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Cannibalization & Incentives in Venture Financing

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Author Info
Stefan ARPING
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.

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Publisher Info
Paper provided by Université de Lausanne, Faculté des HEC, DEEP in its series Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) with number 02.07.

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Length: 31 pages
Date of creation: Mar 2002
Date of revision: May 2002
Handle: RePEc:lau:crdeep:02.07

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Postal: Université de Lausanne, Faculté des HEC, DEEP, Internef, CH-1015 Lausanne
Phone: ++41 21 692.33.64
Fax: ++41 21 692.33.65
Web page: http://www.hec.unil.ch/deep/publications-english/e-cahiers.htm

For technical questions regarding this item, or to correct its listing, contact: (Claudine Delapierre Saudan).

Related research
Keywords: venture capital; strategic substitutabilities; incentives;

Other versions of this item:

Find related papers by JEL classification:
G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
G3 - Financial Economics - - Corporate Finance and Governance
L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
L4 - Industrial Organization - - Antitrust Issues and Policies

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