Small Bus Econ

DOI 10.1007/s11187-011-9337-4

Social capital of venture capitalists and start-up funding

Oliver T. Alexy Joern H. Block
Philipp Sandner Anne L. J. Ter Wal

Accepted: 25 February 2011

 The Author(s) 2011. This article is published with open access at Springerlink.com

Abstract How does the social capital of venture

capitalists (VCs) affect the funding of start-ups? By
building on the rich social capital literature, we
hypothesize a positive effect of VCs social capital,
derived from past syndication, on the amount of
money that start-ups receive. Specifically, we argue
that both structural and relational aspects of VCs
social networks provide VCs with superior access to
information about current investment objects and

An earlier version of this paper by the same authors appeared

in Frontiers in Entrepreneurship Research, the Best Paper
Proceedings of the Babson College Entrepreneurship Research
Conference 2010.
O. T. Alexy
A. L. J. Ter Wal
Imperial College Business School, Tanaka Building,
South Kensington Campus, London SW7 2AZ, UK
e-mail: [email protected]
A. L. J. Ter Wal
e-mail: [email protected]
J. H. Block (&)
Centre for Advanced Small Business Economics, Erasmus
School of Economics, Erasmus Research Institute of
Management (ERIM), Erasmus University Rotterdam,
P.O. Box 1738, 3000 DR Rotterdam, The Netherlands
e-mail: [email protected]

opportunities to leverage them in the future, increasing their willingness to invest in these firms. Our
empirical results, derived from a novel dataset
containing more than 1,500 first funding rounds in
the Internet and IT sector, strongly confirm our
hypotheses. We discuss the implications of our
findings for theories of venture capital and entrepreneurship, showing that the role and effect of VCs
social capital on start-up firms may be more complex
than previously argued in the literature.
Keywords Venture capital
Social capital

Start-ups
Social networks
Structural holes
JEL Classifications

G24
L26
M13
L26

1 Introduction
Venture capital investment plays a pivotal role in
entrepreneurial processes. Aside from the capabilities
and resources of the start-up and its founders (Burton
et al. 2002; De Clercq et al. 2006), venture capital
firms (VCs)1 arguably have the highest level of

P. Sandner
Munich School of Management, Chair for Strategy and
Organization, Technische Universitat Munchen (TUM),
Munich, Germany
e-mail: [email protected]

We understand that VCs are not the only source of funding

for innovative start-ups. However, since they are the largest
category of investors in our dataset, and, more generally, likely
to be the most important and impactful source of funding for
new ventures (De Clercq et al. 2006), we will use this term to
also include corporate venture capitalists and business angels,

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O. T. Alexy et al.

influence in shaping and developing start-up firms

(Audretsch and Thurik 2001; Hsu 2006). Simply put,
VCs, often as a syndicate of several VCs rather than
alone and with the goal of their own financial profit in
mind (Lerner 1994; Wright and Lockett 2003), equip
growth-oriented start-ups with essential resources to
support them in their evolution and eventual success.
In doing so, VCs impact on new ventures in two
distinct ways: directly, by lending money (financial
capital) and providing management skills (human
capital) to the start-ups they fund, and indirectly, by
giving them access to their network, thus taking on
the role of information and resource brokers (social
capital) (De Clercq et al. 2006; Dimov and Shepherd
2005; Pratch 2005; Sapienza et al. 1996).
Generally, social capital is receiving ever more
attention in entrepreneurship research (Aldrich and
Zimmer 1986; Dimov et al. 2007; Hoang and
Antoncic 2003). However, studies on the role of
social capital in entrepreneurship usually focus on the
social capital of the entrepreneurs themselves. For
example, the social capital of starting entrepreneurs
has widely been acknowledged to play an important
role in the evolution of firms and their eventual
success (Bruderl and Preisendorfer 1998; Hallen
2008) by positively affecting access to information,
reputation-building, and recognition of opportunities
(Burton et al. 2002; Hsu 2004). On the contrary, the
role of the social capital and social networks of the
investing VCs takes a much less prominent position.
Extant literature mainly looks at the social capital of
VCs through the eyes of the start-up (Hallen 2008;
Hsu 2004), and how it may benefit from being funded
by a high-social capital VC (Hsu 2006; Pratch 2005).
In this paper, by building on the social capital
literature (Burt 2005; Coleman 1988) we strive to
expand this restricted view of the effect of VCs
social capital. Fundamentally, a strong social network
of the VC should not only hold opportunities for the
start-up, but also for the VCs themselves by granting
them access to superior information about new
ventures and the environmental conditions they face.
For the pre-investment phase, VCs with higher social
capital may have a better knowledge of the most
promising firms currently looking for funding (Burt
Footnote 1 continued
and thus use it interchangeably with the more general term
investor.

123

2005). Regarding the post-investment phase, Pratch

(2005) and Hsu (2006) both show that VCs actively
try to improve the odds of success of their investment
using their social capital, which they derive from the
social networks in which they are embedded through
syndication. Privileged access to information highlighting such opportunities should therefore lead to
the VC either evaluating future cash flows of the
venture more positively, or attributing them with
lower risk (see Tyebjee and Bruno 1984 for how VCs
valuate firms).
Consequently, we argue that the social capital of
VCs should have direct and measurable effects on the
funding decision they make. In doing so, we address
Fitza et al. (2009)s observation that the question of
how exactly VCs social capital affects the funding of
new ventures still lacks systematic research. We
maintain that, compared to VCs that do not have
access to the above types of information, a highsocial-capital VC should have a higher willingness to
invest into a specific venture in the present (than a
low-social-capital VC) for the same share of ownership in the new venture, or to risk buying a larger
share of ownership of a specific venture. In turn, startups that are being invested in by VCs with high social
capital might, ceteris paribus, be able to raise
significantly larger amounts of financial capital than
ventures that are being invested in by VCs with lower
levels of social capital.
To understand the effect that VCs social capital
has on the investments they make in start-ups, we
follow Sorensen and Stuarts (2001) approach in
constructing the social network through VC syndication (Hopp 2010): a link between a new venture and a
VC exists when the VC invests in it. Thus, when
multiple VCs syndicate their investment, they are
also connected to each other through the shared
investment object. According to Granovetter (1992),
we further distinguish structural and relational
aspects of social capital, paying attention to both
the configuration of a VCs syndication network and
the diversity of its partners. Both aspects should,
through distinct mechanisms, give VCs access to
information that is helpful to them both in the preand post-investment phase. We then regress the
lagged structural and relational attributes of investors
on the amount of funds that they invest into a certain
start-up in its first funding round. As a data source,
we employ a novel dataset obtained from the

