On the Strategic Use of Corporate Venture Financing for Securing Demand

This paper focuses on the strategic role of corporate venture financing carried out by a corporation (a headquarter) to secure demand. When the headquarter finances the venture through its corporate venture-financing arm, it commits to compensate the entrepreneur for the effort exerted to increase the complementarity between the entrepreneur's product and the headquarter's product. The obvious effect of having an increase in complementarity is the softening of ex-post product market competition. Hence, in deciding whether or not to finance the venture, the headquarter faces the trade-off between being more aggressive (undercutting its rivals) ex-post in the product market, and using venture financing to affect the outcome of the entrepreneur's product innovation in order to weaken ex-post competition with substitute products. The latter allows the headquarter to secure the venture's demand for its own product. This therefore has direct implications for syndication and the exit strategy of the venture capitalist.