Breaking In Together: How Venture Capital Firms Enter New Markets

Abstract

We examine the patterns of partnership formation of new market domain entrants in the U.S. venture capital (VC) industry. Drawing on the principle of exclusivity in partner selection under uncertainty, we extend it to the analysis of new entrants’ partnership formation in VC investment. In contrast to most prior dyad-level studies, we focus on the syndicate-level analysis as better reflecting partnership formation patterns. Our empirical analyses reveal that new market entrants syndicate predominantly with other new entrants, even controlling for their prior ties. Syndicates of a higher percentage of new entrants tend to invest in more mature start-ups, rounds of smaller amount, larger syndicates, and avoid the turbulent environment of popular market domains. The study highlights the interplay of partner selection preferences, environmental uncertainty, and transaction settings in partnership formation of new market entrants. It also shed lights on the differences of de novo entrants and de alio entrants in these interplays.