Do Venture Capitalists Stifle Competition?

55 Pages Posted: 27 Nov 2019 Last revised: 4 Mar 2020

See all articles by Xuelin Li

Xuelin Li

University of Minnesota - Twin Cities, Carlson School of Management

Tong Liu

University of Pennsylvania - Finance Department

Lucian A. Taylor

University of Pennsylvania - The Wharton School

Date Written: March 3, 2020

Abstract

We find that common ownership leads venture capital (VC) firms to stifle competition among startups, but only in limited circumstances. Our evidence is from pharmaceutical startups, where common ownership is widespread: 39% of startups share a VC with a close competitor. We examine how a startup responds after seeing a competitor make progress on a closely related drug project. If the two startups share a common VC, the lagging startup is less likely to advance its own project and obtain VC funding, which reduces competition between the startups. These anticompetitive effects, however, are limited to markets with few competitors, VCs with larger equity stakes, competing projects with similar technologies, and early-stage projects.

Keywords: venture capital, common ownership, competition, healthcare

JEL Classification: G24, L41, L10

Suggested Citation

Li, Xuelin and Liu, Tong and Taylor, Lucian A., Do Venture Capitalists Stifle Competition? (March 3, 2020). Available at SSRN: https://ssrn.com/abstract=3479439 or http://dx.doi.org/10.2139/ssrn.3479439

Xuelin Li

University of Minnesota - Twin Cities, Carlson School of Management ( email )

Minneapolis, MN
United States

Tong Liu

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Lucian A. Taylor (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

HOME PAGE: http://finance.wharton.upenn.edu/~luket/

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