Do Venture Capitalists Stifle Competition?
55 Pages Posted: 27 Nov 2019 Last revised: 4 Mar 2020
Date Written: March 3, 2020
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
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