Research Paper No.

1561

The Interaction Between Product Marketing and Financing

Strategy: The Role of Venture Capital

Thomas Hellmann
Manju Puri

RESEARCH PAPER SERIES

GRADUATE SCHOOL OF BUSINESS

STANFORD UNIVERSITY
 The Interaction between Product Market
and Financing Strategy:
The Role of Venture Capital

Thomas Hellmann* & Manju Puri**

Graduate School of Business

Stanford University
Stanford, CA 94305-5015

May 1999


We would like to thank the Center for Entrepreneurial Studies at the Stanford Graduate School of Business
for their financial support. We thank Anat Admati, Bill Barnett, Chris Barry, Jim Brander, Bruno Cassiman,
Darrell Duffie, Paul Gompers, Steve Kaplan, Josh Lerner, Robert McDonald, Paul Pfleiderer, William
Sahlman, Andrea Shepard, Sheridan Titman, Jim Vanhorne, seminar participants at American Finance
Association, New York, Arizona State University, Bocconi University in Milano, Humbolt University in
Berlin, University of British Columbia, University of Chicago, University of Dresden, University of
Maryland, University of Munich, Stanford University, Tilburg University and the Western Finance
Association, Monterey, for helpful comments. We also thank Jim Baron, Diane Burton and Michael Hannan
for their generous permission to access their data, and Ali Hortacsu, Vlasta Pokladnik, Shu Wu, Mu Yang,
and Muhamet Yildiz for excellent research assistance. All errors are ours.

* Thomas Hellmann: Tel: (650) 723-6815. Fax: (650) 725-6152. Email: [email protected]
** Manju Puri: Tel: (650) 723-3402. Fax: (650) 725-6152. Email: [email protected]
 Abstract

Venture capital is widely believed to be an influential arrangement for the financing of

new innovative companies. We examine and find empirical evidence that venture capital
financing is related to product market strategies and outcomes of startups. We use a
unique hand-collected database of Silicon Valley high technology start-ups, that contains
both venture capital and non-venture capital backed firms, and that contains firm-specific
data on initial product market strategies, subsequent financing patterns, and the time it
takes a firm to bring its product to market. We find that firms that are pursuing an
innovator strategy are significantly more likely and faster to obtain venture capital. The
presence of a venture capitalist is also associated with a significant reduction in the time
taken to bring a product to market, especially for innovators. Further, firms are more
likely to list obtaining venture capital as a significant milestone in the lifecycle of the
company as compared to other financing events. Our results suggest significant
interrelations between investor type and product market dimensions, and a potential role
of venture capital for innovative companies.
Introduction

Venture capital is widely believed to contribute to the competitive strength of the US

economy by promoting the development of innovative start-ups. Yet little is known about
what kind of companies are most likely to receive venture capital and what impact it has
on these companies. It is commonly argued that a distinguishing feature of venture capital
is the close involvement of the investor with the companies they finance. If one thinks of
financial institutions on a spectrum from ‘arm’s length’ to ‘relational’ investors, venture
capital is typically viewed as lying at the latter extreme.1 A growing (mostly informal)
literature documents the multiple ways in which venture capitalists are extensively
involved in the businesses they finance, not only closely monitoring their activities, but
also providing valuable support and governance.2 The natural question to ask then is
whether the involvement of a venture capitalist makes a difference in the development
path of the entrepreneurial companies.

The issue of what kind of investor might help to promote innovative firms is also
important in the context of the emerging literature on the interaction between financing
and product market behavior. This literature has focused mainly on the relationship
between debt levels and product market behavior.3 The impact of equity investors, or
more broadly the importance of the investor type, however, has received little attention.
Hence, the role of involved equity investors like venture capitalists on product market
dimensions, is an interesting but unexplored avenue for research.

To understand the strategic challenges that new companies face we can draw on a large

1
The literature on arm’s length versus relationship financing includes Fama (1985), Sharpe (1990),
Diamond (1991) and Rajan (1992).
2
See the Appendix for a detailed description of venture capitalists and how they differ from other investors.
3
Brander and Lewis (1986), for example, examine the relationship between capital structure and pricing of
an oligopolist. Other important theoretical contributions to this literature include Bolton and Scharfstein
(1990) and Poitevin (1989) who examine endogenous financial constraints in predatory action games,
Maksimovic and Titman (1991) who examine how financial policy affects firms’ incentive to maintain their
product reputation, and Gertner, Gibbons and Scharfstein (1988) who examine signaling across markets.
Chevalier (1995a,b), Philips (1995), and Gordon and Phillips (1998) provide some empirical evidence. See
Ravid (1988) for a survey.
industrial organization literature that examines the strategic challenges of new companies.
Among the competitive strategies of new companies, an important distinction made in
this literature is between innovator and imitator strategies. Innovators are those firms that
are the first to introduce new products or services for which no close substitute is yet
offered in the market. Imitators are also engaged in relatively new products and
technologies, but they are not the first movers in their markets and therefore tend to
compete on aspects other than innovation.4 There is no general presupposition that one
strategy is systematically better than the other.5 However, the choice of an innovator and
imitator strategy has implications for the relative importance of strategic actions, such as
the importance of being a first mover or being quick to market.

With this distinction between innovator versus imitator strategies, a number of questions
arise about interaction effect with venture capital. First, does the choice of a product
market strategy influence the type of financing obtained by a start-up company? There are
a number of alternative hypotheses. For example, one alternative would be that it is
easier for an innovator company to attract venture capital if innovator companies provide
greater opportunities for venture capitalists to add value by shaping their development
path. Alternatively, innovators could have greater difficulties in attracting venture capital,
because venture capitalists are accountable themselves to a set of investors who prefer
more easily understood products. Second, does the choice of an investor in turn have an
impact on outcomes in the product market? For instance, there may be differences in the
time it takes a company to bring its product to market. Again, a number of alternative
hypotheses are possible. One alternative would be that venture capitalists focus the
entrepreneurs on the key strategic challenges and provide support so as to speed up the

4
In a survey of the theoretical and empirical literature, Lieberman and Montgomery (1988) broadly classify
the advantages of being a first mover in terms of leadership in product and process technology, preemption
of assets and the development of buyer switching costs; the disadvantages of being a first mover relate
mainly to free-rider problems and to lock-in effects and sluggish responses of first-movers. See Fudenberg
and Tirole (1996), and Tirole (1998) for some of the game-theoretic foundations of the first-mover
advantages.
5
Maggi (1996) shows that even with identical players there may be asymmetric equilibria where some firms
pursue innovator and other firms pursue imitator strategies; expected profits, however, are equalized across
companies. A similar conclusion emerges from the literature on the endogenous timing of innovation, that is
summarized in Reinganum (1989).

2
time to market. Alternatively, venture capitalists could be more patient investors that
provide the entrepreneurs with additional breathing room, thus leading to a slower time to
market. Since the theoretical considerations suggest that there might be various
interaction effects pointing in different directions, it is appropriate to submit these
questions to an empirical analysis.

One of the difficulties that typically plagues this line of research is the dearth of available
data sets. In order to research these questions we use a unique hand-collected dataset of
start-up companies. Our sample focuses exclusively on high technology companies in
Silicon Valley, where the high incidence of entrepreneurial activity provides a rich setting
for studying our hypotheses. The companies are sampled independent of financing
choice. To obtain this information a variety of instruments are used, including surveys,
interviews, commercial databases as well as any publicly available information. The
interviews and surveys are particularly useful to obtain retrospective information going
back to the founding stages. This allows the creation of a time line of events in the
company that tells us at what point in time companies obtained venture capital, if at all.
One third of our sample companies are non-venture capital backed firms. Through
interviews, product market information that is usually not available is obtained such as
the founder’s initial product market strategy, and the time a company brings its product to
market. Companies are classified into two groups according to whether their initial
strategy is best described as an innovator strategy or an imitator strategy. The criterion for
being an innovator is that the company is either creating a new market, is introducing a
radical innovation in an existing market or is developing a technology that will lead to
products that satisfy either of the above criteria.6

The first part of the analysis examines the relationship between the product market
strategy and investor type. In a probit model, controlling for age and industry effects, we

6
Imitators typically still have a certain amount of inventiveness, but they seek their competitive advantages
not through innovation itself, but rather through differentiation, typically in terms of product features or
marketing.

