Competition and Specialization: Evidence from Venture Capital
Christos Cabolis (),
Mian Dai and
Konstantinos Serfes ()
No 2014-5, School of Economics Working Paper Series from LeBow College of Business, Drexel University
We investigate the relationship between competition and firm specialization in the venture capital (VC) market. Staged financing motivates VC firms to fund entrepreneurs in various states of maturity: startup/seed, early, growth, and so forth, and leads to stage specialization. Contrary to the conventional wisdom that competition always promotes specialization, we find an inverted-U relationship, using panel data on VC funding rounds in the U.S. between 1980 and 2006. We develop a matching model with two-sided vertical heterogeneity, bilateral bargaining and moral hazard to demonstrate that the non-monotonicity is driven by the expected utility VC firms offer to entrepreneurs, via equity stakes, where higher quality entrepreneurs (with more promising business plans) receive greater utility. Competition shifts and rotates the utility schedule, which gives rise to two opposing forces on the returns to specialization as competition intensifies. We then search for validation of the mechanism we propose and we find consistent empirical evidence.
Keywords: Venture capital market; Stage specialization; Competition; Endogenous matching (search for similar items in EconPapers)
JEL-codes: D21 L11 L14 L22 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2014-03-01, Revised 2014-10-05
New Economics Papers: this item is included in nep-bec, nep-com and nep-ent
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
https://drive.google.com/file/d/0BxRDnd8cEKndM2ROckdrTkhfXzQ/view?usp=drive_web Full text (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:ris:drxlwp:2014_005
Access Statistics for this paper
More papers in School of Economics Working Paper Series from LeBow College of Business, Drexel University Contact information at EDIRC.
Bibliographic data for series maintained by Richard C. Barnett ().