Although it is well known that increasing institutional support promotes the entry and growth of startups, less is discussed about its impact on intermediaries (e.g., VC firms) as part of the entrepreneurial ecosystem. From the perspective of a regulatory pillar in institutionalism, this study investigates how adopting the new law for sector growth affects VC firms’ investment strategy in its early period, facing the dilemma of cherry-picking in the stable established sector vs. frog-kissing in the highly ambiguous emerging sector. Using the quarterly data of entire U.S. VC firms, 2020 August -2023 February, we test how the U.S. government’s enactment of the CHIPS and Science Act for revitalizing the semiconductor industry (established sector) and supporting key technology areas (emerging sector) affects the VC firms’ investment in these two sectors differently. Our results show that the enactment leads VC firms to increase investing in the established sector while reducing investment in the emerging sector. The opposite pattern happens mainly because, despite the regulatory favors, incomplete institutionalization during the early regulatory changes becomes additional source of ambiguity in emerging sector, further increasing investment risk. Furthermore, we find that VC firms’ political embeddedness amplifies the benefits of investing in the established sector, whereas their reputation (ability to deliver high returns) mitigates investment risks in certain technology areas in the emerging sector. Taken together, our study contributes to the institutionalism and entrepreneurship literature by suggesting how institutional support in its early period affects intermediaries’ strategy differently depending on the sector types.
