Mechanisms of Venture Capital Co-Investment Networks: Evolution and Performance Implications

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Mechanisms of Venture Capital Co-Investments Networks - Evolution and Performance Implications.pdf

11wspn7rk-1bk/b0bsl79jx59rwtw7lr978psshbdk7tsxlb1w4wlpmfhprmt/Mechanisms_of_Venture_Capital_Co-Investments_Networks_-_Evolution_and_Performance_Implications.pdf

Description

Students of high technology industry routinely acknowledge that communities knit together by networks of social relations are essential for the development of the industry (Saxenian 1994; Bernasconi et al. 2005) and emphasize that venture capitalists hold central positions in these networks (Banatao and Fong 2000; Castilla et al. 2000). Regis McKenna, a highly reputed IT industry expert, called the venture capital (VC) ‘catalyst for [industrial social] networks’ (Kenney and Florida 2000: 101). Other experts have compared the job of venture capitalists in high technology to that of coaches in professional sports (Hellmann 2000). These metaphors reflect the intuition that the role of VC in the development of high technology goes far beyond that of a mere provider of funds. More importantly, venture capitalists integrate the technological community and manage its human resources. Thus, understanding the consequences of their activity is essential to explaining the organization and the performance of the industry.

Yet the venture capitalists are not autonomous actors and themselves crucially depend on resources conveyed through peer networks. The majority of significant venture investment projects are managed collectively by several VC firms. Therefore, we can hardly obtain valuable insights into the role of VC in the development of the industry or single companies unless we extend the analysis to account for relationship-level and network-level processes.  Researchers’ recent acknowledgement of this requirement led to notable advancement of our knowledge on the functioning of venture capital networks. For example, Podolny (2001) argued that networks serve to reduce market uncertainty by conveying information and signals of actor’s social status.Sorenson and Stuart (2001) demonstrated that distance-spanning social networks help venture capitalists sort into new geographically remote markets.

We are, however, still left with a patchy picture. Most importantly, we lack the overview of the evolution of these networks over time and of the relationship between the functioning of the networks and the performance of organizations in the high technology industry. This study contributes to filling this gap. Relying on the literature, I distinguish four mechanisms through which venture capitalists’ syndication networks (or, synonymously, co-investment networks) may affect investment recipients’ performance. Next I construct operational measures of those mechanisms and describe the evolution of the whole VC co-investment network in the United States in terms of these measures. Finally, the effect of these indicators on the performance of investment recipient companies is examined. Thus, this work has a methodological, a descriptive, and an explanatory aspect.

Author

Denis Trapido. Stanford University