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STANFORD INSTITUTE FOR ECONOMIC POLICY RESEARCH

SIEPR Discussion Paper No. 02-17
The Venture Capital Keiretsu Effect:
An Empirical Analysis of Strategic Alliances
Among Portfolio Firms
By
Laura Lindsey
Stanford University
November 2002



Stanford Institute for Economic Policy Research
Stanford University
Stanford, CA 94305
(650) 725-1874








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University.
The Venture Capital Keiretsu Effect:
An Empirical Analysis of Strategic Alliances Among
Portfolio Firms
Laura Lindsey
Department of Economics
Stanford University
Stanford, CA 94305-6072
llindsey@leland.stanford.edu
November 2002
ABSTRACT
By examining joint ventures and strategic alliances among venture capital portfolio firms,
this paper examines whether venture capitalists facilitate collaborations within the
portfolio. Using a large database of strategic alliances and financing information from
Venture Economics, I find evidence of a keiretsu effect, an increase in the probability that
a portfolio firm will form an alliance with a partner who shares a common venture
capitalist. Because of shortcomings in traditional discrete choice models for this
application, I develop a probability model based on sequential sampling that accounts for
the interdependence of strategic alliances.
I would like to thank Doug Bernheim, Thomas Hellmann, Manju Puri, and Antonio Rangel for valuable discussions
and advice. This work has also benefited from conversations with Katie Carman, Yael Hochberg, Amalia Miller, and
Morten Sorensen. All remaining errors are mine.
2
1. Introduction
Venture capital firms have long stressed their role as value-added investors,
claiming to facilitate appropriate contacts and encourage interaction within their
networks. In this paper, I seek to determine whether there is evidence that venture
capitalists facilitate contacts for their portfolio firms. By combining information on
alliance activity with venture capital financing histories, I find evidence of a keiretsu
effect, or an increase in probability of a firm choosing an alliance partner who shares a
common venture capital investor.
A natural place to test whether venture capitalists foster relationships is within a
pool of their known contacts: other companies that they have funded. Prominent venture
capitalists profess to encourage such interaction among portfolio firms. Kleiner, Perkins,
Caufield, and Byers, a leading Silicon Valley firm, notes in promotional materials on its
web site:
We pioneered the idea 20 years ago of bringing the businesses we work with into an
informal network, which we call a Keiretsu. Connections made through the Keiretsu
have helped facilitate over 100 strategic alliances and countless business partnerships.
This paper asks whether there is any systematic evidence of a keiretsu effect.
Related questions concern where it is most prominent. In addition to increasing the
understanding of the role venture capitalists play beyond that of a traditional financial
intermediary, a keiretsu effect would be an important finding for entrepreneurs. For an
entrepreneur who anticipates needing particular business relationships, a keiretsu effect
would document the importance of considering the venture capitalist's portfolio when
choosing among financing offers. From a VCs perspective, access to symbiotic resources
could change its valuation of the firm. These two factors may influence which
companies are matched to particular venture capital firms.
A keiretsu effect would also have implications for the real economy. In high-
technology settings where firms may have protected or proprietary assets, which firms
collaborate can influence what standards or products are developed. There is at least
some evidence that it these types of alliances are more valuable. Chan, et al. (1997) finds
a greater share price responses to announcements of strategic alliances when technology
is to be shared between firms. Additional studies by McConnell and Nantel (1985) and
3
Anand and Khanna (2000) find favorable market reactions to the announcement of
strategic alliances.
An important additional goal is to develop suitable methods for identifying a
keiretsu effect. The first step in estimation is to define the set of potential alliances from
which actual alliances could have formed. The second is to formulate an appropriate
probability model for this process. The main issue in formulating a probability model is
the obvious interdependence among the choices. This interdependence arises from
interactions in the market such that the realization of one alliance may constrain the
choice of available partners for subsequent alliances for the remaining firms.
Standard discrete choice models such as the logit or probit assume independence
across all observations; it is clear that treating each potential alliance as independent
would be erroneous. A variation in the logit family is the conditional logit, which
recognizes interdependence among choices for one side of the market. To implement this
model, a choosing firm must be designated. This model is used in the literature for
similar applications.
Because of weaknesses in the standard approaches, I develop a model that
recognizes the dynamic features of the alliance market. The model is based on the idea
of sequential sampling, with alliances selected from a pool of possible alliances in a
series of rounds. Each possible alliance is parameterized with a realization potentiality.
