How Do VCs Foster Startup Innovation? VC Global Strategy and the Startup's Regulatory Uncertainty.

In contrast to the U.S., the innovative outcomes of international startups do not always benefit from venture capital (VC) investments. Solving this puzzle requires first understanding how VC firms affect innovation; after all, VC firms lack the complementary assets of corporate VC firms. Instead, I argue that they leverage their industry knowledge and management capabilities through an indirect mechanism: by helping the startup be better managed, the startup can devote more resources, time and attention to innovative processes, which translates into more innovative outcomes. To test this claim I focus on the regulatory uncertainty the startup faces, as a problem the VC firm can alleviate. Besides, regulatory uncertainty varies internationally and ranks high in the list of concerns of investors and startups. I examine the fit with two aspects of the VC firm global strategy: a) VC firm experience or specialization, the latter allowing the VC firm to get involved in the startup problem solving activities; and b) whether the VC has global expertise-- valuable in global industries--or local expertise--valuable to understand the regulatory uncertainty. I test these mechanisms on a sample of 414 international and VC-backed biotechnology startups, founded from 1994 to 2004 (and observed through 2011) across 24 foreign countries, and controlling for the matching between VC firms and startups. I find evidence that VC local specialization fosters startup patents and publications when there is regulatory uncertainty, which supports the idea that VC firms foster innovative outcomes indirectly through mitigating the costs of context uncertainty. [ABSTRACT FROM AUTHOR]