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An important type of product differentiation in the venture capital (VC) market is industry specialization. We estimate a market structure model to assess competition among VCs—some of which specialize in a particular industry and others of which are generalists—and find that the incremental effect of additional same-type competitors increases as the number of same-type competitors increases. Furthermore, we find that the effects of generalist VCs on specialists are substantial, and larger than the effect of same-type competitors. Estimates from other industries typically show the incremental effects falling as the number of same-type competitors increases and the effects of same-type competitors as always being larger than the effects of different-type competitors. Consistent with the presence of network effects that soften competition, these patterns are more pronounced in markets that exhibit dense organizational networks among incumbent VCs. Markets with sparser incumbent networks, by contrast, exhibit competitive patterns that resemble those of other, non-networked industries.