3
find that innovators are more likely to be financed by venture capital than imitators.7 In a
Cox proportional hazard duration model we also find that innovators are faster in
obtaining venture capital. These results refute the sometimes voiced criticisms that
venture capital does not support the most innovative start-ups, or that venture capitalists
only invest in innovative companies when they are already older and less risky.

In the second part of the analysis we examine the relationship between venture capital
financing and the time it takes a company to bring its product to market. In a duration
model with time varying covariates that keeps track at what point in time a company
obtains venture capital, we find that the presence of venture capital is associated with
faster time to market. This effect is particularly strong for innovators but statistically
insignificant for imitators. One interpretation of these results is that venture capitalists
provide support to companies to bring their product to market faster, and this effect is
more pronounced for innovators, for whom such support might be particularly valuable.
This interpretation also helps explain our first finding that innovators are more likely to
obtain venture capital.

The final third part of the analysis is to consider some alternative interpretations, and
additional robustness checks. First we ask whether firms themselves consider obtaining
venture capital important. In surveys, firms were asked to list significant milestones in the
history of the company. We find that firms are more likely to consider venture capital a
milestone event than obtaining financing from some other kind of financier. Second, we
then ask whether our result of a faster time to market may be due to the venture capitalist
selecting companies with particular characteristics. We test for selection by venture
capitalists based on observable information, selection based on expert (predictive)
industry knowledge by venture capitalists, and selection based on product
announcements, either publicly known or anticipated within the year. In all cases, we
find that after controlling for these effects, venture capital is still associated with a faster

7
Insofar as ex-ante measures of innovation are likely to be correlated to ex-post measures our results are
consistent with Kortum and Lerner (1998) who, in a somewhat different context, find that venture capital
backed firms are more likely to innovate (through ex-post patenting activity) than non-venture capital

4
time to market, particularly for innovators, suggesting that selection based on these
aspects are not driving the results. Finally, we ask why do imitators obtain venture
capital. We find that venture capital is associated with significantly greater amounts of
external financing for imitators, but not for innovators. This result suggests that venture
capital can play different roles in different companies. For imitators the provision of
funds may be the more important aspect of venture capital, whereas for innovators the
product market dimension can be more important.

The remainder of the paper is organized as follows. Section 1 lays out the hypotheses.
Section 2 describes the data. Section 3 examines the effect of the founding strategy on the
type of financing. Section 4 examines the relationship between venture capital financing
and product market outcomes. Section 5 discusses alternative interpretations and
robustness checks. Section 6 examines the provision of financing. Section 7 concludes.

1. The hypotheses

In this section we briefly outline the hypotheses that underlie our analysis. Very little is
known about the interaction between the product market attributes and the type of
investor, particularly in the financing of start-up companies. An important question is
therefore whether any such interactions exist. In testing for interactions we will be
careful to account for the timing structure of events. In particular, we distinguish between
ex-ante strategy prior to financing, the financing itself, and the ex-post product market
outcome. Thus, we examine the interrelationship of the ex-ante strategy (innovator or
imitator) and the type of financing (venture capital or other) on the one hand, and the
interrelationship of the type of financing and subsequent product market outcomes (in
particular time to market) on the other.

Our first null hypothesis is that the type of financing is independent of product market

backed firms.

5
strategy, i.e., there is no relationship between the ex-ante strategy and the type of
financing of a start-up company. There are at least two alternative hypotheses. The first
alternative is that venture capitalists prefer to invest in innovator companies, because they
have a comparative advantage in identifying and then supporting innovator companies. In
particular, their business experience may be particular helpful to sort through the greater
ambiguity that surrounds an innovator company. A second alternative is that venture
capitalists, being accountable to their own investors, may prefer to invest in innovator
companies where the business concepts are easier to comprehend and communicate.
Under this view, venture capitalists may shy away from the uncertainty of an innovator
company, but are eager to free ride on the learning of other companies by funding mainly
imitator companies. 8

Our second null hypothesis postulates that the type of financing is product market neutral,
i.e., there is no relation between the type of financing and product market outcomes of a
start-up company. Arguably for start-ups one of the most important product market
outcomes is the time in which they bring a product to market. The null hypothesis would
then argue that type of financing (or investor type) does not affect time to market. Again,
there are at least two alternate hypotheses. The first alternative is that the knowledge and
the involvement of venture capitalists allow them to better identify promising companies
and then support them in their quest to be fast in bringing a product to market. Here we
would then find venture capital being associated with faster time to market. This effect
might be particularly strong for innovators whose strategy is predicated on being a first
mover. Alternatively, it could be the case that venture capitalists are patient investors with
a higher tolerance for long development cycles. In this case, venture capitalists would be
associated with longer time to market.

2. The Data

8
Bylinsky (1995) and Deger (1996) suggest such behavior for the venture capital industry.

6
In order to test our hypotheses we need a sample of firms chosen independent of
financing (so that we have both venture and non-venture capital backed firms). Further,
we need data on ex-ante strategies of firms, the kind and timing of financing (venture
capital or not) received and the timing of bringing a product to market. Our task is
complicated by the fact that existing commercial databases such as Venture Economics
and Venture One contain data only on venture capital backed firms, hence we cannot use
these databases to identify a sample of firms to study. Further, these databases have scant
data on the time line of events, and ex-ante strategies of firms.

To conduct this study we therefore use a unique hand collected data set of start ups in
Silicon Valley culled from a combination of survey data as well as publicly available
data. This data set is collated from combining two independent research efforts
conducted over a period of several years, starting in 1994. The initial sample selection of
Silicon Valley firms and data collection was organized by Baron, Burton and Hannan
(1996a,b) which we supplemented in 1996 and 1997 by an additional financing survey
and related data collection.9 To generate the initial list of companies three main
datasources were used. The first two databases which listed firms in Silicon Valley were:
Rich’s Everyday Sales Prospecting Guide published by Rich’s Guide, and Technology
Resource Guide to Greater Silicon Valley published by CorpTech. A stratified random
sample was selected where firms could have a legal age no older than 10 years and had to
have more than 10 employees. Moreover, young and large firms were over-sampled and
foreign firms were excluded. The Silicon Valley business press was used as a third
datasource to identify very young firms that were not even listed in the two databases
mentioned above, and supplement the sample. The purpose of doing this was to alleviate
concerns that relying exclusively on guidebooks such as Rich’s and CorpTech to

9
A more detailed description of the sampling procedures and their rationale can be found in Burton (1996)
and in Baron, Burton and Hannan, (1996a,b). These papers are based on a first round of interviews of some
100 companies that were performed in the summer of 1994. A second round of interviews was conducted in
the summer of 1995 and follow up interviews were conducted in the summer of 1996. This paper obviously
uses the updated information. Where possible, we also augmented the publicly available information up to
the end of our observation period, which we defined to be October 1997.

7
construct the sample might under represent new start ups since there is sometimes a
considerable time lag before newly created firms appear in these guidebooks. Hence the
sample was supplemented by adding on 22 very young firms identified by tracking the
Silicon Valley business press.

