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

Alexander Ljungqvist

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

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 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

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
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212-998-0304 (Phone)
212-995-4220 (Fax)

HOME PAGE: http://pages.stern.nyu.edu/~aljungqv

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR)

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London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

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

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