Abstract

http://ssrn.com/abstract=2405829
 


 



Competition and Specialization: Evidence from Venture Capital


Christos Cabolis


ALBA Graduate Business School; Yale SOM International Center for Finance

Mian Dai


Drexel University

Konstantinos Serfes


Drexel University--School of Economics

March 1, 2014


Abstract:     
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, C7

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Date posted: March 8, 2014 ; Last revised: May 3, 2014

Suggested Citation

Cabolis, Christos and Dai, Mian and Serfes, Konstantinos, Competition and Specialization: Evidence from Venture Capital (March 1, 2014). Available at SSRN: http://ssrn.com/abstract=2405829 or http://dx.doi.org/10.2139/ssrn.2405829

Contact Information

Christos Cabolis
ALBA Graduate Business School ( email )
6-8 Xenias Street
Athens, 115 28
Greece
+30 210 896 4531 (Phone)
+30 210 896 4737 (Fax)
HOME PAGE: http://www.alba.edu.gr/faculty/Pages/Cabolis.aspx
Yale SOM International Center for Finance ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-7108 (Phone)
203-432-8931 (Fax)
Mian Dai
Drexel University ( email )
Philadelphia, PA 19104
United States
Konstantinos Serfes (Contact Author)
Drexel University--School of Economics ( email )
3141 Chestnut St.
Philadelphia, PA 19104
United States
215-895-6816 (Phone)
215-571-4670 (Fax)
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