Our sample consists of 173 start up companies that are located in California’s Silicon
Valley. In order to collect the data a number of surveys were sent to different key people
in the firm that covered a wide range of questions about historic and current aspects of the
companies. The overall response rate was 80%. Further, trained MBA and Ph.D. students
conducted semi-structured interviews with key informants of the sample companies. An
effort was made to interview the founders, the current CEO and a human resource
manager for each company. This data was then augmented with any information provided
by the company (such as a business plan). Additionally, publicly available information
about each of the firms in the study was gathered from on-line data sources such as
Lexis/Nexis, Dialog, Business Connection, ABI Inform. Further, for firms that had gone
public, annual reports, 10-K or IPO prospectuses, where available were also collected,
and used to augment the data. To obtain financing data, from autumn 1996 to October
1997 we sent out a survey addressed to the most senior member of the company in charge
of finance. The survey asked for a complete financing history of the company since the
time of founding. The information was augmented with data available from two
commercial databases; Venture Economics and Venture One largely for the purpose of
ascertaining which firms in our sample received venture capital.10 We performed
additional cross checks on the data using the interview transcripts, researching public
sources and placing calls to the companies to resolve remaining ambiguities. We also
continued to augment the data coming in from the companies again using public
information as well as the interview and survey material. Considerable emphasis was put
on measuring the timing of events such as the date of founding, the date of the first
product sale, the timing of all financing rounds.

10
See Lerner (1994, 1995) for a discussion of the Venture Economics database and Gompers and Lerner
(1997) for a discussion of the Venture One database. We found 107 of the sample companies in Venture
One and 95 were found in Venture Economics. 66 companies (38%) replied to our financing survey.

8
This experiment design has three distinct advantages. First, the sampling is independent
of the form of financing. One third of the sample are non-venture backed firms, allowing
us to compare and contrast the behavior of venture backed firms with non-venture backed
firms. Second we obtain a clear time line of events. The design of the study allows us to
observe companies over time, including retrospective data all the way back to the
founding events. Third, the use of surveys and interviews, though imperfect for the usual
reasons, allows us to obtain data, such as the founding strategy, that is normally not
available to researchers. Additionally, Silicon Valley is an interesting environment to
study since it has the highest start-up activity in the U.S.A. The narrow focus of our
sample – technology companies in Silicon Valley - has the advantage that we can control
for common economic conditions (geography, labor markets, regulation). The
disadvantage is that the results may, obviously, have limited applicability for companies
under different economic base conditions.

2.1. The variables

In what follows below we describe the main variables, the way they are defined and
collated. Table 1 shows the descriptive statistics.

AGE is the age of the company in October 1997 measured from the birth date of the
company. The date of legal incorporation is often taken as the birth date for companies
and would appear to be a natural choice. However, for entrepreneurial firms this is far
from obvious. In particular, in our sample, over half of the companies, had some other
significant event that preceded the date of incorporation, such as the beginning of normal
business operations or the hiring of a first employee. Moreover, there does not appear to
be any clear sequence of events that these companies follow in this initial period of
creation. In this paper we therefore take a conservative approach and use the earliest date
recorded in any of our data sources corresponding to the earliest evidence of firm activity

9
as the date of birth.

SAMPLE-AGE is the age of the company at the time of sampling measured from the date
of birth of the company.

VC is a dummy variable that takes the value 1 if a firm has received venture capital; 0
otherwise. From the interviews, surveys and commercial databases we identify which
firms are financed by venture capitalists and the timing of such financing. Venture
capitalists are professional investors that specialize in the financing of young private
companies. We also create other venture capital related variables based on the timing of
the venture capital. Thus VC(1) is a dummy variable that takes the value 1 if a firm has
received venture capital in the first year of its birth; 0 otherwise. VC(P) is a dummy
variable that takes the value 1 if the company obtained venture capital before the date of
first product sale.

TIME-TO-VC measures the time from the birth of the company to the date of obtaining
venture capital for the first time.

TIME-TO-MARKET measures the time from the birth of the company to the date of first
product sale. This is an important strategic variable. We obtain this variable from the
interviews with the informants at the company. These interviews included a targeted
question of when the company brought its product to the market. We augment this
information with publicly available data on the company’s product, using in particular the
earliest product mention in Rich’s guide or other public sources.

COMPUTER, TELECOM, and MEDICAL are dummy variables which take the value 1
if the firm is in the computer, telecommunications or medical-related industry
respectively; 0 otherwise. OTHER is a dummy variable which takes the value 1 if the
firm is in another industry (mostly semiconductors); 0 otherwise.

10
INNOVATOR is a dummy variable which takes the value 1 if the founding strategy of the
firm was an innovator strategy; 0 otherwise. This is an important strategic variable as we
are interested in measuring ex-ante strategies. There is no easy way of obtaining this data
hence this variable deserves some discussion.11 The founders’ interviews contained a
specific section that asked about their perceived “distinctive competence and competitive
advantage.” To cross check the information, whenever possible, the same questions were
asked to other people involved in the founding of the company. The classification was
then done based on content analyses of their answers. Further this classification was
supplemented by other objective measures including secondary sources (e.g., newspaper
articles and industry analyst reports) and other material provided by the firm (such as a
business plan). Two trained coders were then asked to separately read through all the
interview transcripts as well as all the other collected material to assign a company to a
strategy.12 Both of the coders coded all of the sample companies independently and in
case they disagreed, a third person was asked to resolve the differences. Conceptually, the
coding of the innovator variable captures the idea of firms that introduce a new product
that is considered not to be a close substitute to any product or service already offered in
the market; firms that introduce a new product or service that is considered to perform an
order of magnitude better than any substitute products already offered in the market; or
firms that are developing new technologies that could lead to products satisfying either of
the two criteria above.13 We put the remaining companies into a single category of

11
This coding was performed under the supervision of Baron, Burton and Hannan. They actually used a
more fine-grained strategy coding that further subdivided the group of what we call imitators. Details can be
found in Burton (1996) and Burton, Lam and Sellars (1996).
12
The instructions included ‘buzzwords’ that the coders were asked to look out for. Buzzwords for
innovators include: “New technology, forefront, new paradigms, brand new discovery, patented technology,
pioneer, unique, no competition, first in the field, first-mover advantage, technological breakthrough, new
idea, technological innovation.” Buzzwords for imitators include: “feature-rich, integration, me-too, better
design, outperform existing competitors, improvements in quality and features, second source, superior
sales/marketing, clone, cheap, low cost, assembly.”
13
Some typical quotes from the interviews that were associated with innovators are:
• “[A] new and unique introduction without a defined market”
• “It was a brand new discovery that could be patented”
• “[A] completely new idea, so there was no competition in the area”
• “There is intense competition in the drug delivery business; they are clearly in a
technological race with many companies”
• “They appear to be at the forefront of developing technology for the information
superhighway… Initial core competence was technology developed at Stanford.”

11
imitators.14 While these firms may still have some degree of novelty in their product
offering, this is typically not the main source of their perceived competitive advantage.
We were able to obtain founding strategies for 149 companies and hence this is our
effective sample size.

2.2. Robustness checks on the data

We next discuss some potential limitations of the data and a number of robustness checks
we performed to deal with these concerns.

