The Social Capital of Venture Capitalists and Its Impact on the Funding of Start-Up Firms
AbstractHow does the social capital of venture capitalists (VCs) affect the funding of start-ups? Extant entrepreneurship literature conceptualizes a substitute effect between the social and financial capital that new firms attain from their investors. On the contrary, by building on the rich social capital literature, we hypothesize a positive effect of VCsâ€™ social capital, derived from past syndication, on the amount of money that start-ups receive. Specifically, we argue that both structural aspects of VCsâ€™ social network, such as the number of connections and the spanning of structural holes, and relational aspects, such as the diversity of network partnersâ€™ attributes, provide VCs with superior access to information about current investment objects and opportunities to leverage them in the future, increasing their willingness to invest in these firms. Our empirical results, derived from a novel dataset containing more than 5,000 funding rounds in the Internet and IT sector, strongly confirm our hypotheses. Both structural and relational attributes of VCsâ€™ syndication networks have a significant influence on the funds received by start-up firms, highlighting the importance of a social capital perspective on new venture funding. We discuss the implications of our findings for theories of venture capital and entrepreneurship, showing that the role and effect of VCsâ€™ social capital on start-up firms is much more complex than previously argued in the literature.
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Bibliographic InfoPaper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2010-028-ORG.
Date of creation: 26 Jun 2010
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social networks; social capital; start-ups; venture capital; structural holes;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-09-03 (All new papers)
- NEP-CFN-2010-09-03 (Corporate Finance)
- NEP-ENT-2010-09-03 (Entrepreneurship)
- NEP-SBM-2010-09-03 (Small Business Management)
- NEP-SOC-2010-09-03 (Social Norms & Social Capital)
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- Kirsten Burkhardt, 2011. "Le rôle des sociétés de capital-risque dans la formation d’alliances stratégiques:Une synthèse de littérature - The Role of Venture Capitalists in the Formation of Strategic Alliances:An acade," Working Papers FARGO 1111102, Université de Bourgogne - Leg (laboratoire d'économie et de gestion)/Fargo (Research center in Finance,organizational ARchitecture and GOvernance).
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