Networking in the venture capital industry

Xue, Feng

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Description

Title

Networking in the venture capital industry

Author(s)

Xue, Feng

Issue Date

2015-11-09

Director of Research (if dissertation) or Advisor (if thesis)

Hong, Seung-Hyun

Doctoral Committee Chair(s)

Hong, Seung-Hyun

Committee Member(s)

• Bera, Anil K.
• Bernhardt, Dan
• Deltas, George

Department of Study

Economics

Discipline

Economics

Degree Granting Institution

University of Illinois at Urbana-Champaign

Degree Name

Ph.D.

Degree Level

Dissertation

Keyword(s)

• venture capital
• network
• common connections
• return on education

Abstract

Strong relationships and networks prevail in the venture capital (VC) industry and are crucial to the success of VC firms and their start-up companies. There are at least two kinds of networks among venture capitalists, the social networks built and nurtured through syndication partnerships among firms and the educational networks shared by managers of these firms. Such relationships also have an impact on VC firms’ decisions to syndicate in their future investments, as well as the success of those investments. Coinvestment networks are established and developed during the extensive process of syndication among VC firms. Educational connections among the managers of venture capital firms are different in the sense that educational networks are often established long before co-investment networks. This dynamic process provides an appropriate setting for the analysis of the social ties that facilitate syndication in the venture capital industry. The first part of this dissertation will examine how the maintenance of social ties formed during past partnerships affect venture capital firms’ investment strategy, while previous studies emphasize the benefits of social networks developed during syndication partnerships. I investigate how indirect ties between two venture capital firms, as measured by common connections, affect the firm’s future investment decisions and how they impact the exit strategies of start-up companies. Instrumental variables are employed to mitigate the problem of endogeneity. The number of common connections that two firms share depends on the prior decisions of intermediate firms to syndicate with both firms of interest. Thus, we are primarily interested in the instrumental variables that characterize the common decision among some venture capital firms to form links with the two firms of interest, and are unrelated with the pair’s investment strategies. Empirical results suggest that a pair of venture capital firms are more likely to syndicate if they share and share more common connections. Furthermore, investments venture-backed by VC firms who share and share more common connections are more likely to receive follow-on funding and to achieve successful exits. Moreover, there is a tendency for a VC firm to lose multiple connections after it fails an entrepreneurial venture as the lead syndicate member among firms sharing numerous connections. The second part of this dissertation attempts to evaluate the benefits of educational networks in the venture capital industry. Educational connections are often developed years prior to venture capital firms’ decisions to form syndication partnerships; this reduces endogeneity confounds and allows more focused analysis of the effect of social ties on investment strategies. Educational networks in the industry also provide fertile ground on which to examine the financial returns of higher education, including the decision to pursue a master’s degree in business administration, for example. I employ propensity scores and smooth coefficient models to estimate the treatment effect of educational networks of different degrees. This study contributes to the economic literature by attempting to distinguish knowledge, skills and educational connections established in educational institutions. I will also investigate whether degrees from more prestigious universities are associated with higher probability of a successful exit for a start-up company. Empirical evidence demonstrates that the proportion of bachelor degree connections among venture capital firms increases the probability of an IPO or sale exit by 4.6% and IPO exit by 3.9%. The evidence also suggests that the value of bachelor’s level commonality is greater than that of a master’s degree or MBA in this industry. However, educational connections among venture capital firms from more prestigious universities are not associated with a higher probability of success for start-up companies.

Graduation Semester

2015-12

Type of Resource

text

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Copyright and License Information

Copyright 2015 Xue Feng

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