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

47 Pages Posted: 13 Nov 2008 Last revised: 23 Oct 2018

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

Stockholm School of Economics; 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: June 30, 2009

Abstract

We examine whether networks among incumbent venture capital firms help restrict entryinto local VC markets in the U.S., thus improving VCs bargaining power overentrepreneurs. We show that VC markets with more extensive networking among theincumbent players experience less entry. The effect is sizeable economically and appearsrobust to plausible endogeneity concerns. Entry is accommodated if the entrant hasestablished 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 freezeout any incumbent that builds a relationship with a potential entrant. Finally, companiesseeking venture capital raise money on worse terms in more densely networked marketswhile increased entry is associated with higher valuations.

Keywords: Venture Capital, Start-up Financing, Networks, Syndication, Barriers to Entry, Entry Deterrence

Suggested Citation

Hochberg, Yael V. and Ljungqvist, Alexander and Lu, Yang, Networking as a Barrier to Entry and the Competitive Supply of Venture Capital (June 30, 2009). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1300775 or http://dx.doi.org/10.2139/ssrn.1300775

Yael V. Hochberg (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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

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Alexander Ljungqvist

Stockholm School of Economics ( email )

111 60 Stockholm
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
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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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