Economic Ties: Evidence from Venture Capital Networks

The venture capital industry is characterized by strong inter-organizational networks that have been shown to affect VC firm performance and the competitive supply of capital for entrepreneurs. We examine how VC firms’ observable resources are related to tie formation, and thus how networks facilitate the distribution and combination of resources across organizations. Unlike the social networks literature, we find little evidence of homophily as a motive for network ties among VC firms. Rather, VC firms tend to form ties with the best available partner in terms of investment scope and network access, but form ties in an anti-homophilous fashion on experience. VCs also use network ties to trade experience, access and investment scope for access to capital by partnering with other VC firms that have ample available capital but few other resources that might foster successful investment. JEL Classification: G24, L14