Competition, Syndication, and Entry in the Venture Capital Market

Both types of entry are extensively observed in the data. In this paper, the author examines (i) the causes of syndication between entrant and incumbent VC firms, (ii) the impact of entry on VC contract terms and survival rates of VC-backed start-up companies, and (iii) the effect of syndication between entrant and incumbent VC firms on the competition in the VC market and the outcomes of incumbent-backed ventures. By developing a theoretical model featuring endogenous matching and coalition formation in the VC market, the author shows that an incumbent VC firm may strategically form syndicates with entrants to maintain its bargaining power. Furthermore, an incumbent VC firm is less likely to syndicate with entrants as the incumbent's expertise increases. The author finds that entry increases the likelihood of survival for incumbent-backed start-up companies while syndication between entrants and incumbents dampens the competitive effect of entry. Using a data set of VC-backed investments in the U.S. between the years 1990 and 2006, the author finds empirical evidence that is consistent with the theoretical predictions. The estimation results remain robust after she controls for the endogeneity of entry and syndication.