The Impact of Competition on Startup and VC Behavior *

This paper examines the impact of competition on the behavior of both startups and VC firms, and identifies a channel through which these effects occur. Following an increase in competition due to the introduction of investor tax credits (ITC), reputable VCs reduce their investments in the affected states and redirect their investments to non-ITC states. One potential reason is that higher-quality startups become less likely to partner with reputable VCs, worsening the pool of startups available to them. While their performance suffers, higher-quality startups appear no worse off for partnering with lesser-known investors.

Keywords: JEL Classification: G24, G28, G34 Venture capital, reputation, competition, investor tax credit

JEL Classification: G24, G28, G34

Suggested Citation: Suggested Citation

Ersahin, Nuri and Huang, Ruidi and Khanna, Naveen, The Impact of Competition on Startup and VC Behavior * (January 10, 2023). Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, SMU Cox School of Business Research Paper No. 21-02, Available at SSRN: https://ssrn.com/abstract=3761472 or http://dx.doi.org/10.2139/ssrn.3761472