Network advantage’s effect on exit performance: examining venture capital’s inter-organizational networks

Abstract

This study investigates how a venture capital’s network affects its exit performance. While most network research focuses on individual characteristics such as centrality and density, this study explores the overall advantage that results from holding a network position (i.e., a network advantage). This network advantage is examined at the syndicate level, which is a group of organizations. Within this context, the study contemplates the syndicate’s network advantage and hones in on the syndicate’s network advantage diversity, because the composition of members’ network advantage within the syndicate as well as the syndicate’s network advantage itself may affect the syndicate’s performance. To do this, first it is hypothesized that both a venture capital syndicate’s network advantage and its network advantage diversity are positively associated with its exit performance. Next, the study predicts that a syndicate’s network advantage diversity negatively moderates the positive relationship between the syndicate’s network advantage and its exit performance. Then a two stage least squares analysis of 1137 venture capital syndicate investments largely confirms the predicted effects. A syndicate’s network advantage is shown to contribute to its exit performance. A syndicate’s network advantage diversity clearly weakens the positive relationship between the syndicate’s network advantage and performance, while its direct effect on performance is not significantly supported. Overall, these findings show that a syndicate’s network advantage and its diversity are critical determinants of its exit performance in the venture capital industry.