Yeal Hochberg, Alexander Ljungqvist and Yang Lu wanted to find a scientific evidence for this reseach question in their Journal of Finance's article "Whom You Know Matters: Venture Capital Networks and Investment Performance". I had a chance to analyze this article in depth while attending EDEN Corporate Finance Seminar in Berlin. Here is attached my presentation. The full article can be dowloaded here (PDF).
The paper presents fivefold contribution. According to authors:
1. This is the first paper to examine the performance consequences of the VC industry’s predominant choice of organizational form: networks. Previous work focuses on describing the structure of syndication networks (Bygrave (1988), Stuart and Sorensen (2001)) and motivating the use of syndication (Lerner (1994a), Podolny (2001), Brander, Amit, and Antweiler (2002)).
2. The findings shed light on the industrial organization of the VC market. Like many financial markets, the VC market differs from the traditional arm’s-length spot markets of classical microeconomics. The high network returns documented suggest that enhancing one’s network position should be an important strategic consideration for an incumbent VC, while presenting a potential barrier to entry for new VCs. The results add nuance to Hsu’s (2004) finding that portfolio companies are willing to pay to be backed by brand-name VCs and suggest that there are real performance consequences to the contractual differences illustrated in Robinson and Stuart’s (2004) work on strategic alliances.
3. The findings have ramifications for institutional investors choosing which VC funds to invest in, as better-networked VCs appear to perform better.
4. The analysis provides a deeper understanding of the possible drivers of cross-sectional performance of VC funds, and points to the importance of additional fundamentals beyond those previously documented in the academic literature.
5. It provides preliminary evidence regarding the evolution of a VC firm’s network position.