Essays on the Venture Capital Market

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 events are extensively observed in the data. This dissertation examines (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. This dissertation contributes to the existing literature by developing an analytical framework to examine the strategic interactions between entrant and incumbent VC firms, and to investigate the impact of VC firms’ entry and syndication on the survival of VC-backed start-ups.

The baseline model characterizes the endogenous matching between entrepreneurs and VC firms. In particular, the model captures the following salient features of the VC market: (i) bilateral negotiations between VC firms and entrepreneurs, and (ii) interdependent negotiations of different pairs of VC firms and entrepreneurs. By extending the baseline model to allow for coalition formation among VC firms, this dissertation explores the motive of VC firms to syndicate. Consistent with the empirical observation, the model shows an incumbent VC firm may strategically form syndicates with entrants to maintain its bargaining power.

The theoretical analysis provides the following predictions. First, an incumbent VC firm is less likely to syndicate with entrants as the incumbent’s expertise increases. Second, entry of VC firms 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, this dissertation provides empirical evidence that is consistent with the theoretical predictions. To control for the endogeneity of VC firms’ entry and syndication, this dissertation follows instrumental variable approach, and the estimation results remain robust.

Many Thanks to Ms. Hong’s Dissertation Committee: Konstantinos Serfes Ph.D. (chair), Mian Dai Ph.D., Mazhar Islam Ph.D., Irina Murtazashvili Ph.D., Vadake Narayanan Ph.D.