Broadening versus reinforcing investor portfolios: Social structure and the search for venture capital investors |
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| Institution: | 1. Technical University of Munich, TUM School of Management, Arcisstr. 21, 80333 München, Germany;2. Université Libre de Bruxelles, Solvay Brussels School Economics and Management, Avenue FD Roosevelt 50, 1050 Brussels, Belgium;3. University of Oklahoma, Price College of Business, 307 W. Brooks St., Norman, OK 73069, United States;4. Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556, United States;1. Department of Entrepreneurship, Baylor University, United States of America;2. Rucks Department of Management, E. J. Ourso College of Business, Louisiana State University, United States of America;3. Belk College of Business, University of North Carolina at Charlotte, United States of America;4. Department of Psychology, University of North Carolina at Charlotte, United States of America;1. Kelley School of Business, Indiana University, Bloomington, IN 47405, USA;2. Stern School of Business, New York University, New York, NY 10012, USA;3. Alberta School of Business, University of Alberta, Edmonton, AB T6G 2R6, Canada;1. Muma College of Business, University of South Florida, 4202 East Fowler Avenue, Tampa, FL 33620, United States of America;2. Cameron School of Business, University of North Carolina Wilmington, United States of America |
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| Abstract: | This paper highlights the venture capital investor (VC) portfolios of startups, and explores how the portfolios evolve. We emphasize the important trade-off between broadening and reinforcing VC portfolios (i.e., expanding to new VCs versus relying on existing VCs). This is because, to startups, new and existing VCs generate very different opportunities and constraints. Focusing on the social structure of existing VCs, we argue that startups are more likely to opt for new VCs when the internal networks of existing VCs are denser, when the external networks of existing VCs are smaller, and when the status of existing VCs is lower. Additionally, we not only focus on whether new VCs are on board, but also pay attention to which new VCs are introduced, by analyzing the ex-ante embeddedness between existing and newly-introduced VCs. We stress that when new VCs are highly embedded with existing VCs, their involvement makes only a limited contribution to broadening a startup's portfolio and network. We test the hypotheses using a sample of VC financing rounds in the U.S. and find broad support. |
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