Networking as a Barrier to Entry and the Competitive Supply of Venture Capital

Journal of Finance, Forthcoming

46 Pages Posted: 12 Aug 2006 Last revised: 10 Nov 2009

See all articles by Alexander Ljungqvist

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR); Swedish House of Finance; European Corporate Governance Institute (ECGI)

Yael V. Hochberg

National Bureau of Economic Research (NBER); Rice University - Jesse H. Jones Graduate School of Business

Yang Lu

AQR Capital Management, LLC

Multiple version iconThere are 3 versions of this paper

Date Written: January 20, 2009

Abstract

We examine whether strong networks among incumbent venture capital firms help restrict entry into local VC markets in the U.S., thus improving VCs' bargaining power over entrepreneurs. We show that VC markets with more extensive networking among the incumbent players experience less entry. The effect is sizeable economically and appears robust to plausible endogeneity concerns. Entry is accommodated if the entrant has established relationships with a target-market incumbent in its own home market. In turn, incumbents react strategically to an increased threat of entry, in the sense that they freeze out any incumbent that builds a relationship with a potential entrant. Finally, companies seeking venture capital raise money on worse terms in more densely networked markets while increased entry is associated with higher valuations.

Keywords: Venture Capital, Start-up Financing, Networks, Syndication, Barriers to Entry, Entry Deterrence

JEL Classification: G24, L13, L14, L22, L84

Suggested Citation

Ljungqvist, Alexander and Ljungqvist, Alexander and Hochberg, Yael V. and Lu, Yang, Networking as a Barrier to Entry and the Competitive Supply of Venture Capital (January 20, 2009). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=923824

Alexander Ljungqvist

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Yael V. Hochberg (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Yang Lu

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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

Paper statistics

Downloads
1,368
Abstract Views
7,204
Rank
21,827
PlumX Metrics