The Market for Venture Capital: Entry, Competition and the Survival of Start-Up Companies

We propose a model of investment, duration, and exit strategies for start-ups backed by venture capital (VC) funds that accounts for the high level of uncertainty, the asymmetry of information between insiders and outsiders, and the discount rate. Our analysis predicts that start-ups backed by corporate VC funds remain for a longer period of time before exiting and receive larger investment amounts than those financed by independent VC funds. Although a longer duration leads to a higher likelihood of an exit through an acquisition, a larger investment increases the probability of an IPO exit. These predictions find strong empirical support.

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“…A similar hypothesis can be found, for instance, in Bergemann and Hege (), Hong et al. (), and Conti et al. ().…”

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confidence: 84%

Investment, Duration, and Exit Strategies for Corporate and Independent Venture Capital‐Backed Start‐Ups

Guo

Lou

Pérez‐Castrillo

2015

Economics Manag Strategy

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“…A limitation of all these search models (including ours) is that they require homogenous types. Hong, Serfes, and Thiele (2013) consider a single-stage VC financing model with matching among heterogeneous types.…”

Section: Relationship To Literaturementioning

confidence: 99%

Friends or Foes: The Interrelationship between Angel and Venture Capital Markets

Hellmann

Thiele

2014

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This paper develops a theory of how angel and venture capital markets interact. Entrepreneurs first receive angel then venture capital funding. The two investor types are 'friends' in that they rely upon each other's investments. However, they are also 'foes', because at the later stage the venture capitalists no longer need the angels. Using a costly search model we derive the equilibrium deal flows across the two markets, endogenously deriving market sizes, competitive structures, valuation levels, and exit rates. We discuss how the model generates alternative testable hypotheses for the recent rise of angel investing.

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“…Finally, some oligopoly models predict excessive market entry because of the "business stealing effect;" see e.g., Mankiw and Whinston (1986). However, entry in the VC market 4 It can be shown, in a set-up featuring a continuum of incumbents in a market, that as an incumbent gains more expertise and becomes more established in a market, entry of VC firms has a reduced impact on the incumbent-backed ventures (See Hong et al (2013)). Accordingly, the dampening effect of syndication, if it exists, becomes limited.…”

Section: Related Literaturementioning

confidence: 99%

“…However, there is no definite conclusion regarding the overall impact of syndication between entrants and incumbents on the success of a given start-up company, as it depends on the relative competitiveness of the incumbent lead investor in the local market. 4 This paper is closest in spirit to Hong et al (2013), which establishes an equilibrium model examining the endogenous matching between heterogeneous VC firms and start-up companies. They find that entry of VC firms forces incumbents to transfer more utility to entrepreneurs and is positively related to the survival of start-up companies.…”

Section: Introductionmentioning

confidence: 99%

Competition, Syndication, and Entry in the Venture Capital Market

Hong

2013

SSRN Journal

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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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The Market for Venture Capital: Entry, Competition and the Survival of Start-Up Companies

Cited by 9 publications

References 72 publications

Investment, Duration, and Exit Strategies for Corporate and Independent Venture Capital‐Backed Start‐Ups

Investment, Duration, and Exit Strategies for Corporate and Independent Venture Capital‐Backed Start‐Ups

Friends or Foes: The Interrelationship between Angel and Venture Capital Markets

Competition, Syndication, and Entry in the Venture Capital Market

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