Divide and Conquer: Investor Type Diversity in Entrepreneurial Ventures

Abstract

Entrepreneurial ventures benefit substantially from close interactions with their resource environment, but dependence on resource providers can give rise to power imbalances. Prior studies have identified various defense mechanisms by which less powerful ventures reduce the risk of opportunistic behavior by more powerful equity investors. This study extends our understanding of resource dependence in entrepreneurial ventures by studying how and which ventures protect themselves in their first interaction with key equity investors when established defense mechanisms are scarce. Drawing from resource dependence theory, we theorize and show that ventures with higher ex-ante cash levels and prior experience with co-investments involving different investor types protect themselves by simultaneously attracting equity from a diverse set of investors in their first investment round. This strategy significantly facilitates follow-on funding. We extend Resource Dependence Theory by showing how a “Divide and Conquer”-strategy can shield a less powerful actor from opportunistic behavior by powerful resource providers.