A common issue is the use of survey data is the use of retrospective data and the bias
such data can impose. While the innovator variable measures the initial strategic intent, it
still relies on retrospective information and could be subject to retrospective biases. Some
argue (see, for example, Bhide, 1998) that entrepreneurs may have a tendency to distort or
dramatize their company’s history. To avoid such problems a number of measures were
taken, during the data gathering stage, as well as afterwards. First, in the interviews
subjects were not asked to classify themselves as innovators or imitators. Instead, this
information was extrapolated from a variety of information sources that included not only
the founders’ technical descriptions, but also the descriptions of other parties involved in
the founding of the company and other available information about the company. Second,
if there is retrospective bias it is likely to be more for older companies so that older firms
are more likely to portray themselves as innovators. Hence we examine the age
composition of the innovator variable. We divide the sample into its younger and older
halves and perform a test whether older firms are more likely to be classified as
innovators. Table 2a performs a χ2 test and reveals no significant differences, suggesting

14
Representative quotes include:
• “The initial competence of the company was a customer focus”
• “Understanding technology, customers’ needs and how to apply the former to the latter
• “Competitive advantage is providing both hardware and software expertise… [their] product
is the most feature-rich in the industry”
• “[T]hey knew that there was a market for optical character recognition and they wanted to
outperform their existing competitors on accuracy and speed. It was a me-too approach.”
• “[It was a] service industry emphasizing quality and low cost. Hard working, long hours, low

12
that retrospective biases are unlikely to be driving this result. Third, we examine whether
companies formalized the strategies that they intended to pursue at the time of receiving
venture capital, in terms of a written detailed business plan. Table 2b shows some
descriptive statistics on how many entrepreneurs had a business plan at the time of
obtaining venture capital. Although the number of observations is somewhat low, two
messages emerge from this table. Most entrepreneurs have a business plan at the time of
venture capital. And innovators are more likely to have a business plan than imitators (the
χ2 test is statistically significant at 1%). Venture capitalists typically use the business plan
to give a high level of scrutiny to the companies’ plans before investing in it. This is
particularly important for an innovator company, because it is likely to be inherently more
difficult to evaluate. The writing of a business plan also forces entrepreneurs to define
their strategy more explicitly. The fact that these companies formalize their intention in
writing would also limit the extent to which their recollections become distorted. Last,
but not least, while a measurement of the ex-ante intent is most relevant to our hypothesis
a natural question that arises is whether this intent is reflected in the realized behavior of
these companies. It is reasonable that the ex-ante strategies be correlated to ex-post
outcomes. We examine this by analyzing the firm’s patenting behavior, since patenting
data reveals information about the ex-post behavior of the companies. [See Griliches
(1990) and Kortum and Lerner (1998) for a detailed discussion of the advantages and
disadvantages of using patenting data as a measure of innovation.] To examine patenting
behavior of the firms in our sample we gathered additional data. We identify patent
activity by using the Lexis/Nexis online database. For each individual firm, we identify
all patents where that particular firm is defined as the Assignee-at-Issue over the entire
sample period that is from birth of the company till October 1997. We classify companies
into whether or not they receive patents. We create a dummy variable PATENT which is
1 if the company received a patent; 0 otherwise. Table 2c shows the relationship between
an innovator strategy and the propensity to patent. The χ2 test shows that innovators are
indeed more likely to obtain patents showing that more often than not, ex-ante intent is
translated into a realized measure of innovation. Furthermore, we examine the natural

margins.

13
logarithm of the number of patents, which is as widely used measure of innovation (see
e.g., Kortun and Lerner (1988)). Table 2d shows a t-test of the equality of means between
the innovator and the imitator sample. We find that innovators do have a significantly
higher number of patents than imitators. Thus, both our ex-post measures of innovation
based on patents) correlate well with our ex-ante measure of innovation.

Another concern with the data is the potential survivorship bias, since companies are not
sampled at birth. A number of arguments, however, suggest that this survivorship bias is
relatively minor. First, a particular effort was made to include many young companies,
precisely to reduce any survivor bias. As a consequence our sample captures firms at a
much earlier stage than most other databases.15 Second, unlike many other studies in
finance relating to venture capital, we are able to sample companies independent of their
financial choices. In fact, our sampling criterion is essentially based on the existence of
the company, and not on any endogenous financial measure. In particular our sampling
criteria is not affected in any way by the firm getting venture capital. Finally, a number of
companies fail within our sample and we estimate a probit to see if the probability of
failing is systematically related to any known characteristic. We find that neither the
strategy (innovator or imitator), the presence of venture capital, age of the firm, nor any
industry effects are statistically significant in predicting exit from the sample. The within-
sample behavior thus suggests that selection issues are unlikely to have a major effect on
our results.

Finally, while we had a high overall response rate, we were still unable to code every
company in the sample. Thus, we identified a strategy for 149 companies in the sample.
This raises the question whether there are response biases. We test for response biases by
estimating a probit where the dependent variable is whether we obtain ex-ante strategy for
the firm. We find that neither the presence of venture capital, age of firm, nor any

15
An interesting issue that emerged in this research is that even at a conceptual level it is not clear how one
could eliminate all survivorship bias. As we discussed, there is no objective date at which a company is
born. Given this inherent ambiguity about if and when entrepreneurial activities should be considered a new
company it seems conceptually impossible to eliminate all survivor bias.

14
industry effects are statistically significant in predicting responses received. This suggests
that there is little systematic response bias.

3. Does strategy affect the type of financing?

In this section we examine the first null hypothesis that concerns the relationship between
initial product market strategy and the type of financing. A univariate χ2 test was
conducted to test for independence between innovators and venture capital. This was
rejected at the 2% level with more innovators taking venture capital. While the univariate
test is suggestive we clearly need to control for other characteristics of the firm. Hence we
estimate a probit regression where the dependent variable is a dummy variable, VC, that
measures whether a firm has obtained venture capital financing. The main independent
variable is whether a company is an innovator or imitator, and we control for factors such
as the age of the firm and the industry the firm is in. Table 3 reports the probit regression
results. We find that innovators are significantly more likely to receive venture capital
financing. The probability that a firm receives venture capital is 18.94% higher for an
innovator than for an imitator, and this result is statistically significant at 5%.

The probit model estimates the overall likelihood of a company receiving venture capital
financing, but it does not use information on the timing of the venture capital investment.
We are interested in the length of time it takes to obtain venture capital and the influence
of the initial founding strategy on that duration. A standard procedure for dealing with
duration data is employing a hazard model (see Kalbfleisch and Prentice, 1980; Kiefer,
1988). To proceed we have to specify the exact nature of our hazard model. We can
choose from a number of parametric models (such as Weibull) or we can use a semi-
parametric model. The parametric models are attractive because of their simplicity but by
imposing as much structure as they do the models can distort the estimated hazard rate.
Since fewer restrictions can result in a more accurate representation we use the
proportional hazard model – a common choice among researchers for modelling duration.
The formal model is

15
 h(t) = h0(t) exp{ β’X}
The Cox proportional hazard model does not impose any structure on the baseline hazard
h0(t). Cox’s partial likelihood estimator provides a way of estimating β without requiring
estimates of h0(t). Suppose the complete durations are ordered t1< t2<…< tn. The risk set
with respect to any moment of time is the set of firms who have not yet exited just prior
to that time. The conditional probability that observation i exits at time ti given that any of
the observations in the risk set Ri could have been concluded at duration ti is
exp{ β ’ X i }
∑ exp{ β ’ X j }
j∈ R i

This conditional probability is independent of the baseline hazard function.16 A

distinguishing feature of our duration data is that some of observations are right censored,
that is, at the end of the sample period the firm has not obtained venture capital, yet there
is a positive probability of such an event occurring. Our hazard model explicitly takes
such censoring into account.

We report both the coefficients and the hazard ratios (i.e. the relative risks). A positive
coefficient on x implies a higher x is linked to a higher hazard rate and thus a lower
expected duration. For ease of interpretation we also give the hazard ratios. The hazard
ratio tells us how much the hazard (i.e. the instantaneous risk) of the event increases for a
unit change in the independent variables. In the case of a dummy variable, this is equal to
the ratio of the (instantaneous) probabilities of the two possible states.

