Working Paper: NBER ID: w18141
Authors: Paul Gompers; Vladimir Mukharlyamov; Yuhai Xuan
Abstract: This paper explores two broad questions on collaboration between individuals. First, we investigate what personal characteristics affect people's desire to work together. Second, given the influence of these personal characteristics, we analyze whether this attraction enhances or detracts from performance. Addressing these problems in the venture capital syndication setting, we show that venture capitalists exhibit strong detrimental homophily in their co-investment decisions. We find that individual venture capitalists choose to collaborate with other venture capitalists for both ability-based characteristics (e.g., whether both individuals in a dyad obtained a degree from a top university) and affinity-based characteristics (e.g., whether individuals in a pair share the same ethnic background, attended the same school, or worked for the same employer previously). Moreover, frequent collaborators in syndication are those venture capitalists who display a high level of mutual affinity. We find that while collaborating for ability-based characteristics enhances investment performance, collaborating for affinity-based characteristics dramatically reduces the probability of investment success. A variety of tests show that the cost of affinity is not driven by selection into inferior deals; the effect is most likely attributable to poor decision-making by high-affinity syndicates post investment. Taken together, our results suggest that non-ability-based "birds-of-a-feather-flock-together" effects in collaboration can be costly.
Keywords: venture capital; collaboration; homophily; investment performance
JEL Codes: G02; G24; G31; L14; L22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ability-based characteristics (J14) | investment performance (G11) |
| affinity-based characteristics (C92) | investment performance (G11) |
| collaboration for ability-based characteristics (O36) | probability of successful exit (C41) |
| collaboration for affinity-based characteristics (D26) | probability of successful exit (C41) |
| same university degrees (M59) | probability of collaboration (D26) |
| same university (Y40) | probability of collaboration (D26) |
| same ethnic minority group (J15) | probability of collaboration (D26) |
| same company (L22) | probability of successful exit (C41) |
| same undergraduate school (A22) | probability of successful exit (C41) |
| same ethnic minority group (J15) | probability of successful exit (C41) |