Many financial markets are characterized by strong relationships and networks, rather than arm's-length, spot market transactions. We examine the performance consequences of this organizational structure in the context of relationships established when VCs syndicate portfolio company investments. We find that better-networked VC firms experience significantly better fund performance, as measured by the proportion of investments that are successfully exited through an IPO or a sale to another company. Similarly, the portfolio companies of better-networked VCs are significantly more likely to survive to subsequent financing and eventual exit. We also provide initial evidence on the evolution of VC networks.

We examine whether strong networks among incumbent venture capitalists (VCs) in local markets help restrict entry by outside VCs, thus improving incumbents' bargaining power over entrepreneurs. More densely networked markets experience less entry, with a one-standard deviation increase in network ties among incumbents reducing entry by approximately one-third. Entrants with established ties to targetmarket incumbents appear able to overcome this barrier to entry; in turn, incumbents react strategically to an increased threat of entry by freezing out any incumbents who facilitate entry into their market. Incumbents appear to benefit from reduced entry by paying lower prices for their deals.ENTREPRENEURSHIP AND INNOVATION are commonly considered key determinants of an economy's capacity for wealth creation, job growth, and competitiveness. Venture capitalists (VCs) serve a vital economic function by identifying, funding, and nurturing promising entrepreneurs, though whether they provide capital and services on competitive terms is much debated. In this paper, we examine whether U.S. venture capital firms engage in practices designed to increase their bargaining power over entrepreneurs by restricting entry into local VC markets, such as Silicon Valley in California or Route 128 in Massachusetts. Our results are consistent with the hypothesis that incumbents engage in