The impact of venture capital on governance decisions in collaborations with start-ups

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.