Social capital of VCs and start-up funding

information provider CrunchBase (Block and Sandner 2009). Within this dataset of over 4,300 firms,
3,800 financial organizations, and 11,300 funding
rounds, we focus on VC activity in the Internet
sector, for which (almost) complete network data
covering the last years are available. This allows us to
derive longitudinal, valued, network-based structural
and relational measures, while other work in this area
often relies on cross-sectional, survey-based, positional measures (Hoang and Antoncic 2003).
Our findings allow us to make three contributions
to the literature on entrepreneurship and venture
capital. First, we show that VCs structural position in
syndication networks positively influences the
amount of money they invest in start-ups. Specifically, structural embeddedness measured by the
number of connections gives VCs access to more
information, and the spanning of structural holes
increases the likelihood that incoming information
will be of unique value. Both effects positively
impact VCs willingness to invest in new firms.
Second, we also find clear indications for the
importance of relational attributes of VCs syndication networks. In particular, contrary to the extant
literature on venture capital that argues mainly in
favor of network specialization, we show that arguments from the social capital literature promoting the
positive effects of diversity amongst network partners
also hold for the setting of VC syndication and their
investment in start-ups. In addition, we highlight that
network strategies emphasizing either diversity or
similarity are preferential in their effect compared to
hybrid approaches. Taken together, our results reemphasize the importance of social networks and
social capital for entrepreneurship research and
entrepreneurs alike. In particular, we show that the
role of social capital in the VCventure relationship
may be more complex than previously hypothesized.

2 Theory and hypotheses

Venture capital investment plays an essential role in
the evolution and eventual success of new ventures. In
addition to the capabilities and resources of the start-up
and characteristics of its founders (Burton et al. 2002;
Franke et al. 2006), VCs arguably have the highest
level of influence in shaping and developing start-up
firms (Audretsch and Thurik 2001; Hsu 2006). By

investing in new ventures, often as a syndicate of

several VCs rather than alone (Lerner 1994; Wright
and Lockett 2003), VCs impact new ventures in several
ways. Primarily and most obviously, VCs, expecting a
high rate of return at high risk, lend financial capital to
new firms so that these can compensate their often
negative cash flows and fund their growth ambitions
(De Clercq et al. 2006). Moreover, VCs can assist startups by providing human capital in the form of
management skills, experience, and expertise (Dimov
and Shepherd 2005). VCs can do so in several ways,
such as by providing strategic advice and planning
support, by taking a governance role on a board of
directors, orthough somewhat less likelyby
actively engaging in day-to-day operations (Lerner
1995; Sapienza et al. 1996).
In addition, VCs have social capital that the startups will seek to access. This social capital is derived
from the (social) network of professionals, experts
(e.g., for industry, market, technology, and law
issues), and other VCs in which the VCs are
embedded. In particular, VCs are strongly linked
with each other through the joint investments they
have made in the past (Bygrave 1987; Hopp 2010;
Sorenson and Stuart 2001, 2008). Through the social
networks arising from such past syndication, VCs
both receive from and pass on to each other strategic
information on current investment opportunities as
well as future innovation and technological trends, in
turn which helps them to reduce the uncertainty they
face (Bygrave 1987, 1988). Specifically, depending
on the amount of social capital they have, VCs will
have access to more or less of such information,
which they will then exploit to the advantage of the
firms in their portfolio (Hsu 2006; Pratch 2005).
Thus, any effect of social capital that VCs receive
from their embeddedness in social networks should
result from their superior access to high-quality
information (about any type of resource) and their
ability to use it to the benefit of the firms they (intend
to) invest in.
A strong social network of its VCs thus provides
the start-up with access to unique and valuable
resources and future opportunities. However, VCs
themselves may also directly benefit from the prospects of their own network when making investment
decisions. In a nutshell, their social capital may allow
VCs to benefit from having superior access to highquality information and thus increase their chances of

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identifying the most promising investment opportunities in the pre-investment phase, as well as
foreseeing opportunities to add value to the venture
after the investment has been made. Looking at the
potential for pre-investment information arbitrage,
VCs are competing against each other to identify and
invest in the most promising new ventures (Bygrave
1987). High social capital should give a VC an
advantage in spotting suitable candidates for investment (see Burt 2005; Granovetter 1985; Uzzi 1997)
and also increase the likelihood that their bid is
accepted (Hsu 2004). Subsequently, during the postinvestment phase, VCs can leverage their investment
through value-adding involvement in their ventures
as related to perceiving and responding to opportunities and threats to increase the chances of success of
the portfolio companies (Dimov and Shepherd 2005,
p. 5). High social capital should again increase the
likelihood that a VC will become aware of such
opportunities and threats (see Burt 2005; Coleman
1988). For example, a VC with high social capital
may be aware of specific customer groups or
complementary ideas in development stage that may
useful to the start-up it is considering investing in
(Bygrave 1988). For such a VC, therefore, the value
of future cash flows it may receive from the start-up
should increase, and the associated risk decrease,
which should lead to a higher willingness to invest
into the start-up at the present time (Tyebjee and
Bruno 1984). On the one hand, this higher willingness to invest may be expressed by a higher
willingness-to-pay for the same share of ownership
in the new venture. On the other hand, it may be
expressed by decreased risk-adversity, leading highsocial-capital VCs to invest more money into the
same venture to buy a large portion of ownership.
From the perspective of the start-up, this means that
the total funds it can raise in one funding round
should increase with the social capital of the
investors that participate in it.
There are two sources of social capital, which, in
distinct ways, will provide VCs with access to
valuable information from their environment as we
have described above, namely, the structural and
relational aspects of the syndication network in which
VCs are embedded. Structural aspects describe the
configuration of the network, such as the number and
intensity of connections a VC has with others (Uzzi
1997) and the position of the VC in the syndication

