Co-investment and competition [electronic resource] : the strategic networks of venture capital firms

"Network Structure and Uncertainty" develops and tests a theory of tie maintenance under environmental uncertainty. Sociological theory of networks indicates that firms benefit from strengthening existing ties, as well as forming new ones. However, this research often overlooks network effects that are contingent on the environment. In this paper, I posit that under greater uncertainty, stronger ties provide better information and facilitate collective action. As uncertainty wanes, stronger ties entail an opportunity cost of redundant information and misallocated social capital. I test this theory using data on venture capital co-investment and startup company performance from 1981-2014. My results indicate that venture capitalists with many strong ties are more successful in early-stage ventures and ventures in emerging industries. This success attenuates for later-stage ventures and ventures in mature industries, and strong ties may actually be detrimental. I supplement my empirical analysis with qualitative interviews to better understand how venture capitalists mobilize support from co-investors under uncertainty. "Network Imprinting and Variability" exposits a theory of firm entry and network imprinting. Existing networks literature indicates that firms positioned in the center of a market's social network are more capable and have better access to resources. What results is a Matthew effect where the more central firms have access to better resources and can thus sustain outstanding performance for new firms entering a network. The closer to the center firms enter, the better they should perform. In this paper, I posit that new firms entering at the center of a pre-existing network are not necessarily better off, nor are the firms that enter at the periphery strictly worse off. Instead, firms that enter into the center are subject to both middle status conformity and learning myopia that leads to exploitation. On the other hand, firms that enter into the periphery develop an orientation toward external search that motivates them to be explorers. I test this theory using data on the co-investment networks of venture capital firms collected from 1981 to 2014. My results indicate that venture capital firms that enter into the center of the network experience are less likely to die, but are also less likely to have extreme success. The converse is true for firms that enter into the periphery. I supplement my empirical analysis with qualitative interviews with venture capitalists to better understand the micro mechanisms at work. "Network Mobility and Performance" builds a theory linking network mobility to firm outcomes. Sociological research on networks has developed theory that relates network positions to outcomes. However, less work explicitly draws attention to changing network positions over time, and how these shifts on their own can influence performance. I argue that certain patterns of mobility will lead firms to success, while others will lead to failure. I focus on the particular situation in which firms are able to begin life in the periphery, and then gain access to the center and are able to relocate there. Firms that may appear to have the same network position, as well as similar previous records of success, may appear the same in cross-section. But, considering the path each firm travels to get to its current position can help make predictions about its performance trajectory. I develop a theoretical example focusing on venture capital firms that enter into the periphery of the co-investment network and in subsequent periods are able to invest with more central co-investors.

Keywords: Business.
Advisor: Hasan Sharique primary advisor. Thesis advisor
Barnett William A.
Ferguson John-Paul