FIN-04-029 |
NYU Stern School of Business |
December 2004
Yael Hochberg and Alexander Ljungqvist
ABSTRACT
Many financial markets are characterized by strong relationships and networks, rather than arm's-length,
spot-market transactions. We examine the performance consequences of this organizational choice in the
context of relationships established when VCs syndicate portfolio company investments, using a
comprehensive sample of U.S. based VCs over the period 1980 to 2003. VC funds whose parent firms
enjoy more influential network positions have significantly better performance, as measured by the
proportion of portfolio company investments that are successfully exited through an initial public offering
or a sale to another company. Similarly, the portfolio companies of better networked VC firms are
significantly more likely to survive to subsequent rounds of financing and to eventual exit. The magnitude
of these effects is economically large, and is robust to a wide range of specifications. Our models suggest
that the benefits of being associated with a well-connected VC are more pronounced in later funding
rounds. Once we control for network effects in our models of fund and portfolio company performance, the
importance of how much investment experience a VC has is reduced, and in some specifications,
eliminated.
Yael Hochberg
Institution: Johnson Graduate School of Management, Cornell University
Telephone: (607) 255-5002
Fax: (607) 254-4590
Email: yael.hochberg@johnson.cornell.edu
Alexander Ljungqvist
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Email:aljungqv@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~aljungqv
Yang Lu
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Email:ylu1@stern.nyu.edu
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