Whom You Know Matters: Venture Capital Networks and Investment Performance

Abstract

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.

Syndication of Venture Capital Investment: The Art of Resource Pooling

“…By inviting another VC firm, a lead investor gets more funding in exchange for an investment opportunity and a potential future invitation if the passive VC firm becomes the lead investor of a future syndication. As mentioned by Hochberg et al (2007), a VC firm is able to generate investment opportunities in the future by syndicating its own deals today in the hope of future reciprocation from its syndication partners.…”

“…Different hypotheses have been explored. Syndications have been understood as a means to diversify risk (Bygrave, 1987;Bygrave & Timmons, 1992;Lerner, 1994;Manigart et al, 2006), to improve projects selection (Brander et al, 2002;De Clercq & Dimov, 2004;Manigart et al), to mobilize competencies (Brander et al;De Clercq & Dimov;Hochberg, Ljungqvist, & Lu, 2007;Manigart et al), and to gain access to deal flow (Manigart et al).…”

“…The rate of bankruptcy is higher at the seed stage than in following stages because of the high uncertainty. Hochberg et al (2007) pointed out that around one-third of companies do not survive beyond the first round of funding and that the survival probability increases in the following stages.…”

“…Third, VC investments are illiquid in the short term because of the lack of efficient capital markets for equity shares of privately held companies. Long horizons of product Figure 1 Funding and Life Cycle of Start-Ups Based on Perez (1987) and Hochberg et al (2007) and market development make valuation difficult. Moreover, the legal restrictions that apply to the resale of such investments lock the investor in for a certain period (Friedman, 1990).…”

Venture Capital and the Financial Crisis: An Empirical Study across Industries and Countries

“…Our data originates from the Thomson VentureXpert database (formerly known as Venture Economics), which has been widely used in the entrepreneurial financing literature (Bygrave, 1989;Sorenson and Stuart, 2001;Gompers and Lerner, 2004;Hochberg et al, 2007). This decision contrasts with those of Block and Sandner (2009), who used the database CrunchBase as a novel dataset.…”