The characteristics of the firm pair can affect the likelihood it is drawn in each round. In
the model, the coefficient vectors can be interpreted as indicating the characteristics that
are associated with a high likelihood of an alliance being formed between a particular
pair of firms.
The framework uses the sequencing of the alliances to identify the nature of the
interaction in the market. In the first variation of the model, the maximum number of
alliances that a firm can enter is fixed at the number of alliances it actually formed. After
a firm has formed its last alliance, all potential alliances involving that firm is removed
from the pool of possible alliances. In the second version, the number of alliances a firm
can form is unconstrained. Only the alliance drawn in the particular round is removed
from the pool of potential alliances, but the characteristics of the remaining potential
alliances can change. Specifically, the number of previous alliances for the constituent
4
firms in a potential pair affects the potentiality of that pair being selected in the
subsequent round.
The data used in estimation are taken from two commercially available databases,
one covering strategic alliances and joint ventures and the other containing venture-
financing information. Overall, I find empirical support for a venture capital keiretsu
effect, defined as an increase in the probability that a portfolio firm will form an alliance
with a partner who shares a common VC investor.
One of the many reasons that there might be a disproportionate number of
alliances between firms with common investors could be due to a venture capitalist's
exploitation of informational advantages. In its role of screening and monitoring the
fledgling firm (see, for example, Gompers, 1995) the venture capitalist gains knowledge
about specific skills or strengths that each of its portfolio firms possesses. This access
places the venture capitalist in a unique position as an aggregator of information (Aoki,
2000). In attempting to maximize the potential value of its investment in one firm, the
venture capitalist may be better able to identify profitable opportunities using the unique
knowledge he has accumulated about other firms in the portfolio.
A related concept is one of asymmetric certification. The certification role of
venture capitalists and other prominent associates has been documented in the literature.
(Megginson & Weiss, 1991; Robinson and Stuart, 2000; Stuart, et. al., 1999) If the
certification effect is asymmetric, i.e., a potential alliance partner gives more weight to
the association with a venture capitalist that also funded it, then within-portfolio alliances
would be more frequent than between-portfolio alliances. There are at least two reasons
why certification might be asymmetric. The first is that interaction with a VC involves
learning information about the VC that may not be captured by its reputation to other
parties. The second is that the VC may still own part of both firms, such that financial
incentives are aligned.
Presumably, information advantages should be most pronounced when firms are
still private. Financial disclosures to the public are not required so that the presence of
asymmetric information is likely to be greater. Thus, if asymmetric information were a
contributing factor for any observed keiretsu pattern, one would expect to see a stronger
effect for private firms relative to public firms. Venture capitalists often retain shares and
5
board representation up to several years after the initial public offering, so that a keiretsu
effect could extend past an IPO.
Further, informational advantages may be more important in certain types of
alliances. In alliances between firms in the same industry, for example, the firms are
more likely to be direct competitors. In this case, the risk of expropriation might
preclude some alliances from taking place unless the potential alliance partner can be
certified by a trusted source. The same is true for alliances where contracts are likely to
be less complete. In situations where two firms are contracting to undertake a research
and development project or to market a new product, many contingencies can arise such
that one firm could take advantage of the other. If certification were asymmetric, more of
these types of alliances should occur within the portfolio. Indeed, I find the effect is
confined to alliances involving private firms, alliances between firms in the same
industry, and for alliances involving research and development or marketing.
The measurement of the keiretsu effect in this framework does not attempt to
separate treatment from selection. It is possible that venture capitalists select firms into
their portfolio that are more likely to align simply because they are similar in some way
which is unobservable. Controls will include factors such as industry focus, reputation of
the venture capitalist, and the frequency of alliances among the venture capitalist's
portfolio. Clustering on unobservable characteristics, however, will be indistinguishable
from a keiretsu effect. While usually one would wish to disentangle selection effects
from estimates, here a certain type of selection may be of interest. If a VC funds a
company knowing that it fits well in a strategic sense with the rest of the portfolio, that
selection can be a value-enhancing activity.
This paper most closely relates to the research exploring the non-traditional
intermediation role of venture capitalists. Much of the previous empirical research on
venture capital studies the allocation of control rights in venture capital contracting and
monitoring of management. Kaplan and Strmberg (2000) find venture capital contracts
generally follow structures that would be predicted in the theoretical literature on
incomplete contracting. Lerner (1995) studies the monitoring activity of VCs via
representation on Boards of Directors and finds evidence that monitoring is increased
when there is greater need. [See Schleifer and Vishny, 1997 for a survey of the corporate
6
governance literature.] Hellmann and Puri (2002) find that venture capital- backed firms
tend to be professionalized relatively sooner than their non-venture-backed counterparts.
