Who You Know Matters: Venture Capital Networks and Investment Performance
Yael V. Hochberg
National Bureau of Economic Research (NBER); Rice University - Jesse H. Jones Graduate School of Business
New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)
AQR Capital Management, LLC
NYU Working Paper No. FIN-04-029
Many financial markets are characterized by strong relationships and networks, rather than arm s-length, spot-market transactions. We examine the performance consequences of this organizational choice in the context of relationships established when VCs syndicate portfolio company investments, using acomprehensive sample of U.S. based VCs over the period 1980 to 2003. VC funds whose parent firms enjoy more influential network positions have significantly better performance, as measured by the proportion of portfolio company investments that are successfully exited through an initial public offering or a sale to another company. Similarly, the portfolio companies of better networked VC firms are significantly more likely to survive to subsequent rounds of financing and to eventual exit. The magnitudeof these effects is economically large, and is robust to a wide range of specifications. Our models suggest that the benefits of being associated with a well-connected VC are more pronounced in later funding rounds. Once we control for network effects in our models of fund and portfolio company performance, theimportance of how much investment experience a VC has is reduced, and in some specifications, eliminated.
Number of Pages in PDF File: 55
Date posted: November 3, 2008
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