The evolution of inter-organizational networks in venture capital financing

Abstract

Using a cross-section of Venture Capital (VC) transactions in Germany during the period 1995 to 2005, I analyse the origins of social networks in VC financing and document how they evolve over time. I focus specifically on the industry and investment experience of VCs as a resource to allow for better screening of business proposals and to provide a higher quality of managerial advice to the financed entrepreneur. The results show that forming relationships with partner VCs can represent a way to overcome the absence of relevant industry experience. Upon entering into new industries, and in the case of unsuccessful collaborations, lead investors in VC syndicates tend to explore new partnering opportunities resulting in network expansions. Moreover, with more experience within a given industry, lead investors tend to rely on existing partners.

Notes

¹ Similarly, Beckman et al. (2004) compare the selection of unknown and previous partners in alliances to the strategic choice between exploration and exploitation in organizational learning, respectively.

² Gompers and Lerner (2002) study the completeness of the TVE database and argue that most VC investments are contained in it and that those missing are among the less significant ones. The studied sample is therefore unlikely to suffer from a sample selection bias by focusing on TVE data.

³ Groupings have been made based on VEIC level 1 codes. Firms that were solely focusing on the Internet to sell and market products were include in the separate Internet/E-Commerce category.

⁴ Information about all entries into the German commercial register can be accessed online via www.handelsregister.de.

⁵ I thank an anonymous referee for pointing this out.