Table 4 shows the result from the Cox regression. The dependent variable is TIME-TO-
VC, i.e. the time to obtaining venture capital.17 We control for industry effects. The

n
16
The partial log likelihood is: ln L = ∑ [β ’X − ∑ exp{β ’X
i =1
i
j∈Ri
j }]

Technically, this is for the simplest case where exactly one firm exits at each distinct time and there are no
censored observations. The partial log likelihood can handle censoring easily. An observation whose spell is
censored between duration tj and tj+1appears in the summation in the denominator of the likelihood function
of observation i through j but not in any others, and does not enter in the numerator.
17
There may be some intervening events that imply that a company will not obtain venture capital anymore,
namely if it goes public, out of business or gets acquired. We model this as a standard competing risk, so
that either of these events constitutes a terminal non-censored event.

16
regression shows that the INNOVATOR variable is significant. Innovators are faster to
obtain venture capital, with an estimated hazard ratio of 1.69. This says that, relative to
imitators, innovators are 1.69 times more likely to obtain venture capital in any given
period of time. This result is statistically significant at 1%.

These two results reject the first null hypothesis that there is no relationship between an
entrepreneurial company’s strategy, and its propensity to obtain venture capital financing.
Firms pursuing an innovator strategy are more likely to obtain venture capital and are
quicker at obtaining it. This suggests that venture capitalists are not shying away from the
uncertainty of innovative business concepts, but rather seem to embrace them. Nor does it
seem to be true that if they invest in innovator companies they invest at a later stage when
a lot of the uncertainty may already have been resolved. Instead we find that innovators
are faster in obtaining venture capital. The natural question to ask is what it is that attracts
innovators and venture capitalist to each other. Is there any particular role that venture
capitalists can play in the development of innovator companies? To examine this we will
now turn to the relationship between venture capital and product market outcomes.

4. Type of financing and product market outcomes

In this section we examine the second null hypothesis, that the presence of a venture
capitalist does affect product market outcomes. We consider the effect of venture capital
on the time it takes a company to bring its product to market. We estimate a Cox duration
regression. The dependent variable is TIME-TO-MARKET, which measures the time
from founding up to the date of the first product sale.

When we examine duration data with respect to the length of time it takes to get a product
to market we have an additional complication. We are interested in the influence of
venture capital on the time to product market, and venture capital is obtained by firms at
different points of time. We therefore modify the original Cox proportional hazard model

17
to allow for time varying covariates. The model being estimated now takes the form of
h(t,X(t)) = h(t,0) exp[β’X(t)]
where h(t,X(t)) is the hazard rate at time t for a firm with co-variates X(t). The Cox
regression estimates the coefficient vector β. Again, our model also takes into account the
right censoring of our data.

Hence, apart from the usual industry controls, the main independent variable is a dummy
variable VC(t), that indicates whether the firm has received any venture capital financing
by time t. Companies do not necessarily start with venture capital, but obtain venture
capital after variable lengths of time. A company may thus change its status from not
being venture capital backed to being venture capital backed. Note that depending on
strategy and industry a company may have a shorter or longer time to market, which is a
function of the underlying technological parameters. The question we are interested in
here is under what circumstances a company with its given technology experiences a
reduction in its time to market. Our tests are designed to capture the importance of
venture capital in this context.

Table 5 reports both coefficients and hazard ratios of the estimated models. Looking first
at the entire sample, we see that the likelihood of the first product sale increases by a
factor of 1.88 with the advent of a venture capitalist. This is statistically significant at the
1% level. Table 5 also shows the results of the Cox regression for the subsample of
innovators and imitators. The presence of a venture capitalist increases the likelihood of a
first product sale by a factor of 3.37 in the innovator sample (this is again statistically
significant at the 1% level), while it has no statistically significant effect in the imitator
sample.

As a robustness check we reran all of our duration models as Weibull regressions, which
is a standard fully parametric model (and which takes time-dependency into account in
the same way than the Cox model). All of our results are very similar, and the

18
significance levels were frequently even stronger.18

These results reject the second null hypothesis that venture capital is product market
neutral. We find that venture capital is associated with faster time to market for
companies that they invest in. This association is particularly strong for innovator
companies. These results tie in with the findings in the previous section. We found that
innovators are more likely to take venture capital and asked the question what is it that
attracts innovators to venture capital. An interpretation consistent with the results of this
section is that the presence of a venture capitalist helps companies in their quest to be
faster to market, especially for innovators, whose strategy is predicated on first-mover
advantages. This interpretation helps explain why innovators are more likely to take
venture capital in the first place.

5. Extensions

One of the main advantages of the use of this data set, which combines survey data and
publicly available data, is the existence of a clear time line of events. We have data on the
founding strategy, on the timing and the type of financing subsequently received by the
company, and the timing of bringing the company’s product to market. The existence of a
clear time line of events has the advantage of allowing us to establish if preceding events
are correlated with subsequent events. This is advantageous over standard cross-sectional
analysis, where two variables are observed at the same point in time and disentangling the
impact of one on the other can be difficult. Our results indicate that an engagement of
venture capital leads to a subsequent increase in the likelihood that a company brings its
product to market. A natural interpretation is therefore that the presence of venture capital
helps these companies to bring their product to market. Nonetheless, other explanations
are possible. In this section we discuss the robustness of our results and some alternative

18
As an another robustness check, we further classified companies in the computer industry into hardware
and software firms, gave them a separate industry dummy and rerun our regressions. Again we obtain
qualitatively similar results.

19
interpretations.

It seems natural to ask whether the firms themselves believe that venture capital is
important to them. To answer this question we turn to data that our sample companies
supplied. Companies were asked to list the events that they considered milestones in the
development of their firm. We consider all the firms that replied to this part of the survey
and that received some kind of external financing. For the venture capital backed
companies we find that 59% list obtaining venture capital as a milestone. For the other
companies we find that 27% list obtaining financing (from some source other than
venture capital) as a milestone. We perform a P-test that shows that the difference in
proportions is significant at 5%. This is an interesting and significant result. It shows
that obtaining venture capital is considered a more significant event for firms than
obtaining finance from other sources. Venture capital is a distinct type of financing and
entrepreneurs are more likely to consider it a milestone event in the development of their
companies.

Among the venture capital backed companies we also ask whether innovators are more
likely to consider obtaining venture capital a milestone. We find that 66% (21 out of 32)
of the innovators and 50% (11 out of 22) of the imitators considered obtaining venture
capital a milestone. While the sample is too small to obtain statistical significance, the
numbers nonetheless suggest that innovators are also more likely to consider obtaining
venture capital a significant milestone.

If venture capital matters to these companies there may be many reasons why it is
important. While we hypothesize that one avenue is that venture capitalists actively
support firms to bring their product to market early, can we rule out some other
explanations? One potential explanation of our results is that the presence of venture
capital, instead of causing, may be caused by a faster time to market. That is, venture
capitalists may be selecting companies with faster time to market. Given that we have

20
already taken into account the time line of events (i.e., we have already established
Granger-causality), it would have to be the anticipation of a faster time to market that
would be driving venture capitalists to invest. The informal literature typically suggests
that venture capitalists are involved in both selecting good companies and adding value to
them; and theory suggests that these may well be complementary activities.19 As such it is
unlikely that one would be operating to the exclusion of the other. Nonetheless, we
conduct some preliminary tests to rule out some potential explanations. In particular, we
conduct a number of tests to identify possible anticipation effects and examine whether
after accounting for those, the effects of venture capital on time to market still hold.

