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Competition in the Venture Capital Market and the Success of Startup Companies: Theory and Evidence

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  • Hong, Suting

    (Shanghai Tech University)

  • Serfes, Konstantinos

    (Drexel University)

  • Thiele, Veikko

    (Queen's University)

Abstract

We examine the effect of a competitive supply of venture capital (VC) on the exits (IPO or M\&A) of startups. We develop a matching model with double-sided moral hazard, and identify a novel differential effect of VC competition on the success of startups. Using VC data, we find evidence for this differential effect. For example, when the VC market becomes more competitive (HHI decreases by 50 percent from its mean of 0.08), the absolute likelihood of success increases by 2.8 percent for startups backed by less experienced VC firms, but it decreases by 3.6 percent for startups backed by the most experienced VC firms

Suggested Citation

  • Hong, Suting & Serfes, Konstantinos & Thiele, Veikko, 2018. "Competition in the Venture Capital Market and the Success of Startup Companies: Theory and Evidence," School of Economics Working Paper Series 2018-2, LeBow College of Business, Drexel University, revised 16 Feb 2020.
    • Handle: RePEc:ris:drxlwp:2018_002
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    Cited by:

    1. Ewens, Michael & Gorbenko, Alexander & Korteweg, Arthur, 2022. "Venture capital contracts," Journal of Financial Economics, Elsevier, vol. 143(1), pages 131-158.
    2. Inés Macho-Stadler & David Pérez-Castrillo, 2021. "Agency theory meets matching theory," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 12(1), pages 1-33, March.
    3. Hellmann, Thomas & Thiele, Veikko, 2022. "May the force be with you: Investor power and company valuations," Journal of Corporate Finance, Elsevier, vol. 72(C).

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    More about this item

    Keywords

    entrepreneurship; venture capital; matching; double-sided moral hazard; exit; IPO and;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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