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: 29 Oct 2014
Date Written: January 20, 2009
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: Suggested Citation