First, venture capitalists may be selecting firms based on particular characteristics, and
these characteristics of the firms may result in a faster time to market. Econometrically,
one way of taking observables into account at the time of the granting of venture capital
to the firm is via a two-stage regression (see Puri (1996) for an application). Typically
the probit, where the dependent variable is obtaining venture capital, would be the first
stage. In our probit (see Table 3) the main determinants of obtaining venture capital is
whether the firm is an innovator, and the industry to which the firm belongs. The
cleanest way to control for these two variables in the duration regression of time to
market, is to rerun this regression within the respective subsamples of innovators and
imitators (as in Table 5). We also reran our results within the computer industry (which
accounts for about 50% of our sample). We obtain qualitatively similar results with
venture capital being associated with faster time to market for innovators. These findings
effectively rule out selection of venture capital based on observable information as an
explanation for the reduced time to market.

Second, we test for selection of firms based on expert knowledge of future market
conditions by venture capitalists. The notion here is that venture capitalists have expert
knowledge of industry conditions, which helps them to pick the right industries at the
right time. We augment the Cox duration model by adding as an independent variable the

19
In particular, the marginal return to supporting a company should be increasing in the expected quality of

21
P/E ratio of the industry at the birth of the company, where the P/E ratio is taken to be a
price based measure of the market expectations for the industry.20 Our results are
qualitatively similar. Further, to take into account the possibility that venture capitalists
are better than others at predicting future market conditions, we replace the P/E ratio of
the industry at the time birth with the P/E ratio at the time of exit for the firm (as
measured by the time of the IPO, acquisition, or else the end of the sample period) if and
when a venture capitalists invests. This models the venture capitalists as having perfect
foresight about future industry attractiveness. Our results remain qualitatively similar.
These results rule out selection by venture capitalists based on their picking the right
industries at the right time.

Third, we examine whether our result of faster time to market for innovators is driven by
venture capitalists investing in firms who are known to be bringing a product to market
soon. Prior to selling their product companies often make an announcement about their
expected product releases. We rerun our time to market regression examining those cases
where venture capitalists invest before product announcements (see Table 6). We find
that the impact of venture capital on time to market continues to be significant at 1% for
innovator companies. One could further argue that venture capitalists have access to some
information that would allow them to even anticipate these product announcements. We
run two crude robustness checks. One, we reran the model where we only consider those
venture capital investments that preceded the product announcement by half a year.
Second, we reran the model treating only those companies as venture backed when the
venture capital investment precedes the product announcement by at least a year. As
shown in table 6, in both cases our results are qualitatively similar.21 Further, since in
medical and telecommunications the necessity of obtaining regulatory approvals in
advance can allow investors to assess product introduction well in advance, we rerun

the company, which is an increasing function of the amount of screening.

20
The P/E ratio for the industries is obtained from the 1998 Standard and Poor’s Analysts’ Handbook and is
the average of the annual high and low P/E ratios for the corresponding industry categories within the S&P
500.
21
Not all companies make product announcements, hence as an additional robustness check, if there is no
product announcement we treat the date of the first product sale as an announcement and redo the above
analysis. The results are qualitatively similar.

22
these regressions in the computer industry alone (which accounts for about 50% of our
sample). The results are qualitatively similar suggesting that selection based on product
announcements that are either publicly known or anticipated within the year is not driving
our results. 22

6. Is there a role of venture capital for imitators?

While our results suggest a role for venture capital for innovators, it does raise the
question as to what, if any, role venture capital plays for imitators. An important potential
role of venture capital is the provision of financing, which can help make companies and
related ideas viable. If it were true that venture capitalists select companies without
adding value to them, then one reason why entrepreneurs would chose to go to venture
capitalists would be the provision of capital. We therefore ask whether it is true that
venture capital backed companies raise more money.

To examine this claim we collect information on the amount of funds that companies
raise up to the point of their product launch. Table 7 reports the results from an OLS
regression. The dependent variable is the amount of funds raised up to the time of the first
product sale and the main independent variable is a dummy variable VC(P), that indicates
whether the company received any venture capital by the time of the product launch. The
presence of venture capital increases the amount of funds raised by imitators. This
provides one possible explanation for what attracts imitators to venture capital. For

22
One may be concerned that the faster time to market is related to some kind of incentives for venture
capitalists to ‘grandstand’ their innovator companies. Gompers (1996) provides evidence that younger
venture capitalists, in particular, are likely to bring companies to the IPO market early, in order to showcase
their successes. Companies pay for this grandstanding as they experience larger underpricing. In addressing
whether our result can be explained by similar concerns that venture capitalists want to showcase successful
innovators, we examined the underpricing of the venture capital backed IPOs in our sample. In unreported
regressions we find no differences in the underpricing of innovator and imitator companies. This suggests
that our product market results are unlikely to be driven by concerns about grandstanding. It is also
consistent with the argument of Gompers (1996), that argues that limited partners have only a limited
understanding of the underlying activities of companies (such as their product market behavior). To
grandstand, venture capitalists thus need to use highly visible events such as an IPO to signal their own
quality.

23
imitators, the provision of financial capital seems to make a difference. It also suggests
that for innovator companies the distinguishing feature of venture capital is not the
provision of funds. If innovators are still seeking out venture capitalists, it appears that
they must be hoping to get more from venture capital than just the provision of financial
capital. This is consistent with our previous interpretation that the support of venture
capital is valuable for innovators on other dimensions, such as in product market aspects.

7. Conclusion

In this paper we use a unique data set of Silicon Valley start-up companies to explore the
role of venture capital financing. We believe we are the first to empirically examine and
document the interrelationship between the type of investor (venture capitalists vs. other
investors) and aspects of the product market behavior of start-up firms. We find that firms
pursuing an innovator strategy are more likely to obtain venture capital financing, and
quicker to do so than those pursing an imitator strategy. We also find that venture capital
is associated with faster time to market for innovators rather than imitators.

Our results have implications for several branches of the literature. From a finance
perspective our results suggest that the appropriateness of choosing an involved investor
depends on the strategic objectives of the company. From an industrial organization
perspective our results suggest that a firm’s choice of financing seems to affect its ability
to secure first mover advantages. Our results also makes a direct contribution to the
emerging literature on venture capital, suggesting that venture capital financing can have
an impact on the development path of a start-up company, and in particular its product
market position.

The picture that emerges from this research is that venture capitalists play different roles
for different companies. Innovator companies obtain venture capital more often and
faster, and obtaining venture capital is associated with particular outcomes in the product
market. Imitator companies on the other hand obtain venture capital less frequently and

24
later, and for them the provision of financial resources seems to matter more. Our results
raise a number of interesting avenues for future research. For instance, it would be
interesting to decompose the effects of venture capital involvement further. A related
issue is whether venture capital has effects on other dimensions for start-up companies.

25
 Appendix

It is frequently argued that venture capitalists are a distinct type of investor for
entrepreneurial companies. In what follows below we give a brief description of venture
capitalists, and the alternatives to venture capital.

Venture Capitalists:
Venture capitalists are full-time professional investors that invest for their partnership
funds. Venture capitalists tend to follow closely the technology and market developments
in their area of expertise to stay in the deal flow and to make an informed investment
decision (Fenn, Liang and Prowse, 1995). Before making an investment they carefully
scrutinize the founders and their business concepts (Fried and Hisrich, 1994). When
making the investment, they bring financial expertise to structuring the deal and setting
appropriate incentive and compensation systems (Sahlman, 1988, 1990). After the initial
investment, venture capitalists tend to be very active in the process of raising additional
funds for their portfolio companies (Gorman and Sahlman, 1989). They also continuously
monitor their companies both formally through participation at the board level and
informally (Rosenstein, 1988, Lerner, 1995). As monitors and through their access to
private information, like banks, they can help provide certification to outside stakeholders
(James, 1987, Puri, 1996, 1998, The Economist, 1997). They can provide valuable
mentoring and strategic advice for the entrepreneurs and they frequently assist companies
in providing business contacts and recruiting senior managers (Bygrave and Timmons,
1992). They tend to play an important role in corporate governance, frequently replacing
the original founder from the position of the CEO (Hellmann, 1998). Finally, they often
take an active role in guiding exit decision, such as influencing a company’s initial public
offering (see Lerner, 1994, Gompers, 1995).

