The Impact of Investment Networks on Venture Capital Firm Performance: A Contingency Framework
| Date | 01 January 2017 |
| DOI | http://doi.org/10.1111/1467-8551.12162 |
| Published date | 01 January 2017 |
British Journal of Management, Vol. 28, 102–119 (2017)
DOI: 10.1111/1467-8551.12162
The Impact of Investment Networks on
Venture Capital Firm Performance:
A Contingency Framework
Cristiano Bellavitis,1Igor Filatotchev2,3 and Vangelis Souitaris2,4
1Higher School of Economics, National Research University,33 Kirpichnaya Street, 105187, Moscow, Russia,
2Cass Business School, City University London, 106 Bunhill Row, London EC1Y 8TZ, UK, 3Vienna University
of Economics and Business, Welthandelsplatz 1, 1020, Wien, Austria, and 4Luiss Guido Carli University, Viale
Romania 32, 00197, Rome, Italy
Corresponding author email: CBellavitis@Hse.ru
Venturecapital (VC) syndicates involve repeated transactions among partners and there-
fore possess network-like characteristics. Although networks provide access to impor-
tant externalities, extant literature has not studied the eects of the focalfir m’sresource
needs on performance benefits arising from dierent network structures. We investigate
the impact of two proxies for firm-levelresources, namely maturity and status, on the re-
lationship between network cohesion and VCperformance. We find that mature and high
status VCs benefit less from network cohesion. We also show that maturity and status
simultaneously determine the performance eects of network cohesion.
Introduction
Syndicates are a common practice in variousfinan-
cial markets including VC investments and bank
lending. Syndicates are formed when a groupof fi-
nanciers makes a joint decision to provide finance
under conditions of uncertainty, and payos are
subsequently shared among them (Lerner, 1994).
In the entrepreneurial finance context, prior stud-
ies indicate that the majority of VC investments
are syndicated and this practice ‘creates a network
The authors gratefully acknowledge the helpful com-
ments from Robert Hoskisson, Martin Kildu, Curt
Moore, Keith Brouthers, Hans Frankort, Rayan Krause,
Benjamin Hallen, Joost Rietveld, Katy Brown and sem-
inar participants at Imperial College Business School
(London, UK), Rice University (Houston, US), Texas
Christian University (Fort Worth, US), McGill Univer-
sity (Montreal, Canada), Higher School of Economics
(Moscow, Russia), Luiss Guido Carli University (Rome,
Italy), University of Sussex (UK). We would also like to
thank Andre Silva for helping with data collection. The
usual disclaimers apply.
of relations within the VC community’ (Sorenson
and Stuart, 2001, p. 1559). VCsyndicates often in-
volve repeated transactions among partners that
lead to the formation of network-based relation-
ships (Hochberg, Ljungqvist and Lu, 2007, 2010),
and VCs ‘are bound by their current and past in-
vestments into webs of relationships with other
VCs’ (Hochberg,Ljungqvist and Lu, 2007, p. 251).
However, there is very little research on the struc-
tural characteristics of VC syndication networks
and how they aect the performance of individual
syndicate members.
When selecting co-investment partners, a VC
firm has to make a decision as to whether it wants
to co-invest with partners already in its network,
therefore increasing the cohesiveness of its net-
work, or to establish new ties to form a network
rich in structural holes (Echols and Tsai, 2005).
The debate related to the cost−benefit trade-os
associated with membership of cohesive versus
structural holes networks has become one of the
most prominent conversations in the network
literature, fuelled by a considerable ambiguity
© 2016 British Academy of Management. Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4
2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.
Venture capital, networks, and performance 103
in empirical findings (Shipilov and Li, 2008). A
cohesive network is beneficial to its members
because it enhances an environment of trust
and facilitates the flow of resources within the
network (Coleman, 1988). However, Burt (1992)
demonstrates that social constraints arising within
a cohesive network limit the actor’s flexibility
and the scope of exchange in non-redundant
resources. Burt (1992) emphasizes the opportuni-
ties provided within a network rich in structural
holes that supplies non-redundant resources and
allows for brokerage opportunities that network
members may exploit. Although network studies
have emphasized the relevance of a network’s
structural characteristics (cohesion versus struc-
tural holes) for organizations, there is a dearth
of research exploring the impact of syndication
networks on the performance of an individual
syndicate member.1Our study aims to shed light
on the eect of the structural characteristics of
VC syndication networks on the performance of
individual VCs and on the eciency trade-os
associated with dierent network structures.
Previous research within the broader network
literature has mainly focused on various external-
ities associated with cohesive or structural holes
networks, such as formation of trust, informa-
tion exchange and the flow of non-redundant re-
sources among the network members. As indicated
above, these studies are inconclusive in determin-
ing which type of network structure is more bene-
ficial for a member firm (Kildu and Brass, 2010).
‘One reason for a lack of consistent findings is that
firmsdier greatly[ ...],andsuchdierenceshave
not been considered yet’ (Echols and Tsai, 2005,
p. 233). In particular, previous network research
has focused predominantlyon the network’s ability
to supply relevant resources to the focal firm (e.g.
Stuart, Hoang and Hybels, 1999) and has over-
looked dierences between firms in terms of their
idiosyncratic resourceneeds (Oh, Chung and Labi-
anca, 2004). In other words, extant research has
extensively studied the supply side of network re-
sources from the focal firm’s perspective, and less
attention has been paid to the demand side, which
may depend on a number of firm-level resource
contingencies. As Bae and Gargiulo (2004, p. 857)
argue, ‘a joint consideration of actors’ resources
1Notable exceptions are represented by Hochberg,
Ljungqvist and Lu (2007, 2010) and Echols and Tsai
(2005).
and of the social structure in which those resources
are exchanged will lead to better understanding
of the economic consequences of social relations’,
and this is a focal theoretical lens we apply in our
study of geographically bound VC co-investment
networks.
We build on a contingency approach to explore
the performance eects of network characteristics.
Previous studies overlooked the moderation eect
of the focal firm’s resources on the relationship
between network structure and firm performance.
Researchers have tested moderators, which fall
under three broad categories, namely network
context (e.g. Baum, McEvily and Rowley, 2012),
change in the environment (e.g. Gargiulo and
Benassi, 2000) and business strategy (e.g. Shipilov,
2006). We argue that the benefits associated with
a particular network structure are contingent
upon complementarity and fit between resources
accessible through the network and resources
already controlled by the firm. More specifically,
in the context of the VC industry, we focus on
VC maturity and status as important firm-level
factors that may help to unambiguously deter-
mine the balance between the costs and benefits of
dierent network structural characteristics from
the focal firm’s perspective that, so far, has eluded
network researchers. The maturity of a VC is an
indication of its strong resource position vis-`
a-vis
younger, recently formed funds (Gompers, 1996;
Petty and Gruber, 2011). Mature VC firms have
better access to financial resources provided by
limited partners, more experience with selecting
better investment targets in their environment,
and a higher ability to develop and sell successful
ventures compared to their newly established
peers (Gompers et al., 2008). The VC firm’s
status is another important firm-level factor that
underpins a favourable exchange position with
regard to other firms (Podolny, 2001, 2005). High
status VCs are more visible within the local VC
community, and they are more likely to be invited
to join syndicates organized by other VCs. By
jointly considering these firm-level characteristics
and network structure, we explore the following
research question. What are the eects of the focal
VC firm’s maturity and status on the relationship
between network cohesion (versus structural
holes) and the VC’s performance?
This research makes a number of contributions
to both network and entrepreneurial finance lit-
eratures. First, we contribute to network literature
© 2016 British Academy of Management.
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