The rise of ecommerce as an epidemic in the small world of venture capital

Abstract

Syndicated investments in startups within a particular industry follow an evolutionary path consistent with models of industry growth and evolution. Some industries spend a long time gestating, while others grow and mature quickly. Entry into ecommerce industry segments has both characteristics. What spurred the sector's slow emergence and subsequent quick rise? One obvious answer is the development of the Internet in the mid-1990s. However, a competing possibility is that the diffusion pattern resembles an epidemic among venture capital firms. This chapter examines how the existing structure of the VC syndication network in the US enabled such an epidemic. Consistent with existing theory on the spread of a disease in a small world, this study argues that the incidence of investments in ecommerce startups was a function of prior investments located on shortcuts in the network. The time frame is 1980 to just before the NASDAQ boom in 1999.