The Value of Connections in Bad Times: Evidence from Venture Capital

While industry specialization offers VCs advantages in information and deal flow during stable periods, it also exposes them to elevated risks in downturns.

Who

Anna Toldrà-Simats (Universidad Carlos III de Madrid)

Where

IWH, conference room and via Zoom

Personal details

Anna Toldrà-Simats is currently an Associate Professor (with tenure) at the Department of Business Administration at Universidad Carlos III de Madrid. Her research interests are empirical corporate finance, innovation, venture capital and banking.

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This paper investigates the resilience of venture capital (VC) firms following sector-specific shocks, focusing on how their industry connections affect their capacity to adapt. Using the burst of the internet bubble as an exogenous shock, I first examine the investment behaviors and performance of VCs with heavy exposure to the internet sector compared to those with more diversified portfolios. I find that more exposed VCs are constrained to reinvest in struggling companies in their portfolios rather than pursue new investments, highlighting the rigidities of closed-end fund structures. I then examine the role of industry connections and find that they offer limited support in mitigating the losses and fundraising difficulties that followed the shock. This study underscores the strategic trade-offs VCs face between specialization and diversification, offering insights into the role of sector-focused investing in shaping the long-term resilience of VC firms.