Other Investors:
The main alternatives to venture capital financing are so-called ‘angels’ (i.e., private
individuals), corporations, banks, government and self-financing. Sahlman (1990)

26
emphasizes the high-powered incentives of venture capitalists and their high degree of
specialization to the financing of young companies, often only within a very limited
number of industry segments. Angel investors are independently wealthy individuals that
diversify part of their wealth by investing in young companies. Typically they do not have
any staff for supervising their investments and tend to rely on their pre-existing networks
to source new deals. While there is considerable heterogeneity within the angel
community, many of them exercise some other position as their main professional activity
(see Fenn, Liang and Prowse (1998) and Benjamin and Sandles (1998)). Corporations
also invest in entrepreneurial companies, either as part of an organized venture capital
fund, or on an ad-hoc basis. In addition to seeking financial gains, they frequently also
pursue strategic objectives. Hellmann (1998) shows that entrepreneurs may be quite
reluctant to receive funding from corporations if there are potential conflicts of interest.
More generally, while a corporate investor may in principle be in a good position to add
value to an entrepreneurial company, incentive problems and bureaucracy are frequently
believed to limit the usefulness of a corporate investor (see also Gompers and Lerner
(1998), Block and McMillan (1993)). Commercial banks are an infrequent provider of
funding to entrepreneurial companies. Apart from occasional loan commitments, banks
sometimes engage in venture capital investments through wholly-owned subsidiaries.
Regulatory constraints tend to make banks more conservative investors (see Fiet and
Fraser (1994) and Hellmann (1997)). Some investment banks also make venture capital
investments, typically with an eye on future transactions, such as underwriting the IPO
(see Tkacs (1998). Puri (1996, 1998), and Gompers and Lerner (1997) examine the
potential conflict of interest when underwriters are also investors). Government
financing is entirely passive by nature and consists mainly of grants (see, for example,
Lerner (1996)). Self-financing comprises financing from the founders, their families and
their friends (for an empirical examination of self-financing, see Fluck, Holtz-Eakin and
Rosen (1998)). Hence it seems reasonable to conjecture that venture capital is a
somewhat distinct type of investor that specializes in the financing of entrepreneurial
companies.

27
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 Table 1: Descriptive Statistics

INNOVATOR is a dummy variable which takes the value 1 if the founding strategy of the
firm was an innovator strategy; 0 otherwise. VC is a dummy variable that takes the value
1 if a firm has received venture capital; 0 otherwise. VC(P) is a dummy variable that
takes the value 1 if the company obtained venture capital before the date of first product
sale. TIME-TO-VC measures the time from the birth of the company to the date of
obtaining venture capital for the first time. TIME-TO-MARKET measures the time from
the birth of the company to the date of first product sale. AMOUNT measures (in $
million) the amount of financing that a company obtains prior bringing its product to
market. COMPUTER, TELECOM, and MEDICAL are dummy variables which take the
value 1 if the firm is in the computer, telecommunications or medical-related industry
respectively; 0 otherwise. OTHER is a dummy variable for other industries. SAMPLE-
AGE is the age of the company at the time of sampling. AGE is the age of the company in
October 1997.

Variable Number of Mean Mean Mean

observations Full Sample Innovator Sample Imitator Sample
INNOVATOR 149 0.5033557 1 0

VC 149 0.6912752 0.7866667 0.5945946

VC(P) 149 0.4228188 0.4933333 0.3513514

TIME-TO-VC 103 2.626462 2.461966 2.847038

TIME-TO- 132 2.588798 2.832472 2.337626

MARKET
AMOUNT 91 8.107369 11.05957 4.663135

COMPUTER 149 0.4765101 0.4666667 0.4864865

TELECOM 149 0.2147651 0.1466667 0.2837838

MEDICAL 149 0.147651 0.24 0.0540541

OTHER 149 0.1610738 0.1466667 0.1756757

SAMPLE-AGE 149 6.74506 6.366528 7.128707

AGE 149 10.12593 9.703195 10.55438

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 Table 2

Table 2a provides descriptive statics and a χ2 test for the breakdown of AGE into innovators and
imitators.

AGE INNOVATOR IMITATOR Total

Above Median 38 45 83
Below Median 37 29 66
Total 75 74 149
P-value 0.213

Table 2b provides descriptive statics and a χ2 test for the breakdown of BUSINESS-PLAN into
innovators and imitators. The variable BUSINESS-PLAN is a dummy variable that takes the
value 1 if a company had a business plan at the time that they first raised venture capital; 0
otherwise.

BUSINESS-PLAN INNOVATOR IMITATOR Total

YES 39 19 58
NO 4 7 11
Total 43 26 69
P-value 0.053

Table 2c provides descriptive statics and a χ2 test for the breakdown of PATENT into innovators
and imitators. The variable PATENT is a dummy variable that takes the value 1 if a company had
received a patent; 0 otherwise.

PATENT INNOVATOR IMITATOR Total

YES 48 37 85
NO 27 37 64
Total 75 74 149
P-value 0.084

Table 2d provides descriptive statistics and a t-test for the difference in means for the number of
patents. The variable, NUMBER OF PATENTS, is the natural logarithm of 1 + the number of
patents.

NUMBER OF Number of Mean Standard Deviation

PATENTS Observations
INNOVATOR 75 1.2838 1.311502
IMITATOR 74 0.8838137 1.112151
P-value 0.0948

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 Table 3

Table 3 presents the results of a Probit. The dependent variable is VC, which is a dummy
variable taking the value of 1 if a company has ever received venture capital; 0 otherwise.
The independent variables are INNOVATOR, which is a dummy variable taking the
value of 1 if the founding strategy of the company was an innovator strategy; 0 otherwise;
LNAGE which is the natural logarithm of the company’s age; and COMPUTER,
TELECOM, and MEDICAL which are dummy variables which take the value 1 if the
firm is in the computer, telecommunication or medical industry respectively; 0 otherwise.
Pseudo R2 = 1 – log L/log Lo where log L is the maximized value of the log-likelihood
function, log Lo is the log-likelihood computed only with a constant term. T-ratios are
computed using heteroskedasticity-adjusted standard errors. *, ** or *** mean the
coefficient is significant at 10%, 5% or 1% level respectively.

Probit Regression
Dependent Variable: VC

Independent Marginal Coefficients t-ratio P-value

Variables increase in
probability
CONSTANT N/A -0.3696116 -0.405 0.686
INNOVATOR 0.1894893** 0.5573478** 2.304 0.021
LNAGE 0.017164 0.0500831 0.134 0.893
COMPUTER 0.1276939 0.3759489 1.244 0.214
TELECOM 0.2706599*** 0.9673541*** 2.561 0.010
MEDICAL 0.2531136** 0.9464507** 2.214 0.027
Number of firms 149
Pseudo R2 0.0880
χ2 (5) 15.34
P-value 0.0090

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 Table 4

Table 4 presents the results of a Cox regression. The dependent variable is TIME-TO-
VC, which measures the time from the birth of a company to the date of obtaining venture
capital for the first time. The independent variables are INNOVATOR, which is a dummy
variable taking the value of 1 if the founding strategy of the company was an innovator
strategy; 0 otherwise; and COMPUTER, TELECOM, and MEDICAL which are dummy
variables which take the value 1 if the firm is in the computer, telecommunication or
medical industry respectively; 0 otherwise. *, ** or *** mean the coefficient is significant
at 10%, 5% or 1% level respectively.