123

network (Burt 2005). Relational aspects on the other

hand focus on who one is connected with, including
their (relative) characteristics (Flap and Volker 2004;
Granovetter 1992). For example, whether I am central
or not within a network is a structural characteristic;
whether I am connected to people that are similar or
dissimilar to me is a relational characteristic.
In the following, we will derive hypotheses for why
and how structural and relational aspects of a VCs
social networks facilitate access to superior information, thereby increasing a VCs willingness to invest in
a start-up firm, and, consequently, the investment sum
the new venture may collect in a funding round. In
doing so, we build on Fleming et al. (2007,
pp. 444445) who note that [most] research on the
influence of brokerage has focused on purely structural
explanations (). Little research in the controversy
has started from the premise that individuals have
biographies and experiences and attributes that they
bring to their brokered or cohesive collaborations. We
thus follow more recent studies that pay increasing
attention also to the relational characteristics of
networks (Moran 2005; Reagans and McEvily 2003).
2.1 Structural aspects and investment sum
Due to the syndicative nature of the VC industry,
most VCs make their investments in new start-ups
jointly with other VCs (Lerner 1994; Wright and
Lockett 2003). On the one hand, this may bring at
least another pair of eyes to a deal, thus decreasing
the likelihood of failed investments. At the same
time, other VCs may contribute distinct competencies
to the partnership that will increase the likelihood of
venture success (for a discussion of these partly
competing explanations, see Brander et al. 2002). On
top of this, joint investments create ties between
organizations through which information can be
exchanged in the future, which may well be independent of the investment that created the tie
(Bygrave 1987, 1988). Finally, multiple ties between
two organizations may result from multiple joint
investments in different start-ups, which will allow
for an increased amount and quality of information
flowing between them (Bygrave 1988).
The number and strength of ties that a VC has with
its peers is thus an essential source of information it
may use to leverage its portfolio investments. This is
captured by a specific structural network attribute,

Social capital of VCs and start-up funding

namely, the number of connections the VC has (also

accounting for the fact that a connection with the
same partner may occur repeatedly). Ceteris paribus,
the more information the VC has available to use,
filter, or recombine, the higher the likelihood that it
can extract value from this information (Uzzi 1997).
In our setting, the more connections an investor
holds, the higher the likelihood that this investor will
become aware of new high-quality investment prospects, as well as of opportunities that can be used to
leverage (also more widely known) investment
prospects if they were to become part of its portfolio.
As argued previously, both factors should positively
impact a VCs anticipated returns from the investment object being considering, relative to investors
with fewer network connections. This will increase
the focal VCs willingness-to-investthat is, both
the likelihood of investment as well as the amount of
funds investedinto this start-up, which will result in
the start-up ultimately receiving higher investment
funds. However, it might be nave to assume that
anyone could establish and maintain an unlimited
number of connections to other parties. On the
contrary, keeping a network tie to another party alive
and healthy requires actors to bear significant cost
and effort, while the additional information a new
connection can add will decrease (Uzzi 1997).
Considering that management attention and information processing capability is limited (Ocasio 1997),
we expect that, after a certain threshold, the marginal
value that an additional network connection can add
for the firm will begin to decrease, and that it might
even turn negative (Uzzi 1997). Consequently, we
can formulate two hypotheses that:
H1a [valued degree: linear] The number of connections investors have in the syndication network
prior to their investment in the start-up will have a
positive effect on the funds raised by the start-up in
an investment round.
H1b [valued degree: curvilinear] With an increasing number of connections investors have in the
syndication network prior to their investment in the
start-up, the positive effect of an additional connection on the funds raised by the start-up in an
investment round will decrease.
In addition to the sheer volume of incoming
information, the quality and uniqueness of incoming

information should fundamentally impact a VCs

ability to engage in information arbitrage. Burts
work (1982, 1992, 2005) shows how a structurally
advantageous network position may give actors in a
network privileged access to such information. In the
literature on social capital, there is ongoing debate of
whether such advantages are derived from open of
closed network structures (Arenius and De Clercq
2005; Burt 2005; Soda et al. 2004).
Existing studies at the interface of networks and
social capital have conceptualized the network structure associated with social capital in two different
ways. Burt (2005) favors the view that social capital is
derived from open network structures, arguing that
firms or individuals that span structural holes in
networks can acquire unique rents through information arbitrage. The spanning of structural holes
happens when an individual or firm is the sole link
between two otherwise disconnected individuals or
groups. The argument is that, in such a case, all
information that has to travel from one group to the
other must travel through the person or firm in
the middle, the so-called broker (Burt 2005). Since the
broker is the only person who has access to both pools
of disconnected knowledge (or: resource), he or she is
in a position to act strategically to derive personal
benefits through information arbitrage. For example,
the broker may selectively pass on or, alternatively,
hold back information from one group according to
the brokers best interest, or he/she may charge a fee
for either action. Alternatively, the broker may bring
together information from the disconnected groups
and combine them into a superior, more valuable
configuration. The latter is, for example, crucial in
innovation problems, which are often successfully
solved by individuals at the interface between different fields (Jeppesen and Lakhani 2010). Conversely,
Coleman (1990) argues that firms or individuals gain
most from being embedded in closed network structures. Closed structures act as vehicles of trust,
promoting the exchange of sensitive information and
the establishment of common norms and routines
among members of dense parts of a network (Uzzi
1997).
In empirical research, both brokerage and closure
have been demonstrated to lead to positive outcomes
in a wide variety of settings (Ahuja 2000; Fleming
et al. 2007; Rodan and Galunic 2004). Although
closure and brokerage are direct conceptual

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oppositesand hence are often measured by a single

indicatorthere are increasing attempts to unite both
approaches, examining the conditions under which
one might be more relevant than the other. Most
notably, it is argued that when fast access to
information is important, brokerage may be more
advantageous than closure; as a consequence, brokerage is particularly relevant in fast-paced, competitive environments (Burt 2009). For example, Rowley
et al. (2005) show that the advantages of brokerage
are contingent upon the level of turbulence in an
industry. Likewise, Zaheer and Bell (2005) suggest
that in a context in which the speed of new product
development is high, a network rich in structural
holes may be more beneficial than a network with
high closure.
Speed of access to information, such as in terms
of promising investment opportunities, is of utmost
importance in the context of VC investments
(Bygrave 1987, 1988). Therefore, we argue that
VCs derive social capital from structural holes in the
network rather than from closure. More precisely,
we argue that a VC that is able to span structural
holes should readily have access to unique and
valuable information related to both the pre- and
post-investment phase. Furthermore, the more structural holes a VC spans (i.e., the fewer connections
that exist between the members of a VCs network),
the higher the likelihood that the focal VC is the
only one to know about prospective investments
and/or future opportunities to leverage. As a consequence, this VC should, following our earlier
argumentation, arrive at a higher willingness to
invest into the focal venture, which will ultimately
increase the amount of funds this venture will
receive in a funding round. Thus, we specify as our
second hypothesis:
H2 [structural holes] The more an investor is
spanning structural holes in the syndication network
prior to their investment in the start-up, the higher
the funds raised by the start-up in an investment
round.
2.2 Relational aspects and investment sum
Relational attributes refer to the characteristics that
network partners have, and how these compare with
each other and to the focal organization. They thus

