From Seed to Success: The Role of Venture Capital on Startup Innovation

Abstract: This master thesis aims to investigate the influence of venture capital (VC) on the innovation practices of early-stage startups. The research was conducted because existing literature lacks a comprehensive understanding of the "how" behind the influence of VCs from a startup perspective, as current scholars assess the impact from an investor side. To achieve this, the study used the five Lean Startup Capabilities (LSC) customer orientation, hypothesizing, experimentation, validation, and learning to investigate changes in innovation practices caused by VCs and their provided funding. A total of 15 semi-structured interviews were conducted with German early-stage software startups. The identified influences were analyzed and mapped on the LSC using thematic analysis. Hereafter, the most critical influences for a change in practices were discussed, revealing varying degrees of VC influence on the five LSC. Our findings suggest that customer orientation experienced the most substantial impact in refining customer segments and a more professionalized approach. Furthermore, VC influence indirectly led to a reformulation of hypotheses. Startups were also subject to a greater emphasis on frequent and highquality experimentation, but in some cases, they also decreased their testing efforts after funding. Validation experienced a weak impact with a slightly higher emphasis on easier quantifiable metrics. Lastly, the startups' learning behaviors were influenced by VCs through the provision of knowledge and the possibility to pivot. Overall, the funding itself was found to be one of the most influential drivers for change, while guidance and investor expectations also have high relevance.