The diminishing effect of VC reputation: Is it hypercompetition?

Venture Capital (VC) influence on Technology Entrepreneurship (TE) and economic development has prompted policy makers to devote significant resources for attracting VCs to their area, especially VCs with a higher reputation. The VC literature has traditionally supported the importance of VC firm reputation to success of entrepreneurial firms and entrepreneurial activity in a region. The VC industry structure, where the VC firm reputation strongly determines their power and investment returns, seems to have remained isolated from the disruptive influences of hypercompetition affecting other industries. But, this assumption remains untested. Our goal in this study is to assess if VC industry is changing and becoming more hypercompetitive. We empirically assess the influence of VC reputation by studying its impact on the success of portfolio companies over a 24-year period from 1990 to 2013. More specifically, we assess whether ventures backed by high reputation VCs have better post Initial Public Offering (IPO) performances than ventures backed by low reputation VCs. Our findings indicate that while VC reputation was strongly associated with portfolio company success in the past, its impact has diminished significantly in recently.