Take It or Leave It? Impact of Investments from Tech Giants on IT-Startups’ Future Funding

Tech giants (e.g., Alphabet, Amazon, Apple, etc.) are making huge investments in startups, vastly expanding their tech footprint and penetrating various other industries. While tech giants have become important external equity financing sources for startup companies, it remains unclear whether IT-startups (i.e., startups in the information technology industry) should take investments from the tech giants, given their competing nature with these established tech companies. Our study attempts to understand how taking investments from tech giants influences the long-term success of IT-startups. In this study, we mainly use the amount of future funding as a measure of IT-startups’ success, and our results indicate that taking investments from tech giants has a negative impact on the amount of funding IT-startups could obtain in the following rounds. Analyses using alternative measures for IT-startups’ success (e.g., IPO, acquisition, and closure) show consistent results: taking investments from tech giants has a negative effect on IT-startups’ success. We further explore the mechanisms behind this phenomenon. Results suggest that when tech giants invest in IT-startups, they predominate the new technologies by applying for more patents in the relevant fields and crowd out new investors in the following funding rounds. Moreover, results suggest that the social ties between IT-startups’ regions and locations with substantial capital could significantly attenuate such negative impact of taking investments from tech giants. We contribute to the OM and entrepreneurship literature by uncovering the potential risks for IT-startups to take investments from tech giants, providing insight into how external financing influences the operation management of IT-startups regarding financial resources, technology, and innovation