How do Competition and Reputation Affect Startup and VC Behavior?

47 Pages Posted: 13 Jan 2021 Last revised: 30 Mar 2022

See all articles by Nuri Ersahin

Nuri Ersahin

Michigan State University-Department of Finance

Ruidi Huang

Southern Methodist University (SMU) - Finance Department

Naveen Khanna

Michigan State University

Date Written: March 30, 2022

Abstract

This paper examines the impact of competition and reputation on the behavior of venture capital (VC) firms and startups and identifies a channel through which it occurs. Following the adoption of investor tax credit programs that increase competition, reputable VCs reduce the number and size of their investments, create smaller syndicates, and shrink the time between financing rounds. High-quality startups become less likely to partner with reputable VCs who experience deteriorating performance. Our results suggest that increasing competition depresses returns for reputable VCs, hurting their incentive to invest and undertake costly screening activities.

Keywords: Venture capital, reputation, competition, investor tax credit

JEL Classification: G24, G28, G34

Suggested Citation

Ersahin, Nuri and Huang, Ruidi and Khanna, Naveen, How do Competition and Reputation Affect Startup and VC Behavior? (March 30, 2022). SMU Cox School of Business Research Paper No. 21-02, Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3761472 or http://dx.doi.org/10.2139/ssrn.3761472

Nuri Ersahin (Contact Author)

Michigan State University-Department of Finance ( email )

East Lansing, MI 48824
United States
8478686532 (Phone)

HOME PAGE: http://sites.google.com/site/nuriersahin/

Ruidi Huang

Southern Methodist University (SMU) - Finance Department ( email )

United States

Naveen Khanna

Michigan State University ( email )

East Lansing, MI 48824-1121
United States
517-353-1853 (Phone)
517-432-1080 (Fax)

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