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Competition, syndication, and entry in the venture capital market

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  • Hong, Suting

    (Federal Reserve Bank of Philadelphia)

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    Abstract

    There are two ways for a venture capital (VC) firm to enter a new market: initiate a new deal or form a syndicate with an incumbent. Both types of entry are extensively observed in the data. In this paper, I examine (i) the causes of syndication between entrant and incumbent VC firms, (ii) the impact of entry on VC contract terms and survival rates of VC-backed start-up companies, and (iii) the effect of syndication between entrant and incumbent VC firms on the competition in the VC market and the outcomes of incumbent-backed ventures. By developing a theoretical model featuring endogenous matching and coalition formation in the VC market, I show that an incumbent VC firm may strategically form syndicates with entrants to maintain its bargaining power. Furthermore, an incumbent VC firm is less likely to syndicate with entrants as the incumbent’s expertise increases. I find that entry increases the likelihood of survival for incumbent-backed start-up companies while syndication between entrants and incumbents dampens the competitive effect of entry. Using a data set of VC-backed investments in the U.S. between year 1990 and 2006, I find empirical evidence that is consistent with the theoretical predictions. The estimation results remain robust after I control for the endogeneity of entry and syndication.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 13-49.

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    Length: 54 pages
    Date of creation: 01 Dec 2013
    Date of revision:
    Handle: RePEc:fip:fedpwp:13-49

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    Related research

    Keywords: Entrepreneurship; Externalities (Economics); Venture capital; Entry; Contracts; Exernality; Efficiency; Coalition;

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    Cited by:
    1. Cabolis, Christos & Dai, Mian & Serfes, Konstantinos, 2014. "Competition and Specialization: Evidence from Venture Capital," School of Economics Working Paper Series 2014-5, LeBow College of Business, Drexel University.

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