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, and (ii) the impact of entry on VC contract terms and survival rates of VC-backed start-up companies. This dissertation contributes to the existing literature by developing an analytical framework that incorporates the competition and collaboration among VC firms and the bilateral negotiation between entrepreneurs and VC firms. This dissertation first presents an endogenous matching model that characterizes the bilateral negotiations between entrepreneurs and VC firms. The model captures the following salient features of the VC market. First, the bilateral negotiations between entrepreneurs and VC firms are inter-dependent: the negotiation result of one pair of VC firm and entrepreneur is likely to affect the negotiation of another pair in the same market. Second, VC firms are vertically heterogeneous with respect to their experience. I then extend the baseline model to allow for coalition formation among VC firms. By doing that, I explore the motive for VC firms to syndicate. 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. In addition, I find that entry always increases the survival likelihood of incumbent-backed start-up companies regardless of whether entrants syndicate with incumbents or not. Using the data extracted from Venture One, I empirically examine the effect of VC firm entry on the survival of VC-backed start-up companies. I study the two types of entry events: entry with and without syndication. When there is entry without syndication, entry generates a positive externality: entry of VC firms leads incumbents to give higher valuations to entrepreneurs and is associated with a higher probability of survival of a project. When there is entry with syndication, entry increases the survival of a project, which is consistent with the theoretical finding that the syndication of incumbents and entrants improves productivity of investment. My result also suggests as an incumbent becomes more experienced, it is less likely to form syndicates with entrants.