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capture the fact that it is important and relevant to the

organization with whom it is connected, implying
that diversity or similarity of connections will affect
social capital (Granovetter 1985; Reagans and McEvily 2003). In this study, we focus on diversity among
a VCs syndication partners in terms of the structure
of their portfolio of past investments to capture
relational attributes of social capital.
Interestingly, past literature is split on whether it is
similarity or diversity of partners in the social
network that might be a more potent source of
information arbitrage. Diversity will give a VC
access to more exclusive and varied information
(Almeida and Kogut 1997; Granovetter 1985), going
beyond the advantages associated with the mere
spanning of structural holes (Fleming and Waguespack 2007). Generally, the social networks and
social capital literature would argue that, with
increasing diversity in the relational attributes of an
actors network, the higher the likelihood that this
actor has access to rich, unique, and varying information (Reagans and McEvily 2003). Furthermore,
information from outside the domain of the focal
actor, provided that it fits the actors needs, is likely
to have a higher impact on performance-related
outcomes. For example, as Poetz and Schreier
(2009) show, problem solutions that are based on
analogies from more cognitively distant fields are
likely to be more innovative than those based on local
knowledge. In our case, access to more diverse
information should thus provide VCs with access to
more unique opportunities, in particular regarding
their identification in the post-investment phase. For
example, being linked to investors that have prior
investments in a diverse range of technological fields
will give a VC a higher chance of receiving a certain
unique piece of information, for example about an
upcoming technology, than VCs without this type of
relation. That is, being linked to investors that have
diverse investment portfolio structures might give the
focal VC unique information in the form of new
markets for start-ups it has invested in.
On the other hand, much of the existing venture
capital literature and its wider theoretical foundations
strongly argue in favor of specialization. At the core
of the argument is the idea that being embedded in a
network of similarly specialized VCs will increase
the focal VCs ability to extract valuable information
from the network and efficiently and effectively

Social capital of VCs and start-up funding

process it (Bygrave 1987). In particular, in fast

moving areas, specialization will be the only way to
keep up with technological progress and guarantee
the ability to process newly incoming information
relating both to the pre- and post-investment phase
(Bygrave 1987; De Clercq and Dimov 2004).
Repeated engagement with partners that invest in
similar industries or sectors should lead to VCs being
able to build specific routines and capabilities for
doing so. Similarly, a smaller cognitive distance
between the VC and its network partners will increase
the VCs effectiveness in processing information sent
out by the partners (Gulati 1995; Nooteboom 2000;
Uzzi 1997). This will make it easier for the focal VC
to use this information to learn about new investment
prospects and opportunities to leverage them, which
could for example reside in collaborating with a
similar firm in the portfolio of one of the partners.
Thus, specialization regarding the structure of their
investment portfolios as compared to each other and
relative to the VC firm, might enable the VC to
extract more reliable and higher-quality information
from its social network. The effects of this are shown
by Dimov and De Clercq (2006), who find that VCs
following a specialization strategy actually see a
lower default rate in their portfolio.
Summarizing, extant theory on social networks
and venture capital makes competing claims concerning the effects of similarity/diversity on VCs
ability to benefit from information that is flowing
through their social network. Thus, we can derive
competing hypotheses for the effect of similarity/
diversity in terms of the structure of the portfolios of
past investment partners on the investors ability to
draw valuable information from the network. That is,
we arrive at two competing logics for how these two
relational attributes of the network may improve the
firms ability to profit from information in its social
network. Identical to the arguments we presented for
the effect of network structure on investment sum, we
can say that, whichever explanation holds true, VCs
having superior information due to the relational
aspects of their social network will again be in a
preferential position when making an investment
decision. They will have better knowledge about both
upcoming investment prospects and how to potentially leverage them, using suitable information
extracted from the social network. Similar to H1
and H2, and taking into account that two competing

logics for the effects of relational network attributes

exist, we thus state:
H3a [past investments: diversity] The more diverse
investors networks in terms of the fields of investment of its past syndication partners prior to the
investment in the start-up, the higher the funds raised
by the start-up in an investment round.
H3b [past investments: similarity] The more similar investors networks are in terms of the fields of
investment of its past syndication partners prior to the
investment in the start-up, the higher the funds raised
by the start-up in an investment round.
Finally, we also note that our hypotheses, in fact,
might not be competing, but indicative of a non-linear
effect. For example, one might imagine that both very
similar and very diverse syndication networks might
help VCs in generating social capital. Yet again, we
are not aware of corresponding theory that would
allow us to make a clear prediction. Rather, we will
control for potential non-linear effects in an exploratory fashion when analyzing our data.

3 Data and method

3.1 The CrunchBase data set
As a data source, we make use of a novel dataset
obtained from the web site CrunchBase (Block and
Sandner 2009). CrunchBase can be best viewed as a
repository of start-up companies, individuals, and
investors having a focus on U.S. high-tech sectors (in
particular IT and Internet). CrunchBase describes
itself as a free database of technology companies,
people, and investors that anyone can edit. Also
complying with the characteristics of a repository,
CrunchBase offersat least for the last years
almost complete coverage of start-ups and investors
in the Internet sector, including the relationships
between them. Therefore, we can derive longitudinal,
valued, network-based structural and relational measures, while other work in this area often rests on
cross-sectional, survey-based, positional measures
(Hoang and Antoncic 2003). CrunchBase is operated
by TechCrunch located in the Silicon Valley (California), one of the most popular Internet blogs and
information sources on technological innovations and

