How do Competition and Reputation Affect Startup and VC Behavior?
47 Pages Posted: 13 Jan 2021 Last revised: 30 Mar 2022
Date Written: March 30, 2022
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: Suggested Citation