Abstract

https://ssrn.com/abstract=2405829
 


 



Competition and Specialization in the VC Market: A Non-Monotonic Relationship


Christos Cabolis


IMD World Competitiveness Center; ALBA Graduate Business School; Yale SOM International Center for Finance

Mian Dai


Drexel University

Konstantinos Serfes


Drexel University - School of Economics

February 5, 2017


Abstract:     
We investigate the relationship between competition and stage specialization in the venture capital (VC) market. Stage financing is used as a mechanism to better align the goals of investors and entrepreneurs through the achievement of certain milestones. A typical successful company goes through multiple stages of VC investments, but an average VC firm specializes and participates only in a subset of these stages. We develop an infinitely repeated game of VC competition, where VC firms make stage specialization decisions (either invest in one of the two stages, or in both) and compete in equity offers to entrepreneurs. Contrary to conventional wisdom that competition always promotes specialization, the model predicts that the relationship between competition and stage specialization is non-monotonic. Using panel data on VC funding rounds in the U.S., and consistent with the theoretical prediction, we find an inverted-U relationship between competition and stage specialization.

Number of Pages in PDF File: 30

Keywords: Venture capital market, Stage specialization, Competition, Endogenous matching

JEL Classification: G24, D4, C7


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Date posted: March 8, 2014 ; Last revised: February 6, 2017

Suggested Citation

Cabolis, Christos and Dai, Mian and Serfes, Konstantinos, Competition and Specialization in the VC Market: A Non-Monotonic Relationship (February 5, 2017). Available at SSRN: https://ssrn.com/abstract=2405829 or http://dx.doi.org/10.2139/ssrn.2405829

Contact Information

Christos Cabolis
IMD World Competitiveness Center ( email )
Ch. de Bellerive 23
P.O. Box 915
CH-1001 Lausanne
Switzerland
+41 21 618 0742 (Phone)
+41 21 618 0707 (Fax)
ALBA Graduate Business School ( email )
6-8 Xenias Street
Athens, 115 28
Greece
+30 210 896 4531 (Phone)
+30 210 896 4737 (Fax)
HOME PAGE: http://www.alba.edu.gr/faculty/Pages/Cabolis.aspx
Yale SOM International Center for Finance ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-7108 (Phone)
203-432-8931 (Fax)

Mian Dai
Drexel University ( email )
Philadelphia, PA 19104
United States
Konstantinos Serfes (Contact Author)
Drexel University - School of Economics ( email )
3141 Chestnut St.
Philadelphia, PA 19104
United States
215-895-6816 (Phone)
215-571-4670 (Fax)
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