Common Venture Capital Investors and Startup Growth
Venture capital (VC) investors play an important role in advising, monitoring, and providing expertise to entrepreneurial startups. VC investors typically have substantial control rights, and actively seek to constrain managerial discretion over key decisions through the appointment of board representatives. A key, yet often overlooked, feature of VC investments is that VC portfolios tend to […]
Ofer Eldar is Professor of Law, and Jillian Grennan is an Associate Adjunct Professor of Finance and Sustainability at the University of California, Berkeley. This post is based on their article forthcoming in the The Review of Financial Studies.
Venture capital (VC) investors play an important role in advising, monitoring, and providing expertise to entrepreneurial startups. VC investors typically have substantial control rights, and actively seek to constrain managerial discretion over key decisions through the appointment of board representatives. A key, yet often overlooked, feature of VC investments is that VC portfolios tend to include many startups in the same industry. In fact, the rate of startups in the same industry with a common VC investor has risen dramatically in recent years (Eldar and Grennan 2021). Most startups nowadays share a VC investor with at least one other startup in the same industry. Even startups that operate in the same line of business, such as Uber and Lyft, often raise capital from the same VC investors.
In our paper, Common Venture Capital Investors and Startup Growth, published in the Review of Financial Studies, we explore the relation between common VC investment and startups’ trajectory for growth and success. On one hand, VC investors could play favorites by diverting valuable competitive information from one startup to another. Startups that operate in complementary spaces within the same industry (such as software and media) may seek similar business opportunities, whether developing a new service or pursuing an attractive contract, and there is a risk that VCs will favor some startups at the expense of others. On the other hand, VC investors can act as incubators for valuable information and expertise. The expertise acquired through common investments at the industry level could benefit all portfolio companies and maximize VC investors’ returns. VCs can allocate different business opportunities efficiently to the startups that, based on the common VC’s information, are best positioned to pursue them.
