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What Do VC Firms Have in Common With High School Cliques?

Ahh, high school. The time in one's life where buying the right sweater seemed just as important as having clean air to breathe. While most of us have at least some fond memories of high school, many are happy to leave those days of adolescent angst behind. So what happens when you find out that the business world is more like high school than you thought it would be?

New research from the Kellogg School of Management finds that in the world of VC firms, there are established cliques (the cool kids, if you will) and new kids, or new firms, trying to find their way into the cliques.

The research was conducted by Yael Hochberg, a professor at the Kellogg School of Management; Alexander Ljungqvist a professor at New York University's Stern School of Business; and Yang Lu, an assistant VP at Barclays Capital. Here are some of the effects of VC cliques they found, as reported by a Kellogg Insight article:

  • Established firms field each other new, promising deals that they can't take on themselves. This makes finding funding easier for start-ups, but makes it difficult for new VC firms to find these deals.
  • VC firms tend to flock to areas of new business creation, and those that have been in the same location for a long time establish strong networks and relationships with the entrepreneurial community. Therefore, it's nearly impossible for new firms to break into areas like the Silicon Valley and Boston's Route 128.
  • Firms that are open to outsiders may be punished for betraying the confines of the clique as well. "Incumbent" firms that do business with newbies experience an average 2.3 percent reduction in opportunities fielded by their network, a number that increases over time.
However, the research also finds that new firms can eventually find their way in with established VCs. When new firms approach incumbent firms with the offer of entering a new market, established firms may be willing to suffer their network's disapproval for the new opportunity.

While this research deals with VC firms specifically, it made me curious whether any of you reading this have ever felt in a business situation like you were back in high school. If so, please leave a comment and share your experience.

Letter jacket image courtesy of Flickr user grovesa16, CC 2.0

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