Sarath Balachandran
London Business School
Sungyong Chang
Johnson Graduate School of Management, Cornell University
Sukhun Kang
University of California Santa Barbara
[Link to the Working Paper Version on SSRN]
Startups often face a challenging decision: should they redirect resources to pursue emerging opportunities, or should they stay focused on their ongoing efforts? This choice can significantly impact their growth and success. Our recent study explores the critical role venture capital (VC) investors play in guiding these decisions.
The Role of Venture Capital Investors
Venture capital investors do more than just provide funding—they influence strategic decisions, especially when new market opportunities arise. We examined this dynamic using a unique natural experiment: the staggered release of data from The Cancer Genome Atlas (TCGA), which mapped genetic mutations across various cancers. Occasionally, the release of TCGA data for one cancer type revealed genetic links to others, presenting startups with unexpected opportunities to develop new treatments.
Key Findings
1. Timing of Funding Matters: Startups were more likely to seize new opportunities shortly after receiving a funding round. This period is when they are least constrained by resources, allowing them to explore new markets more freely. As time passes and resources dwindle, startups become less inclined to take on new projects.
2. Investor Knowledge Networks Boost Responsiveness: Startups were more responsive to new opportunities when their investors had other portfolio companies with experience in the emerging market. This connection provided a channel for knowledge transfer, giving startups an edge. This effect was particularly pronounced for startups located outside major oncology hubs, where access to specialized knowledge is more limited.
3. Short-Term Focus from Investors Can Limit Flexibility: Startups with investors under pressure to achieve short-term exits were less likely to pursue new market opportunities. These investors tended to encourage a narrower focus, prioritizing near-term gains over longer-term exploration. This suggests that while investors can enable startups to pivot and expand, they can also impose constraints when under pressure to deliver quick returns.
Implications for Entrepreneurs and Investors
Our findings highlight the dual role of venture capital investors as both enablers and constraints in startup strategy. Entrepreneurs should be aware of how their funding timing and the nature of their investors can shape their ability to pursue new opportunities. Meanwhile, investors can reflect on how their pressure for short-term returns might limit the strategic flexibility of their portfolio companies.
This study contributes to a deeper understanding of how external stakeholders influence startup strategy, particularly in dynamic, high-stakes fields like oncology. As the startup ecosystem continues to evolve, recognizing these dynamics can help both founders and investors make more informed decisions.
Sungyong Chang 