Whom You Know Matters: Venture Capital Networks and Investment Performance





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    • Hochberg is from the Northwestern University Kellogg School of Management, Ljungqvist is from the New York University Stern School of Business and the Centre for Economic Policy Research, London, and Lu is from the New York University Stern School of Business. Thanks for helpful comments and suggestions go to Viral Acharya, Steve Drucker, Jan Eberly, Eric Green, Yaniv Grinstein, David Hsu, Josh Lerner, Laura Lindsey, Max Maksimovic, Roni Michaely, Maureen O'Hara, Mitch Petersen, Ludo Phalippou, David Scharfstein, Jesper Sorensen, Morten Sorensen, Rob Stambaugh (the editor), Per Strömberg, an anonymous referee, and seminar participants at the University of Amsterdam, Bar Ilan University, Binghamton University, Cornell University, London Business School, Northwestern University, the Stockholm School of Economics, Tel Aviv University, the University of Texas at Austin, Tilburg University, the University of Utah, the Spring 2005 National Bureau of Economic Research (NBER) Entrepreneurship meeting, and the 2005 Western Finance Association meetings.


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 structure in the context of relationships established when VCs syndicate portfolio company investments. We find that better-networked VC firms experience significantly better fund performance, as measured by the proportion of investments that are successfully exited through an IPO or a sale to another company. Similarly, the portfolio companies of better-networked VCs are significantly more likely to survive to subsequent financing and eventual exit. We also provide initial evidence on the evolution of VC networks.