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market developments related to high-tech sectors in

general and the Internet in particular. CrunchBase
itself serves as a data provider for TechCrunch, as the
latter frequently embodies standardized start-up or
investor profiles from CrunchBase in the published
articles.
Our analysis is based on data obtained from
CrunchBase in early 2010. As of February 15, 2010,
CrunchBase included information on 34,302 firms,
3,843 financial organizations, and 11,375 funding
rounds. The companies covered by CrunchBase span
a wide spectrum. On the one hand, large companies
like Google or eBay are included in the dataset. On
the other hand, small start-up companies that might
have been founded recently or do not rely on thirdparty investments are included as well. Thus, as the
database covers privately held companies with very
few employees as well as multi-billion dollar businesses, the spectrum of companies included is wider
compared to other company databases. As we seek to
analyze the social capital of VCs, our first step is to
remove those 7,926 companies that do not receive
any funding. Because of our focus on U.S. high-tech
sectors (in particular, the IT and Internet sectora
focus that also holds true for both CrunchBase and
TechCrunch), we then exclude those companies not
related to the IT and Internet sectors. This results in a
sample of 5,649 start-up companies in the areas of
advertising, e-commerce, enterprise software and
services, games and video, hardware, mobile, network hosting, search, security, software, and web.
Second, we drop those start-up companies that are not
based in the USA (1,381 observations) or whose
domicile is unknown (600 start-ups), arriving at a
reduced sample of 3,668 start-up companies. Third,
we only consider those financial organizations that
have invested in the start-ups above and which have
significant activities in the USA, which reduces our
sample to 1,688 of the total 3,843 financial organizations. We compute our network metrics and
conduct our regression analysis on these reduced
samples. This implies that both our analysis and the
conclusion will also reflect the structure of our
sample and might thus potentially be limited to a
North American Internet and IT setting. Consequently, as a robustness check, we also conduct an
analysis identical to the one above, but in which we
do not drop the observations originating from other
industries, affecting both the social network of VCs

123

resulting from the syndication data as well as the

other variables entering the regression. The results
remain largely identical, with all variables of interest
keeping their sign and only minor changes in
coefficient sizes and levels of significance. Finally,
to exclude effects such as learning, sustained or
disrupted syndication networks, or varying investor
motivations between subsequent investment rounds
in the same firm, we only consider the first funding
round into a new venture for our analysis.2 Our final
sample thus contains 3,173 unique VC investments in
1,649 different first funding rounds.
3.2 Social network analysisthe network
The CrunchBase dataset is a formidable dataset to
employ for social network analysis as it covers almost
complete relationships between start-ups and VCs.
This is contrasted by other research relying on survey
data as the latter leads to methodological difficulties
since networks can only partly be observed. The
relationships between start-ups and VCsmaterializing through investments (i.e., funding rounds)is
thus the point of departure for calculating the network
metrics on the VC syndication network. This syndication network is a one-mode representation of a twomode network; a network of investors (one-mode) is
created on the basis of investments by investors in
startups (two-mode). The value of links in the onemode network among investorsi.e., the syndication
networkis given by the number of times they have
jointly invested in the same startup firm. Using a
5-year moving window procedure, the investment
volume of a funding round in which a VC participates
in year t is regressed on metrics of the VCs position
in the syndication network covering the 5 years
preceding that investment. The syndication network
that was generated in this way is shown in Fig. 1 at
three different points in time. The network grows
substantially over the complete observation period,
from 110 unique investors in 19982002 up to 1,050
unique investors in 20052009.

We are indebted to an anonymous reviewer for bringing this

issue to our attention.

Social capital of VCs and start-up funding

a 1998-2002

b Fig. 1 Venture capitalist (VC) syndication networks over

time. Nodes represent VCs, lines represent joint investments in

a start-up firm through syndication. The size of the nodes
indicates their degree centrality in the network

3.3 Dependent variable

b 2001-2005

Our dependent variable is the amount of funds raised

by the focal start-up in its first funding round
(variable funds raised). The measure reflects realizedrather than intendedinvestments (Dimov and
De Clercq 2006). In addition, this variable may also
be regarded as a proxy for the value of the firm at the
time when the investors jointly conducting a funding
round equip the start-up with VC money. Since the
variable is highly skewed in nature, we apply the
natural logarithm of this variable in our regression
model.
3.4 Independent variablessocial network
measures
3.4.1 Valued degree

c 2005-2009

To test the first hypothesis, we measure the number of

connections VCs have in the syndication network. In
network terminology, we measure the valued degree
(Wasserman and Faust 1994). This is a centrality
measure that indicates the number of direct coinvestment relationships, where (vs. the unvalued
degree) multiple co-investment relations with the
same partner are also counted as such. To cater to
potential multicollinearity issues, we divide this
number by the number of investments a VC has
made in the same 5-year moving window.
3.4.2 Network constraint
In order to measure the effect of structural holes on
investment sum, we use Burts constraint measure
(1992, p. 55). Network constraint is an index that
measures the extent to which a persons contacts are
redundant. More precisely, the lack of structural holes
in a VCs network of direct relationsalso referred
to as network redundancyis measured by the extent
to which relations are directly or indirectly concentrated in a single contact. For each node in a focal
VCs network, we calculate which proportion of the

123

O. T. Alexy et al.

focal VCs direct connections directly or indirectly

have a network path through that node. The constraint
measure is the sum of squared proportions for all
nodes in the VCs network of direct syndication links.
The richer a network of a VCs network of direct
syndication partners is in structural holes, the lower
constraint, and the more opportunities for information
arbitrage should exist.
3.4.3 Network specialization index
Diversity in a VCs network can also result from the
sub-sectors within the IT sector in which its syndication partners have invested. The network specialization index calculates the specialization/diversity of
a focal VCs investment portfolio relative to those
VCs to which it is connected. On the basis of their
investment history over the 5 years preceding the
focal investment, we calculated the extent to which a
VCs past syndication partners have invested in a
similar versus diverse range of subsectors. That is, for
each investor we defined a vector specifying the
shares of its investments over 11 subfields. Taking
the cross-product of vectors for each pair of investors
(Bonacich 1972) results in a matrix with values
between 0 and 1 that specifies the relative extent to
which two investors focus on the same subsectors for
all combinations of investors. To obtain a measure for
each investor that relates only to those other investors
to which it is connected, we then calculated a
weighted average of this pairwise specialization
index, where the weight is the value of the connection
(the number of times two investors co-invested in a
start-up in a moving 5-year period; 0 if unconnected).
In the final index a value of 1 represents the situation
where a VCs syndication partners exclusively
invested in the same subfields as the focal VC (a
specialized network) and 0 a situation in which a
VCs syndication partners invested in entirely different subfields as the focal VC (a diverse network).
3.5 Control variables
To not confound the effects of the VCs social
network with other effects, we include a number of
control variables. Based on a careful review of extant
literature (Block and Sandner 2009; De Clercq and
Dimov 2004; Dimov and Shepherd 2005; Dimov
et al. 2007), we include variables related to the

