The Impact of Competition on Startup and VC Behavior
SMU Cox School of Business Research Paper No. 21-02
Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC
53 Pages Posted: 13 Jan 2021 Last revised: 31 Jan 2023
Date Written: January 10, 2023
Abstract
This paper examines the impact of competition on the behavior of both startups and VC firms and identifies a channel through which it occurs. Following an exogenous shock that increases competition, reputable VCs reduce the number and size of their investments, create smaller syndicates, and shrink the time between financing rounds. Also, high-quality startups become less likely to partner with reputable VCs, worsening their investment pool, depressing returns and hurting their incentive to invest and/or undertake costly screening. Notably, VCs with the highest reputation are crowded out the most.
Keywords: Venture capital, reputation, competition, investor tax credit
JEL Classification: G24, G28, G34
Suggested Citation: Suggested Citation