Cox Regression
Dependent Variable: TIME-TO-VC

Independent Variable Hazard ratio Coefficient z-ratio P-value

INNOVATOR 1.695095** 0.5277389** 2.532 0.011
COMPUTER 1.334181 0.2883178 0.889 0.374
TELECOM 2.375416** 0.8651728** 2.468 0.014
MEDICAL 2.094569** 0.7393477** 1.970 0.049
Number of firms 149
χ2(4) 16.65
P-value 0.0023

35
 Table 5

This table presents results from a Cox regression with time-varying co-variates. The dependent variable
is TIME-TO-MARKET, which measures the time from the birth of a company to the date of first
product sale. The independent variables are VC(t), which is a time-dependent dummy variable that
takes the value 0 as long as a firm has not received venture capital and 1 thereafter; and COMPUTER,
TELECOM, and MEDICAL which are dummy variables which take the value 1 if the firm is in the
computer, telecommunication or medical industry respectively; 0 otherwise. The regression is run for
the full sample, innovator sub-sample and imitator sub-sample respectively. *, ** or *** mean that the
coefficient is significant at 10%, 5% or 1% level respectively.

Cox Regression: Full Sample

Dependent Variable: TIME-TO-MARKET
Independent Variables Hazard ratio Coefficients z-ratio P-value
VC(t) 1.88499 0.6339223*** 3.185 0.001
COMPUTER 1.278382 0.2455951 0.972 0.331
TELECOM 0.8627586 -0.1476204 -0.502 0.616
MEDICAL 0.4970323 -0.6991003** -2.140 0.032
Number of firms 149
χ (4)
2 18.09
P-value 0.0012

Cox Regression: Innovator Sample

Dependent Variable: TIME-TO-MARKET
Independent Variables Hazard ratio Coefficients z-ratio P-value
VC(t) 3.371708*** 1.215419*** 4.282 0.000
COMPUTER 2.38884** 0.8708079** 2.257 0.024
TELECOM 2.533499** 0.9296012** 1.969 0.049
MEDICAL 0.4268758* -0.85112621* -1.884 0.060
Number of firms 75
χ (4)
2 32.78
P-value 0.0000

Cox Regression: Imitator Sample

Dependent Variable: TIME-TO-MARKET
Independent Variables Hazard ratio Coefficients z-ratio P-value
VC(t) 1.479275 0.3915523 1.269 0.204
COMPUTER 0.7754147 -0.2543572 -0.746 0.456
TELECOM 0.4915214* -0.7102497* -1.837 0.066
MEDICAL 0.7624329 -0.2712407 -0.467 0.640
Number of firms 74
χ (4)
2 4.64
P-value 0.3261

36
 Table 6
This table presents results from a Cox regression with time-varying co-variates. The dependent variable is TIME-TO-
MARKET, which measures the time from the birth of a company to the date of first product sale. The independent
variables are VC(t), which is a time-dependent dummy variable that takes the value 0 as long as a firm has not received
venture capital and 1 thereafter; and COMPUTER, TELECOM, and MEDICAL which are dummy variables which take
the value 1 if the firm is in the computer, telecommunication or medical industry respectively; 0 otherwise. In the first
table we drop an observation if a company received venture capital, but not before the date of product announcement. In
the second table we drop an observation if a company received venture capital but not 6 months prior to the product
announcement. In the third table we drop an observation if a company received venture capital but not 1 year prior to the
product announcement. *, ** or *** mean that the coefficient is significant at 10%, 5% or 1% level respectively.

Cox Regression: VC occurs before product announcement

Dependent Variable: TIME-TO-MARKET
Independent Innovator Sample Imitator Sample
Variable Hazard Ratio Coefficient z-value Hazard Ratio Coefficient z-value
VC(t) 2.98809*** 1.0946634*** 3.759 1.479275 0.3915523 1.269
COMPUTER 2.254052* 0.8127294** 2.100 0.7754147 -0.2543572 -0.746
TELECOM 2.441519* 0.8926204* 1.891 0.4915214* -0.7102497* -1.837
MEDICAL 0.4238518 -0.8583715 -1.864 0.7624329 -0.2712407 -0.467
Number of firms 72 74
χ2 (4) 27.66 4.64
P-value 0.0000 0.3261

Cox Regression: VC occurs 6 month prior to product announcement

Dependent Variable: TIME-TO-MARKET
Independent Innovator Sample Imitator Sample
Variable Hazard Ratio Coefficient z-value Hazard Ratio Coefficient z-value
VC(t) 2.634752*** 0.9687892*** 3.221 1.479275 0.3915523 1.269
COMPUTER 2.147199** 0.761644** 1.965 0.7754147 -0.2543572 -0.746
TELECOM 2.236849* 0.8050684* 1.665 0.4915214* -0.7102497* -1.837
MEDICAL 0.4385352* -0.8243152* -1.788 0.7624329 -0.2712407 -0.467
Number of firms 69 74
χ (4)
2
22.73 4.64
P-value 0.0001 0.3261

Cox Regression: VC occurs 1 year prior to product announcement

Dependent Variable: TIME-TO-MARKET
Independent Innovator Sample Imitator Sample
Variable Hazard Ratio Coefficient z-value Hazard Ratio Coefficient z-value
VC(t) 2.45034*** 0.8962267*** 2.838 1.255881 0.2278376 0.677
COMPUTER 2.086522* 0.7354984* 1.873 0.7936273 -0.2311414 -0.668
TELECOM 2.237684* 0.8054413* 1.663 0.5088823* -0.6755385* -1.744
MEDICAL 0.4106908* -0.8899146* -1.894 0.8040182 -0.2181334 -0.336
Number of firms 66 70
χ2 (4) 21.09 3.52
P-value 0.0003 0.4749

37
 Table 7

This table presents results from an OLS regression. The regressions are run using the
whole sample, the innovator sub-sample and imitator sub-sample respectively. The
dependent variable, AMOUNT, is the amount of money received by the company before
the first date of its product sale. Independent variables include VC(P), which is a dummy
variable taking value 1 if the company had received venture capital before the first date of
its product sale; LNAGE, which is the natural logarithm of company’s age; and industry
dummy variables; and COMPUTER, TELECOM, and MEDICAL which are dummy
variables which take the value 1 if the firm is in the computer, telecommunications or
medical industry respectively; 0 otherwise. Numbers in the parenthesis are t-ratios using
heteroskedasticity-adjusted standard errors *, ** or *** mean that the coefficient is
significant at 10%, 5% or 1% level.

OLS Regression
Dependent Variable: AMOUNT

Independent Full Sample Innovator Sample Imitator Sample

Variable
CONSTANT 29.24691 55.33423* -1.068363
(1.526) (1.750) (-0.193)
VC(P) -0.6630899 -9.309727 4.177051**
(-0.166) (-1.063) (2.078)
LNAGE -7.225776 -13.36145 1.915676
(-1.351) (-1.617) (0.590)
COMPUTER -7.516981 -14.5908 -0.3533606
(-1.027) (-1.246) (-0.097)
TELECOM -8.466668 -15.39738 -1.609893
(-1.260) (-1.338) (-0.475)
MEDICAL 1.2652 -0.7526487 -2.608425
(0.185) (-0.075) (-0.699)
Number of firms 91 49 42
R2 0.1020 0.2082 0.1171
P-value 0.0558 0.1466 0.1572

38