Competition and Specialization in the VC Market: A Non-Monotonic Relationship
32 Pages Posted: 8 Mar 2014 Last revised: 15 May 2020
Date Written: May 14, 2020
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: Suggested Citation