Department of Finance Working Paper Series

FIN-05-012

Whom You Know Matters: Venture Capital Networks and Investment Performance

Yael Hochberg, Alexander Ljungqvist and Yang Lu April 2005

Abstract
	Many financial markets are characterized by strong relationships and networks, rather than arm’s-length, spot-market transactions. We examine the performance consequences of this organizational choice in the context of relationships established when VCs syndicate portfolio company investments, using a comprehensive sample of U.S. based VCs over the period 1980 to 2003. VC funds whose parent firms enjoy more influential network positions have significantly better performance, as measured by the proportion of portfolio company investments that are successfully exited through an initial public offering or a sale to another company. Similarly, the portfolio companies of better networked VC firms are significantly more likely to survive to subsequent rounds of financing and to eventual exit. The magnitude of these effects is economically large, and is robust to a wide range of specifications. Once we control for network effects in our models of fund and portfolio company performance, the importance of how much investment experience a VC has is reduced, and in some specifications, eliminated. Finally, we provide initial evidence on the evolution of VC networks.

Yael Hochberg
	Institution: Johnson School of Management, Cornell University Email: yael.hochberg@johnson.cornell.edu Phone: (607) 255-5002 Fax: (607) 254-4590
Alexander Ljungqvist
	Institution: Stern School of Business, New York University Email: aljungqv@stern.nyu.edu Phone: (212) 998-0304 Fax: (212) 995-4233 Home Page: http://www.stern.nyu.edu/~aljungqv
Yang Lu
	Institution: Stern School of Business, New York University Email: ylu@stern.nyu.edu Phone: (212) 998-0316 Home Page: http://www.stern.nyu.edu/~ylu

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The 2005 Department of Finance Working Paper Series has been generously sponsored by