Abstract

http://ssrn.com/abstract=923824
 
 

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Networking as a Barrier to Entry and the Competitive Supply of Venture Capital


Alexander Ljungqvist


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


NBER

Yang Lu


AQR Capital Management, LLC

January 20, 2009

Journal of Finance, Forthcoming

Abstract:     
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, L84

Accepted Paper Series


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Date posted: August 12, 2006 ; Last revised: October 2, 2013

Suggested Citation

Ljungqvist, Alexander and Hochberg, Yael V. and Lu, Yang, Networking as a Barrier to Entry and the Competitive Supply of Venture Capital (January 20, 2009). Journal of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=923824

Contact Information

Alexander Ljungqvist
New York University (NYU) - Department of Finance ( email )
Stern School of Business
44 West 4th Street, Suite 9-160
New York, NY 10012-1126
United States
212-998-0304 (Phone)
212-995-4220 (Fax)
HOME PAGE: http://pages.stern.nyu.edu/~aljungqv
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Research Institute of Industrial Economics (IFN) ( email )
Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden
Yael V. Hochberg (Contact Author)
NBER ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Yang Lu
AQR Capital Management, LLC ( email )
Greenwich, CT
United States
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