Who You Know Matters: Venture Capital Networks and Investment Performance

55 Pages Posted: 3 Nov 2008  

Yael V. Hochberg

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

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)

Yang Lu

AQR Capital Management, LLC

Multiple version iconThere are 3 versions of this paper

Date Written: December 2004

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. Our models suggest that the benefits of being associated with a well-connected VC are more pronounced in later funding rounds. Once we control for network effects in our models of fund and portfolio company performance, theimportance of how much investment experience a VC has is reduced, and in some specifications, eliminated.

Suggested Citation

Hochberg, Yael V. and Ljungqvist, Alexander and Lu, Yang, Who You Know Matters: Venture Capital Networks and Investment Performance (December 2004). NYU Working Paper No. FIN-04-029. Available at SSRN: https://ssrn.com/abstract=1294481

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

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

Yang Lu

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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