123

characteristics of the start-ups, the investors and the

respective funding rounds.
3.5.1 Start-up characteristics
To distinguish between early-stage and later-stage
start-ups, we include the age of the start-up (in days).
Since this variable is highly skewed, we take its
natural logarithm. To distinguish between start-ups
belonging to different subsectors within the Internet
and IT industry, we include the more fine-grained
indicator variables: consumer web, electronic commerce, enterprise, advertising, games/video/entertainment, hardware, mobile/wireless, software,
network hosting, search, and security. The categorization is based on the categories provided by
CrunchBase. Moreover, we include the start-ups
number of registered patents and trademarks at the
time of investment as controls for the level of
innovation orientation and appropriability efforts (Jell
et al. 2011; Mendonca et al. 2004; Sandner and Block
2011; Wagner and Cockburn 2010). As both measures are highly skewed, we take their natural
logarithms.
3.5.2 Investor characteristics
As a proxy for the experience of the VC investor, we
include 11 variables indicating the number of prior
investments in the above noted industries (to control
for industry and general investment experience). In
addition, we inserted dummy variables indicating
whether the investor is a business angel, a (financially
oriented) VC, or a strategic investor (industrial firm
or corporate VC).
3.5.3 Funding round characteristics
To control for funding round characteristics, we
calculate the number of participants in the funding
round and insert this variable in linear and squared
terms. To account for business cycle effects in the
provision of VC (Block and Sandner 2009; Block
et al. 2011), we include several year dummies.
Finally, we insert 36 U.S. state dummies to control
for potential regional disparities, such as in the
provision of venture capital (Sorenson and Stuart
2001).

7.15
0

2.31

0.16

0.22

(8) Log (age of start-up)

(9) Log (number of patents)

(10) Log (number of trademarks)

n = 3,173 observations; correlations with an absolute value [0.03 are significant at p B 0.05

7.38

3.26
(7) n participants in funding syndicate

0.59

33.44

0.003
(6) Investor is business angel

0.62

0.98

SD standard deviation, VIF variance inflation factor, VC venture capitalist

1.30

1.34
0.46
-0.02
0.02
0.01
0.02
0.03
0.03
-0.01

-0.02
0.04

0.04
0.00

-0.00
-0.01

0.02
0.02

0.05
0.05

0.02
-0.02

-0.03

Table 1 presents the descriptive statistics and correlations of the variables in our regression models. Not
surprisingly, the social network measures are correlated with each other. For example, the higher the
investors degree, the more likely this financial
organization is able to span structural holes. Yet,
given the large number of observations in our dataset
(n = 3,173), we regard the potential issue of multicollinearity to be only of minor concern. The variance
inflation factors (VIFs) belonging to our independent
variables are relatively low. Some descriptive statistics are noteworthy: about 98% of investors are VCs;
only a small portion of investors are strategic
investors, such as industrial firms (2%) or business
angels (0.3%). The mean syndicate size is 3.3, and
the mean number of total investments of each
investor is 21. About 20% of all prior investments
of the investors were in the start-ups sector. This
may seem low but can be explained by the finegrained categories which we use. The mean investment sum per funding round is US$ 13 million.
However, this number is highly skewed. The median
investment sum is only 9 million. To account for
this high degree of skewness in the regressions, we
use the natural logarithm of the raised amount.

-1.66

0.19

4.1 Descriptive statistics

(5) Investor is VC

1.55

-0.01
0.01

0.01
-0.03

0.12
0.12

-0.01
0.03

-0.02
0.23

20
1
1.84

-0.01

-0.07
-0.05
-0.07
0.05
1
0

0.03
0.23
-0.08
0.89
-1
-0.61
(4) Network specialization index

0.18

-0.30
0.13

-0.09
1.76

0.03

0.05

0.31

(3) (Degree/n total investments)

0.56

0.36

1.03

(2) Burts constraint measure

6.82

-4.42
(1) Log (raised amount)

0.24
0.20

2.07

% of investors prior investments in start-ups sector

1.04

920
0.01
21.20
n of prior investments of the investor

28.35
13.00
Raised amount

0.09

(8)
(7)
(6)
(5)
(4)
(3)
(2)
(1)
Maximum
Minimum
SD
Mean
Variable

Table 1 Descriptive statistics

4 Results

0.11

1.17

1.07

7.47

1.56

1.07

1.26

(9)

VIF

1.36

Social capital of VCs and start-up funding

4.2 Regression analysis

As explained above, our unit of analysis is the
individual VC participating in the start-ups first
funding round. We argue that the amount raised in the
first funding round depends on VCs social capital as
derived from the social network created through past
syndication. Table 2 shows different regression specifications, with the amount of funds raised in the focal
funding round as the dependent variable. Model I
contains the control variables and all but one of our
variables of interest. Namely, in Model II, we add the
squared term of valued degree, and we can interpret
both the change in model fit as well as the significance level of this coefficient to understand the effect
of this variable. Model II is thus our preferred
specification. Finally, in Model III, we explore
potential non-linear effects of the relational network
attributes. To do so, we replace the network

123

O. T. Alexy et al.
Table 2 Linear regression on log (raised amount)
Independent variables

Model I
Coeff (SE)

Model II
Coeff (SE)

Model III
Coeff (SE)

Burts constraint measure

-0.29 (0.07)***

-0.25 (0.07)***

-0.32 (0.07)***

Degree/n total investments

0.16 (0.04)***

0.28 (0.10)***

0.15 (0.04)***

Investors social network position

(Degree/n total investments)2

Network specialization index

-0.042 (0.031)
-0.58 (0.15)***

-0.59 (0.15)***

Absolute value of network specialization index

0.45 (0.16)***

Other investor characteristics

Investor is VC

0.22 (0.29)

-0.22 (0.29)

-0.24 (0.30)

Investor is business angel

0.11 (0.19)

