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Networking as a Barrier to Entry and the Competitive Supply of Venture Capital
Author(s) -
HOCHBERG YAEL V.,
LJUNGQVIST ALEXANDER,
LU YANG
Publication year - 2010
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2010.01554.x
Subject(s) - barriers to entry , business , venture capital , industrial organization , market power , bargaining power , market economy , market structure , microeconomics , economics , finance , monopoly
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.