The received wisdom is that stronger relationships reinforce over time and lead to better deals. Examining investor relationships in the venture capital (VC) industry we challenge this received wisdom by identifying circumstances where relationships weaken over time, and can even lead to lower performance.
Our central research question is how investor relationships evolve over time under a variety of conditions. For this we examine the investment history of the fifty most active U.S. venture capital firms between 1985 and 2012, constructing a sample of approximately 1.4 million real and hypothetical coinvestment opportunities. Our empirical analysis proceeds in three main steps. We first test whether the past strength of networks affects the likelihood of future coinvestments. After we introduce VC-pair fixed effects to the regression analysis, they absorb all cross-sectional variation across VC-pairs, which enables us to focus on the relationship dynamics within a pair of VCs. We find that, within a pair of VCs, the more they coinvested in the past, the less likely they will coinvest in the future. This may come as a surprise as the prior literature might leave the impression that deep relationships should lead to further coinvestments. The fact that we find the opposite suggests that there are countervailing forces that over time weaken stronger (and strengthen weaker) relationships. Hence the paper’s title is about “getting tired of your friends”.
