The Impact of Competition on Startup and VC Behavior

53 Pages Posted: 13 Jan 2021 Last revised: 31 Jan 2023

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: January 10, 2023

Abstract

This paper examines the impact of competition on the behavior of both startups and VC firms and identifies a channel through which it occurs. Following an exogenous shock that increases competition, reputable VCs reduce the number and size of their investments, create smaller syndicates, and shrink the time between financing rounds. Also, high-quality startups become less likely to partner with reputable VCs, worsening their investment pool, depressing returns and hurting their incentive to invest and/or undertake costly screening. Notably, VCs with the highest reputation are crowded out the most.

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

JEL Classification: G24, G28, G34

Suggested Citation

Ersahin, Nuri and Huang, Ruidi and Khanna, Naveen, The Impact of Competition on Startup and VC Behavior (January 10, 2023). 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)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
232
Abstract Views
1,547
Rank
199,102
PlumX Metrics