Networking as a Barrier to Entry and the Competitive Supply of Venture Capital
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)
Yael V. Hochberg
Northwestern University - Kellogg School of Management; NBER
AQR Capital Management, LLC
January 20, 2009
Journal of Finance, Forthcoming
We examine whether strong networks among incumbent venture capital firms help restrict entry into local VC markets in the U.S., thus improving VCs' bargaining power over entrepreneurs. We show that VC markets with more extensive networking among the incumbent players experience less entry. The effect is sizeable economically and appears robust to plausible endogeneity concerns. Entry is accommodated if the entrant has established relationships with a target-market incumbent in its own home market. In turn, incumbents react strategically to an increased threat of entry, in the sense that they freeze out any incumbent that builds a relationship with a potential entrant. Finally, companies seeking venture capital raise money on worse terms in more densely networked markets while increased entry is associated with higher valuations.
Number of Pages in PDF File: 46
Keywords: Venture Capital, Start-up Financing, Networks, Syndication, Barriers to Entry, Entry Deterrence
JEL Classification: G24, L13, L14, L22, L84Accepted Paper Series
Date posted: August 12, 2006 ; Last revised: November 10, 2009
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