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





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    • Hochberg is at the Kellogg School of Management, Northwestern University. Ljungqvist is at the Stern School of Business, New York University, ECGI, and CEPR. Lu is with Barclays Capital. The authors thank Campbell Harvey (the editor), an anonymous referee, an anonymous associate editor, John Asker, Ola Bengtsson, Jan Eberly, Shane Greenstein, Arvind Krishnamurthy, Laura Lindsey, Andrew Metrick (our American Finance Association meetings discussant), Ramana Nanda, Leslie Papke, Mitchell Petersen, David Scharfstein (our Entrepreneurship, Venture Capital and IPOs conference discussant), Morten Sørensen, Scott Stern, Per Strömberg (our RICAFE2 discussant), Toby Stuart (our NBER discussant), Toni Whited, Jeffrey Wooldridge, and seminar participants at the European Central Bank, Cornell University, Harvard Business School, Northwestern University, University of Texas at Austin, City University of New York, Hong Kong University of Science and Technology, University of Pittsburgh, University of Wisconsin-Madison, Australian National University, University of Zurich, Columbia University, London Business School, the Berkley Workshop at New York University, the 2007 American Finance Association meeting, the 2006 RICAFE2 Conference at the London School of Economics, the Third Entrepreneurship, Venture Capital and IPOs Conference at Harvard University, the 2006 NBER Entrepreneurship Meetings, and the 2007 Next Generation Conference at London Business School for helpful comments and suggestions. Lu gratefully acknowledges funding from the Ewing Marion Kauffman Foundation. The views expressed in the paper are those of the authors and not of Barclays Capital.


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.