Venture Capital trends mimic Nash equilibrium

VC trends

(1) Late-stage investing is outpacing early-stage [1]
(2) Follow-on VC investment soars while first-time remains almost unchanged [2]
(3) Deal volume rises while deal number declines [1]

Hypothesis

  • The agents here are VCs on the one side and entrepreneurs on the other
  • The actions of VCs are 1) funding startups 2) exit deals (M&A, IPOs) and entrepreneurs’ actions are 1) business decisions leading to a company growth 2) preparation for a quick & lucrative exit
  • It’s a non-zero-sum game because basically neither side wins at the expense of the other: when a startup grows VCs invested in it do not lose but celebrate, and vice versa, when a VC fund makes money entrepreneurs likely expect additional VC support rather than the end of relationships
  • It’s a repetitive game because of the continuous investing rounds and valuations
(4) One-shot prisoner’s dilemma [3]

How the trends support the hypothesis?

  • The incentive of VC here is to play the long-term game, because capital compounding requires time
  • Late-stage businesses have more chances to play the long-term game, especially in digital businesses where steadily growing customer base reinforces their competitive advantage due to the network effect
  • No one wants to be defected by the other
  • The actual duration of VC and entrepreneur relationship is unclear to both at the beginning

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Consultant at Avanade; www.linkedin.com/in/k-ts

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Kirill Tsyganov

Kirill Tsyganov

Consultant at Avanade; www.linkedin.com/in/k-ts

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