Whom You Know Matters:Venture Capital Networks and Investment Performance

57 Pages Posted: 3 Nov 2008

See all articles by Yael V. Hochberg

Yael V. Hochberg

National Bureau of Economic Research (NBER); Rice University - Jesse H. Jones Graduate School of Business

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR); Swedish House of Finance; European Corporate Governance Institute (ECGI)

Yang Lu

AQR Capital Management, LLC

Multiple version iconThere are 3 versions of this paper

Date Written: April 2005

Abstract

Many financial markets are characterized by strong relationships and networks, rather than arm s-length, spot-market transactions. We examine the performance consequences of this organizational choice in the context of relationships established when VCs syndicate portfolio company investments, using acomprehensive sample of U.S. based VCs over the period 1980 to 2003. VC funds whose parent firms enjoy more influential network positions have significantly better performance, as measured by the proportion of portfolio company investments that are successfully exited through an initial public offering or a sale to another company. Similarly, the portfolio companies of better networked VC firms are significantly more likely to survive to subsequent rounds of financing and to eventual exit. The magnitudeof these effects is economically large, and is robust to a wide range of specifications. Once we control for network effects in our models of fund and portfolio company performance, the importance of how muchinvestment experience a VC has is reduced, and in some specifications, eliminated. Finally, we provide initial evidence on the evolution of VC networks.

Suggested Citation

Hochberg, Yael V. and Ljungqvist, Alexander and Ljungqvist, Alexander and Lu, Yang, Whom You Know Matters:Venture Capital Networks and Investment Performance (April 2005). NYU Working Paper No. FIN-05-012, Available at SSRN: https://ssrn.com/abstract=1294148

Yael V. Hochberg (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Yang Lu

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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