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Competition in the venture capital market and the success of startup companies: Theory and evidence

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  • Suting Hong
  • Konstantinos Serfes
  • Veikko Thiele

Abstract

We examine the effect of a competitive supply of venture capital (VC) on the exits (initial public offering or mergers and acquisitions) 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 (Herfindahl–Hirschman Index decreases by 50% from its mean of 0.08), the absolute likelihood of success increases by 2.8% for startups backed by less experienced VC firms, but it decreases by 3.6% for startups backed by the most experienced VC firms.

Suggested Citation

  • Suting Hong & Konstantinos Serfes & Veikko Thiele, 2020. "Competition in the venture capital market and the success of startup companies: Theory and evidence," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 29(4), pages 741-791, October.
    • Handle: RePEc:bla:jemstr:v:29:y:2020:i:4:p:741-791
    DOI: 10.1111/jems.12394
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    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).
    4. 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.
    5. 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).

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    More about this item

    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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