Competition and Specialization: Evidence from Venture Capital
ALBA Graduate Business School; Yale SOM International Center for Finance
Drexel University--School of Economics
March 1, 2014
We investigate the relationship between venture capital (VC) market competition and stage specialization of VC firms. VC investments are characterized by stepwise infusion of capital to entrepreneurial (EN) companies in different development stages: early/seed, start-up, expansion and other stages. Stage specialization is crucial for the development and growth of the companies that receive VC funding, because: i) VC firms actively monitor and advise the ENs and ii) each stage requires different skills and abilities on part of the VC firms. Therefore, it is important to understand how competition in the VC market influences specialization. It is generally accepted in economics that competition leads to a higher degree of specialization. Contrary to conventional wisdom, we find strong evidence of an inverted-U relationship using panel data on VC investments in the US. We develop a market equilibrium model that captures many of the salient features of the VC market, such as two-sided vertical heterogeneity, bilateral bargaining, endogenous matching and moral hazard, and gives rise to two opposing effects on the incentives of VC firms to specialize as competition (market size) increases.
Number of Pages in PDF File: 51
Keywords: Venture capital market, Stage specialization, Competition, Endogenous matching
JEL Classification: G24, D4, C7working papers series
Date posted: March 8, 2014 ; Last revised: May 3, 2014
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