To be or Not to be Friends: Exploiting Social Ties for Venture Investments

Abstract

Recent years have witnessed the boom of venture capital industry. Venture capitalists can attain great financial rewards if their invested companies exit successfully, via being acquired or going IPO (Initial Public Offering). The literature has revealed that, from both financial and managerial perspectives, decision-making process and successful rates of venture capital (VC) investments can be greatly improved if the investors well know the team members of target startups. However, much less efforts have been made on understanding the impact of prominent social ties between the members of VC firms and start-up companies on investment decisions. To this end, we propose to study such social relationship and see how this information can contribute to foreseeing investment deals. We aim at providing analytical guidance for the venture capitalists in choosing right investment targets. Specifically, we develop a Social-Adjusted Probabilistic Matrix Factorization (PMF) model to exploit members social connections information from VC firms and startups for investment recommendations. Unlike previous studies, we make use of the directed relationship between any pair of connected members from the two institutions respectively and quantify the variety of social network groups. As a result, it brings in much more flexibility, and the modeling results inherently provide meaningful managerial implications for the operators of VC firms and startups. Finally, we evaluate our model on both synthetic and real-world data. The results demonstrate that our approach outperforms the baseline algorithms with a significant margin.