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

Author

Listed:
  • Suting Hong

    (Shanghai Tech University)

  • Konstantinos Serfes

    (Drexel University)

  • Veikko Thiele

    (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

  • Suting Hong & Konstantinos Serfes & Veikko Thiele, 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.
    • Handle: RePEc:ris:drxlwp:2018_002
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    Cited by:

    1. Fu, Hui & Liu, Qianqian & An, Yunbi & Yang, Jun & Xiong, Heng, 2025. "Exit disruption and matching in venture capital markets: Evidence based on IPO suspensions in China," International Review of Economics & Finance, Elsevier, vol. 98(C).
    2. Hellmann, Thomas & Thiele, Veikko, 2022. "May the force be with you: Investor power and company valuations," Journal of Corporate Finance, Elsevier, vol. 72(C).
    3. Liu, Qianshuo, 2024. "Pharmaceutical innovation collaboration, evaluation, and matching," Journal of Health Economics, Elsevier, vol. 98(C).
    4. Ewens, Michael & Gorbenko, Alexander & Korteweg, Arthur, 2022. "Venture capital contracts," Journal of Financial Economics, Elsevier, vol. 143(1), pages 131-158.
    5. Francesco Sannino, 2024. "The Equilibrium Size and Value‐Added of Venture Capital," Journal of Finance, American Finance Association, vol. 79(2), pages 1297-1352, April.
    6. 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.
    7. Liang, Weiping & Zhou, Xiangyi, 2024. "Why do entrepreneurial firms switch lead venture capital? A double-sided matching perspective," Research in International Business and Finance, Elsevier, vol. 72(PA).
    8. Chen, Zhuming & Luo, Xue, 2024. "Optimal investment and exit decision of venture capitals with multiple heterogeneous Beliefs," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 1138-1153.
    9. Fu, Hui & Qi, Huilan & An, Yunbi, 2024. "When do venture capital and startups team up? Matching matters," Pacific-Basin Finance Journal, Elsevier, vol. 85(C).

    More about this item

    Keywords

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    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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