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

32 Pages Posted: 8 Mar 2014 Last revised: 15 May 2020

See all articles by Christos Cabolis

Christos Cabolis

IMD; Yale SOM International Center for Finance

Mian Dai

Drexel University

Konstantinos Serfes

Drexel University

Date Written: May 14, 2020

Abstract

We investigate the relationship between competition and stage specialization in the venture capital (VC) market. 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 hypothesize that a VC firm's decision to stage specialize or not poses a trade-off between business expansion on the one hand and competition mitigation on the other. The intensity of competition in the VC market influences the strength of these two effects. Using panel data on VC funding rounds in the U.S., and consistent with our hypotheses, we find robust empirical evidence for a non-monotonic relationship (inverted-U shape) between competition and stage specialization. This result is novel and can have interesting managerial and policy implications.

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

JEL Classification: G24, D4, C7

Suggested Citation

Cabolis, Christos and Dai, Mian and Serfes, Konstantinos, Competition and Specialization in the VC Market: A Non-Monotonic Relationship (May 14, 2020). Available at SSRN: https://ssrn.com/abstract=2405829 or http://dx.doi.org/10.2139/ssrn.2405829

Christos Cabolis

IMD ( email )

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Yale SOM International Center for Finance ( email )

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Mian Dai

Drexel University ( email )

Philadelphia, PA 19104
United States

Konstantinos Serfes (Contact Author)

Drexel University ( email )

3220 Market Street
Philadelphia, PA 19104
United States
215-895-6816 (Phone)
215-571-4670 (Fax)

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