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Competition and Specialization in the VC Market: A Non-monotonic Relationship

Author

Listed:
  • Christos Cabolis

    (IMD)

  • Mian Dai

    (Drexel University)

  • Konstantinos Serfes

    (Drexel University)

Abstract

We investigate the relationship between competition and stage specialization in the venture capital (VC) markets. A typical successful entrepreneurial company goes through multiple stages of VC investments; but an average VC firm specializes and participates only in a subset of these stages. We hypothesize that a VC firm’s decision to stage-specialize (or not) poses a trade-off between business expansion and competition mitigation. Both effects are influenced by the intensity of competition. Consistent with a prediction of the theoretical model, we find robust empirical evidence for a non-monotonic relationship—an inverted-U shape—between competition and stage specialization in the U.S VC markets between 1980 and 2012. This result is novel and can have interesting managerial and policy implications.

Suggested Citation

  • Christos Cabolis & Mian Dai & Konstantinos Serfes, 2023. "Competition and Specialization in the VC Market: A Non-monotonic Relationship," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 62(3), pages 241-269, May.
    • Handle: RePEc:kap:revind:v:62:y:2023:i:3:d:10.1007_s11151-023-09898-x
    DOI: 10.1007/s11151-023-09898-x
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    More about this item

    Keywords

    Venture capital market; Stage specialization; VC market competition;
    All these keywords.

    JEL classification:

    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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