The Social Capital of Venture Capitalists and its Impact on the Funding of Start-Up Firms

40 Pages Posted: 16 Aug 2010

See all articles by Oliver Alexy

Oliver Alexy

Technische Universität München (TUM), TUM School of Management

Jorn H. Block

University of Trier - Faculty of Management; Erasmus University Rotterdam (EUR) - Institute of Management (ERIM)

Philipp G. Sandner

Frankfurt School of Finance & Management

Anne L. J. Ter Wal

Imperial College Business School

Date Written: June 25, 2010

Abstract

How does the social capital of venture capitalists (VCs) affect the funding of start-ups? Extant entrepreneurship literature conceptualizes a substitute effect between the social and financial capital that new firms attain from their investors. On the contrary, by building on the rich social capital literature, we hypothesize a positive effect of VCs’ social capital, derived from past syndication, on the amount of money that start-ups receive. Specifically, we argue that both structural aspects of VCs’ social network, such as the number of connections and the spanning of structural holes, and relational aspects, such as the diversity of network partners’ attributes, provide VCs with superior access to information about current investment objects and opportunities to leverage them in the future, increasing their willingness to invest in these firms. Our empirical results, derived from a novel dataset containing more than 5,000 funding rounds in the Internet and IT sector, strongly confirm our hypotheses. Both structural and relational attributes of VCs’ syndication networks have a significant influence on the funds received by start-up firms, highlighting the importance of a social capital perspective on new venture funding. We discuss the implications of our findings for theories of venture capital and entrepreneurship, showing that the role and effect of VCs’ social capital on start-up firms is much more complex than previously argued in the literature.

Keywords: venture capital, social capital, start-ups, social networks, structural holes

JEL Classification: M10, L2, M12, M

Suggested Citation

Alexy, Oliver and Block, Jorn Hendrich and Sandner, Philipp and Ter Wal, Anne L. J., The Social Capital of Venture Capitalists and its Impact on the Funding of Start-Up Firms (June 25, 2010). ERIM Report Series Reference No. ERS-2010-028-ORG. Available at SSRN: https://ssrn.com/abstract=1657794

Oliver Alexy (Contact Author)

Technische Universität München (TUM), TUM School of Management ( email )

Arcisstr. 21
Munich, 80333
Germany
+49-89-289-52803 (Phone)
+49-89-289-52899 (Fax)

HOME PAGE: http://www.ent.wi.tum.de

Jorn Hendrich Block

University of Trier - Faculty of Management ( email )

D-54296
Germany

Erasmus University Rotterdam (EUR) - Institute of Management (ERIM) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Philipp Sandner

Frankfurt School of Finance & Management ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

HOME PAGE: http://www.philipp-sandner.de

Anne L. J. Ter Wal

Imperial College Business School ( email )

Tanaka Building
South Kensington Campus
London, London SW7 2AZ
United Kingdom
+44 (0) 20 7594 1460 (Phone)
+44 (0) 20 7594 5915 (Fax)

HOME PAGE: http://www.anneterwal.com

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