In addition, venture-backed firms tend to move products to market more quickly
(Hellmann & Puri, 2000).
Also closely related are studies of affiliation and strategic alliances. In addition to
the first order benefit of finding the right blocks to build a firm, there is value in
affiliation with other known entities. Especially in the context of young firms where
information about them may be scarce, a company's alliance partners can convey
information about that company to the market. Stuart, Hoang, and Hybels (1999) find
that biotechnology firms with prominent alliance partners are both quicker to have an
initial public offering and raise more money in that offering compared to companies
without alliance partners. Recent work (Hsu, 2002) suggests that entrepreneurs pay for
this access by giving up a larger share of equity to venture capital firms which it believes
can provide them with a better quality network.
Robinson & Stuart (2000) explore the governance role of the strategic alliance
network in biotechnology. They find parities who either have formed a previous alliance
or share a common alliance partner, which they interpret as a proxy for a decreased cost
of gaining information, give up less control in return for financing. There are additional
studies of alliances in the biotechnology sector such as Lerner and Merges (1999) and
Lerner and Tsai (2000), which focus on the availability of alliances as funding substitutes
for venture capital when private equity financing cycles are weak.
The remainder of the paper is structured as follows. The next section describes
the data. Section 3 outlines each estimation approach and its implementation. In Section
4, I present and discuss the empirical results. Section 5 develops a univariate test as an
alternative approach that conditions on different information. The final section
concludes.
2. Data
The data are taken from two publicly available databases: Securities Data Corporation
(SDC) Joint Ventures and Venture Economics. SDC compiles the database of strategic
alliances and joint ventures from company press releases, news wires, and trade journals.
7
The data are rich because they cover a cross section of industries and include both public
and private firms. The raw data cover alliances from 1987 through June 2001. I
eliminate alliances containing foreign firms because the venture capital information
cannot be considered comprehensive for international firms. In addition, privatizations,
spinouts, and exploration agreements are eliminated. The first two are included in the
database for historical reasons and are not alliances; the later consists of oil and gas
activity, an area where venture capitalists do not concentrate.
Company information includes the main SIC code for each parent company, its
status as a public or private entity, and its geographic location. For each alliance, the
main type of activity is given (such as marketing or research & development), the
announcement date, as well as an SIC code for the alliance activity. More detailed
information is sometimes included in a text description, but not in a systematic way.
Financing information comes from Venture Economics, also an SDC company.
The data are collected from reporting venture capital firms and public sources. It
includes detailed financing round information such as the date of investment, the stage of
the firm at the time of investment, the participating venture capitalists, as well as the
eventual outcome for the company. From these detailed data, a variety of venture
capitalist variables can be constructed. From its inception in 1970 to June 2001, the data
cover 54,722 financing rounds for 23,767 companies by over 1,500 venture capitalists.
The two databases were matched on company name
1
to recover venture-financing
information for participants in alliances. Of the 16,818 unique firms in the alliance data,
3,032 are venture-backed, or roughly 18%.
2.1 Descriptive Statistics
Throughout the analysis, an alliance is defined as the initial affiliation of two
firms. Repeat interactions between the same firms are eliminated. In alliances where
more than two firms participate, each bilateral pair of firms is treated as an alliance.

1
Because of the large number of observations in each database, a perl computer program was written to
perform the matching. To begin, I examined the company name field to determine the naming conventions
used by each data source. I wrote code to eliminate the various non-identifying information (such as Co,
Corp, PLC), removed spaces, and performed case-insensitive matching on the core name. To check the
program, I compared samples of names by hand and modified the code accordingly until there were no
errors in several repeated samples.
8
Figure 1 shows the total number of initial alliances through time, as well as the
proportions where at least one firm received venture backing and where both firms
received venture backing. Though only 18% of the firms in initial alliances are venture-
backed, almost one-half of the alliances involve at least one venture-backed firm.
Figure 2 shows the composition of the alliances by publicly traded versus private
status of the firms on an annual basis. A slight majority of alliances is between one
private firm and one publicly traded firm. Alliances between two private firms are more
frequent than alliances between two public firms.
