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Networking as a Barrier to Entry and the Competitive Supply of Venture Capital

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  • YAEL V. HOCHBERG
  • ALEXANDER LJUNGQVIST
  • YANG LU

Abstract

We examine whether strong networks among incumbent venture capitalists (VCs) in local markets help restrict entry by outside VCs, thus improving incumbents' bargaining power over entrepreneurs. More densely networked markets experience less entry, with a one‐standard deviation increase in network ties among incumbents reducing entry by approximately one‐third. Entrants with established ties to target‐market incumbents appear able to overcome this barrier to entry; in turn, incumbents react strategically to an increased threat of entry by freezing out any incumbents who facilitate entry into their market. Incumbents appear to benefit from reduced entry by paying lower prices for their deals.

Suggested Citation

  • Yael V. Hochberg & Alexander Ljungqvist & Yang Lu, 2010. "Networking as a Barrier to Entry and the Competitive Supply of Venture Capital," Journal of Finance, American Finance Association, vol. 65(3), pages 829-859, June.
    • Handle: RePEc:bla:jfinan:v:65:y:2010:i:3:p:829-859
    DOI: 10.1111/j.1540-6261.2010.01554.x
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