0.11 (0.19)

0.10 (0.19)

11 cat. (p \ 0.01)

11 cat. (p \ 0.01)

11 cat. (p \ 0.01)

Investor is strategic investor (reference cat.)

n investments in the respective industry sectors
Funding round characteristics
n participants in funding syndicate

0.33 (0.04)***

0.33 (0.04)***

0.33 (0.04)***

(n participants in funding syndicate)2

-0.025 (0.005)***

-0.025 (0.005)***

-0.025 (0.005)***

Log (age of start-up)a

Log (number of patents)

0.13 (0.03)***
0.03 (0.04)

0.13 (0.03)***
0.03 (0.04)

0.13 (0.03)***
0.03 (0.04)

Log (number of trademarks)

0.15 (0.04)***

0.15 (0.04)***

0.14 (0.04)***

Sector dummies (reference cat.: security)

10 cat. (p \ 0.01)

10 cat. (p \ 0.01)

10 cat. (p \ 0.01)

Year dummies (reference cat.: year 2003)

9 cat. (p \ 0.01)

9 cat. (p \ 0.01)

9 cat. (p \ 0.01)

State dummies (reference cat: California)

36 cat. (p \ 0.01)

36 cat. (p \ 0.01)

36 cat. (p \ 0.01)

Constant

1.53 (0.42)***

1.45 (0.44)***

1.65 (0.42)***

n investment observations (funding rounds)

3,173 (1,649)

3,173 (1,649)

3,173 (1,649)

F test

p \ 0.01

p \ 0.01

p \ 0.01

R2

0.31

0.31

0.31

Two-sided tests: * p B 0.10, ** p B 0.05, *** p B 0.01

Sample: only first funding rounds
Coeff Coefficients, SE robust and clustered standard error, cat. category
a

Observations with missing values are proxied by the sample mean. To control for this, we included also a dummy variable which
indicates whether the firm age was missing or not. The variable shows a significant effect (e.g., b = 0.37 *** in Model I)

specialization index (originally ranging from -1 to 1)

with its absolute values, so that higher values
represent high levels of either similarity or diversity,
and lower values are indicative of the use of hybrid
forms in between.
Looking at Model II, most of our hypotheses
relating to the VCs social capital are supported. We
first look at our hypotheses on the effect of the
structural attributes of VCs syndication networks on
funds raised in an investment round. In support of
H1a, we find that the higher the investors degree of
connection to other investors, the higher the start-ups
amount of funds raised in the respective funding
round (b = 0.28, p \ 0.01). In contrast, we only find

123

marginal support for H1b: the squared term of the

investors degree of connection to other investors
points in the right direction (b = -0.04), but it only
becomes weakly significant when a one-sided test is
applied (p = 0.09; one-sided test).3 Nonetheless,
when controlling whether the coefficient values of
degree and its squared term are truly indicative of a
curvilinear effect, we find that the variable degree/n
total investments has an absolute positive effect on
investment sum up to a value of 3.33, after which it
turns negative (about 99% of our sample falls into

Please note that all other p values are two-sided.

Social capital of VCs and start-up funding

this range). Finally, Burts constraint measure (H2)

shows the hypothesized negative effect on the amount
of funds raised (b = -0.25, p \ 0.01). That is, the
more the VC investors are spanning structural holes
in the syndication network prior to the investment in
the start-up, the larger the amount of funds raised in
the particular funding round, and H2 is confirmed.
Our results further support our arguments on the
role of relational aspects of VCs syndication networks in general and of network partners investment
portfolios specifically (H3). The more diverse the
syndication network of the VC in terms of the sectors
in which the investors prior syndication partners
invested (relative to the VC), the higher the amount
of funds raised by the start-up in the first funding
round (H3a, b = -0.59, p \ 0.01). However, when
we control for the possibility of a non-linear effect,
we find indications that both specialization and
diversity may in fact matter. Specifically, when we
transform the network specialization index to a
format in which 0 indicates a perfectly hybrid
strategy between similarity and diversity, and 1
may stand both for a perfectly similar and a perfectly
diverse network (see Model III), we see that the
coefficient for network diversity/specialization in
terms of IT sectors carries a positive sign and
remains significant (Model III: b = 0.45, p \ 0.01).
This indeed indicates that both similar and diverse
networks may have positive effects on the investment
made by the VC when compared to hybrid
approaches.

5 Discussion and implications

5.1 Discussion of results
In this paper, we looked at the effects of VCs social
capital, originating from the relational and structural
attributes of VC syndication networks, on investments made into start-up firms. Regarding the
structural dimension of social capital, we find that
brokerage has a significant effect which is significant
in all specifications. Also, the variable capturing the
number of connections has a positive effect on
investments made, with some indications of curvilinearity. The relational elements of social capital also
shows an effect. We found that diversity in terms of
investment portfolio in a VCs syndication network is

positively associated to the investment sum. Furthermore, exploratory analysis showed that both high
levels of specialization and diversity of a VCs
syndication network have positive effects on investment sum. In the following, we analyze the implications of these findings for theory and practice.
5.2 Implications for theory
With this study, we make three contributions to the
literature on entrepreneurship and venture capital.
First, we indicate how the structure of past syndication networks affects investment into start-ups by
facilitating knowledge flows between the involved
investors (Bygrave 1987, 1988). We highlight the
effects of degree and brokerage, which represent,
respectively, the sheer volume of incoming information available to an investor and the uniqueness of
this information, resulting in opportunities for information arbitrage. First, we show that the sheer
amount of information that VCs have at their disposal
will increase the amount of money they put into startups. In doing so, we show that structural embeddedness (Uzzi 1997) in the social network of investors
has a clear effect on the investment decisions that
VCs make. In addition, we show that brokerage (Burt
2005), as in many other fields, matters for venture
capital. Specifically, the spanning of structuring holes
allows VCs to achieve abnormal returns and lower
risk through information arbitrage (Burt 2005), thus
positively affecting their willingness to spend money
on a start-up.
Second, we add to the literature by shedding light
on the role and importance of relational network
attributes. In particular, we offer a new perspective
on the debate about the relative advantageousness of
investors having either similar (Bygrave 1987; De
Clercq and Dimov 2004; Dimov and De Clercq 2006)
or diverse (Fleming and Waguespack 2007; Granovetter 1985; Reagans and McEvily 2003) syndication
networks. Importantly, we show that, in terms of the
relative composition of network partners investment
portfolios, diverse networks affect investment sum
more strongly than similar ones. However, on closer
inspection, we see that both similarity and diversity
have positive effects on the information available to a
VC and the investments they are willing to make.
Thus, our findings suggest that VCs may be successful by strategically building networks alike to both