Figure 3 breaks down the alliances by type of agreement. The categories are
marketing, technology licensing, research & development, original equipment
manufacturing (OEM), manufacturing, supply, royalty, funding, joint ventures, and
unknown. A large fraction of the data describes the type of agreement as "unknown," and
the segment grew through time. The size of this category compelled its inclusion. The
largest share of identified alliance types is marketing agreements, followed by technology
licensing, and then R&D. Joint Ventures are categorized separately and with no further
detail. They are roughly as frequent as marketing alliances.
The ten most frequent industry pairs, defined as four digit SIC codes, comprise
roughly 16% of the data. They are listed in Table I. Prepackaged Software is the
dominant industry category. Within-industry software alliances are the most frequent
category, followed by software and electronic computers. Other frequent groupings
include software with computer programming services, information retrieval services,
and integrated systems design. Biotechnology alliances rank third, and a related category
of commercial physical and biological research with biotechnology also places in the top
ten. The remaining top industries include semiconductors, electronic computers, and
information retrieval.
Four of the top ten industry pairs are alliances within a single industry code.
Figure 4 shows that, in general, this pattern is not followed in the rest of the data. Only
10 to 20% of alliances are within a single SIC-code overall. These features of the data
become important in constructing the sample used in the estimation procedures and in
later analysis.
9
2.2 Variable Definitions
The variables used in the analysis can be divided into two groups. In the first
group are variables pertaining to characteristics of the companies in the alliances. In the
second are variables constructed from the venture capital portfolios of which the
companies involved in the alliance are members.
The variables are designed to be characteristics of the pair forming the alliance.
Therefore, for analytic simplicity, the venture capital portfolio variables are summed
across the alliance participants. Variable definitions are as follows:
Company Characteristics
ALLIANCE is a dummy variable which takes the value 1 if the company pair formed
an alliance; 0 otherwise.
ONE VC is a dummy variable indicating at least one firm in the company pair was
venture-backed; 0 otherwise.
BOTH VC is dummy variable indicating both companies were venture-backed; 0
otherwise
KEIRETSU is dummy variable that takes the value 1 if the company pair shared a
common venture capital investor; 0 otherwise.
ONE PUBLIC is a dummy variable indicating at least one firm in the company pair
was publicly traded at the time of the initial pairing; 0 otherwise.
BOTH PUBLIC is a dummy variable indicating that both firms were publicly traded
at the time of initial pairing, 0 otherwise.
SAME STATE is a dummy variable that takes a value of 1 if the companies in the
pair are headquartered in the same state, 0 otherwise.
Venture Capitalist Characteristics
NUM VCS is the sum of the total number of Venture Capital (VC) firms involved in
funding each of the alliance participants.
FIRM EXPERIENCE is the sum of the ages, in years, of the funding VC firms
calculated from their first entry into the venture economics database.
EARLYSTAGE is the total number of companies in which the funding VCs invested
at an early stage.
10
NUM IPOS is the number of companies in the funding VCs portfolios that eventually
had a public offering.
NUM INDUSTRY is the number of companies the funding VCs had in the alliance
participant's industry at the two-digit SIC code level.
2
3. Estimation Approaches
In order to determine whether the presence of a common VC investor increases
the probability of two particular firms forming an alliance, an estimation framework that
can explain which pairs are more likely to form is needed. The first issue encountered is
determining the set of feasible counterfactual alliances from which actual alliances
emerged. Because only the alliances made and not the set of alliances considered but not
made are observed, assumptions about the set of alliances that might have otherwise
occurred are necessary.
Suppose the potential alliances are the set of all pairs of observed firms based on a
specified criterion. If one were to include the set of firms that did not form alliances, the
number of pairs generated would be immense and, in any event, these data are not
observed. Therefore, the analysis will be conditional on the firm having formed an
alliance. This is reasonable since it indicates an inclination to ally.
Because alliances are formed with some purpose in mind, a company's industry is
a natural way to restrict the choice set of companies with which the firm might have
formed an alliance. For each alliance, the data contain the four-digit SIC code of each
company, as well as the four-digit SIC code for the alliance activity. Because a firm
typically has some particular project in mind when forming an alliance and is looking to
match with a firm that has a complementary skill set, it is useful to think of firms on two
sides of a market. Therefore, for each firm observed in an alliance, one would want to
include the set of firms from the industry of its partner as the potential choices.

2
SIC codes are missing for a large fraction of the Venture Economics database. Venture Economics
industry codes are available, but do not have a 1 to 1 correspondence to SIC codes at any level. From the
observations where both industry codes are available, I construct a mapping from Venture Economics
codes to 2-digit SIC codes based on the most frequent occurrences between the two codes and use the
mapped SIC code where missing.
