Venture Capital Firms and Entrepreneurship: A Study of Start-Up Companies and Their Funding

Research on what determines the performance of start-up companies is characterized by a sharp debate in the literature of economic sociology and the sociology of the economy. There is one extreme view proposing that in the long run, a rational market takes care of allocating scarce resources such as venture capital funding to the most potentially profitable and exciting business plans. By contrast, a more sociological social network perspective highlights how entrepreneurial efforts and economic activities are more successful when embedded in a densely connected network of social actors. My research adds to the study of new organizations’ performance by examining the different economic, regional, and sociological factors influencing the performance of venture capital funded start-up companies (between 1995 and 1998) in the United States. I find evidence that after controlling for the economic characteristics of portfolio investments, network variables still play an important role in explaining start-up companies’ success. Companies backed by venture capital firms involved in more dense patterns of coinvestments are more likely to go public (or to merge / get acquired) than start-ups funded by isolated venture capital firms. In addition, the success of a company in the public market seems to be significantly enhanced when its funding comes from a syndication network of venture capital firms with at least one highly central and structurally autonomous venture capital investor. Most importantly, my analyses also show that the same network structure seems to predict the survival of the newly-created company, finding support to the often ignored argument in economic sociology that social ties, under certain circumstances, can result in the funding of non-profitable business ventures as well.