Networks in Venture Capital Markets

Abstract

This paper investigates the role of alumni networks in venture capital markets by leveraging partner hiring events as exogenous shocks to network formation. Startups that gain new alumni connections experience a 10.10% increase in investment probability, with effects particularly pronounced among underrepresented founders and smaller VC firms. However, these investments underperform: failure rates increase by 24.35%, acquisition rates decline by 15.59%, and IPO rates drop by 58.70%. These findings indicate that while alumni ties may facilitate access, the favoritism they induce outweighs informational benefits, leading to inefficiencies in capital allocation.

Keywords: Venture Capital, Alumni Networks, Information, Homophily Bias

JEL Classification: G02, G24, G3, L14, L02, L26