123

O. T. Alexy et al.

focused boutiques as well as broad generalists. Both

archetypes of networking strategy and design seem to
facilitate improved access to information as compared to hybrids. Boutiques should have higher
chances at processing valuable information flowing
through their network, whereas generalist may have a
chance of receiving, on average, higher value information. In turn, following our theoretical argumentation, both boutiques and generalists may show
higher willingness to invest in a focal start-up. These
start-ups, as a consequence, need not have a preference for any of the two archetypes as long as the VC
either has a clear specialization or diversity strategy
with regards to their approach to the selection of
syndication partners.
Taken together, our main contribution lies in
extending the current perspective on venture capital
and its role in entrepreneurship by applying a
comprehensive social capital perspective. Overall,
we clearly show that the social capital of VCs,
derived from the structural and relational attributes of
the syndication networks they are embedded in,
matters with respect to the investment decisions they
take and, consequently, the amount of funding that
start-ups may receive. In doing so, our findings
further allow us to add to an ongoing debate which
suggests that VCs social capital might actually need
to be bought or paid for by the new venture, as
reflected in entrepreneurships willingness to accept
lower offers of financial capital from well-networked
VCs (Hsu 2004). Whereas our findings on the nature
of the relationship between financial and social
capital are not fully conclusive (see below), they
nevertheless allow us to speculate that this relationship might be complementary, rather than substitutive. Indeed, we find that start-ups that are invested in
by high social-capital VCs receive higher levels of
funding that those new ventures supported by low
social-capital VCs, and we identify the elements of
social capital that drive these investments. In so
doing, we show that the role and nature of VCs
social capital might be much more complex than
previously stated in the respective literatures. This
claim is further supported by some of our more
specific results which, for example, illustrate that
both similarity and diversity in the social network
may lead to higher investments, whereas hybrid
strategies do not (Uzzi 1997). However, we need to
emphasize that further research into all elements of

123

social capital brought forward in this paper is needed

to truly understand the effect of VCs social capital
on the investment decisions they make in practice. In
particular, we believe that our work raises a call for
more qualitative work to investigate and scrutinize
this issue, as our understanding of the processes
inside venture capital organizations, including their
management and use of social capital as well as the
effect of the latter on the ventures in their investment
portfolio, is currently limited at best. In addition,
because of data limitations, we cannot clearly say
whether start-ups received higher investment sums
from high-social capital VCs because those had a
higher willingness-to-pay for the same share of
ownership in the new venture or because they bought
a larger share of ownership over the new venture.
Accordingly, we call for future research to extend our
work on this important question.
5.3 Implications for practice
Our results have practical relevance for both VCs and
entrepreneurs. For VCs, they further indicate the
importance of social capital, which they will need to
build and maintain through suitable strategies. Specifically, we point out that both a strong diversification as well strong specialization strategies seem to
have merits, whereas hybrid forms could be of lower
value. Regarding the start-up, we find that they do not
have to be shy about approaching high-social capital
VCs. Indeed, if there is a chance their social capital is
beneficial to a specific deal, there is no reason why
this should result in the start-up receiving a discount
on their inherent valuation. In fact, the opposite may
hold.
5.4 Suggestions for future research
In addition to those already stated earlier, this study
opens up several avenues for future research on the
role of social capital for investors in general and for
their funding of new ventures and their eventual
success in particular. First, regarding investor strategies aimed at building social capital, we did not find
the expected curvilinear effect on investment sum
that we had expected, and we encourage future
research to investigate why. Similarly, while our
results allow us to point out that both similarity and
diversity in the social networks of VCs should have

Social capital of VCs and start-up funding

positive effects on them extracting valuable information from the network, we cannot draw any conclusions on the circumstances under which one of the
two strategies would be preferable, and thus leave
this question open for future research. Finally, our
paper raises the question of how social capital in
general, and specific attributes of it, may affect new
ventures beyond the funding decision. In particular,
we encourage future research to take a closer look at
the impact of VCs social capital on new venture
survival, growth, and, ultimately, success.

Physical Sciences Research Councils IMRC at Imperial

College London. The authors gratefully acknowledge
feedback from Martin Kilduff and Isabell M. Welpe, as well
as participants at the Babson College Entrepreneurship
Research Conference 2010, the G-Forum 2010, the UK-IRC
early career researcher workshop 2010, and the IECER
Conference 2011. The authors further thank two anonymous
reviewers and the editor of the journal for constructive
comments. All authors contributed equally to the manuscript.
Open Access This article is distributed under the terms of the
Creative Commons Attribution Noncommercial License which
permits any noncommercial use, distribution, and reproduction
in any medium, provided the original author(s) and source are
credited.

5.5 Limitations and conclusion

Some limitations of our study need to be mentioned.
First, we do not observe exact ownership percentages
by VCs in a funding round. However, since we
control both for the size of the syndicate as well as for
many other characteristics, we do not expect this
effect to have a large impact on our results. Similarly,
our data are biased towards North American IT and
Internet firms. Yet, as stated earlier, a robustness
check that included all of the reliable investment
information available to us (worldwide and across
many different industries) provided almost identical
results, with all results reported qualitatively
unchanged. Nevertheless, future research that can
link the CrunchBase dataset to other sources that may
cater to its disadvantages (e.g., VentureExpert) will
help to ensure the validity of our findings. Second, we
do not observe founder characteristics, such as
industry or entrepreneurship experience. Zhang
(2011) shows that serial entrepreneurs have an
advantage in venture capital acquisition.
Limitations aside, our study has shed new light on
the role of VCs social capital for the entrepreneurship and venture capital literatures, showing that its
effects are likely to be more complex than previously
hypothesized. While answering some questions on
this issue, we have simultaneously created many new
ones, which we hope will encourage further research
on this topic. Given this background, we believe that
our study can provide a valuable building block to
help improve our still limited understanding of the
role of VCs social capital and its effects on the startup firms they invest in.
Acknowledgments Oliver Alexy and Anne Ter Wal are
grateful for financial support from the Engineering and

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