1991). Comparative economic organization: The analysis of discrete structural alternatives. Administrative Science Quarterly, 36(2), 269–296.
Williamson, O. E. (1996). Mechanisms of governance. Oxford: Oxford University Press.
Wright, M., & Lockett, A. (2003). The structure and management of alliances: Syndication in the venture capital industry. Journal of Management Studies, 40(8), 2073–2102.
Wright, M., & Robbie, K. (1998). Venture capital and private equity: A review and synthesis. Journal of Business Finance & Accounting, 25(5&6), 521–570.
About this article
Cite this article
Jolink, A., Niesten, E. The impact of venture capital on governance decisions in collaborations with start-ups. Small Bus Econ 47, 331–344 (2016). https://doi.org/10.1007/s11187-016-9719-8
- Strategic alliances
- Transaction cost economics
- Venture capital