Random Network Formation in Entrepreneurial Finance: A Simple Model and Evidence

Abstract

We provide an empirical analysis of the investments’ network of investors and startups, using original data from the entrepreneurial finance setting in California. We also propose, and calibrate a two-mode random network formation model. We show that an essential mechanism of the entrepreneurial finance setting: the tendency of investor to invite each other to deals, as in syndicated deals, is able to account for observed properties, including the heavy-tailed distribution in the degree distribution of investors (i.e., serial investors), relatively small average distance and diameter, and clustering. This is achieved without assuming preferential attachment, or any other particular preferences for matching between investors and startups. We discuss implications for market efficiency.

Keywords: Entrepreneurial Finance, Networks, Random Models of Network Formation, Empirical Network Structure, Syndicates, Serial-Investors

JEL Classification: D85, G01, G24, L14, M13