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Strategic investors, such as corporate venture capitalists, engage in the financing of start-up firms to complement their core businesses and to facilitate the internalization of externalities. The authors argue that while strategic objectives make it more worthwhile for an investor to elicit high entrepreneurial effort, they can also undermine his commitment to penalize poorly performing entrepreneurs by terminating their projects. Based on this tradeoff they develop a theory of financing choice between strategic and financial investors. Their framework provides insights into the design of corporate venturing deals and the choice between corporate venturing and independent venture capital finance.
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