11
A particular example may be instructive. Suppose a small biotechnology
company forms an alliance with a large pharmaceutical company in order to develop a
drug using a proprietary compound. If the alliance activity code is used to identify other
firms who also had an alliance focused on drug development, it would likely identify two
distinct sets of firms. The first set would be small biotechnology companies like the
example firm and the second would be large pharmaceutical companies. It is really only
the second set that is similar to the firm with which the example company actually
formed an alliance. It is reasonable not to condition on alliance type since large
pharmaceutical companies who formed commercialization alliances (not drug
development alliances) might also have been suitable choices for the example firm.
It is possible to have a wider choice set than is described above. There are two
reasons to limit the choice set, one economic and one practical. For a given firm, limiting
its possible partners to companies who formed an alliance with another firm in its
industry has the strength of eliminating companies that may have lacked the
complementary assets to be a desirable alliance partner for that firm. It also eliminates
companies that might have found an alliance with another firm in the given firm's
industry to be undesirable. The second reason is to keep the data set to a manageable
size. Because of the large number of observations, constructing the counterfactual
matches on a wider criterion adds considerable calculation time. More restrictive criteria
are excellent robustness exercises to ensure that the results are not sensitive to
assumptions made about the market from which counterfactual matches can be made.
Formally, let S denote the set of possible strategic alliances. Each element of S
consists of firm pairs {a,b}. The observed data are D S, which are the pairs of firms, d
D, that actually form alliances. Let I set of observed industries. Let P set of industry
pairs. Define pP, where p={i,j} with i,j I. Define S
p
S to be the set of strategic
alliances for industry pair p. Let () denote a firm's industry. If {a,b} S
p
, where ab
and (a)=i and (b)=j, then d={a,b') and d'={b,a'} such that (b')=j and (a')=i.
Estimation requires a probability model describing the selection of actual
alliances D from the set S. Below, I will outline three alternatives. The first are models
from the logit family, a standard approach. Because many of these firms might interact in
markets where the choice of one firm's alliance partner precludes that partner from
12
collaborating with a third firm, there is an interdependence among choices. Statistically,
this means that, viewed as random events, realizations of potential alliances are
correlated. Proper estimation should account for these correlations. Even with
modifications to account for the constructed nature of the data, this approach cannot
overcome problems with interdependence among choices for both firms simultaneously.
Two variations of a second model are developed that take this interdependence
into account. They differ with respect to assumptions about alliance capacity of each
firm. A firm's alliance capacity is the number of alliances it has a positive probability of
entering. In the first version, alliance capacity is fixed at the number of alliances
observed; in the second, a firm can form any number of alliances, but the number of
previous alliances formed by the members of the pair can affect the probability of
forming an additional alliance. These models are designed to allow for the possibility
that firms' alliance choices may not be independent from one another.
3.1 Logit Family
To fix concepts, it is expositionally useful to begin with an approach that is not
employed, which involves the application of a simple logit or probit technique. Suppose
each element of S is an observation, with a binary variable taking the value of 1 if the
pair formed an alliance, 0 otherwise. Suppose further that there exists a latent variable,
y
s
*
, for the pairing of firms {a,b} such that the pair forms an alliance if the latent variable
exceeds some value. Without loss of generality, the value can be normalized to zero.
In the current context, the X's contain characteristics of the firm pair. The
dependent variable is the realization of an alliance between a firm pair. In order to write
the likelihood as a product of the observed events, the assumption of independence across
observations is necessary. Taking the product across S:
L = F X F X
s
y
s
y
S
s s
( ) ( ( )) 1
1

y u
y y
s s s
s s
*
*
,
= +
= >

1 0 if and 0 otherwise
13
The F functions are cumulative distribution functions. In the case of the probit, it
is cumulative normal, resulting from a normally distributed error term in the first
equation. If the error term is distributed according to the extreme-value distribution, the
F function is the cumulative logistic distribution, yielding the logit model. If only firms
that form an alliance are observed and the counterfactual choices are constructed, it is
clear that a simple logit or probit will yield biased estimates because the observations are
not independent (Chamberlain, 1980).
Consider an example of firms from only two industries, with four firms each.
Each firm forms one alliance, each of which takes place across industries. The
constructed data would contain 16 observations, four for which a dependent variable
would take a value of 1. The errors across those observations cannot be assumed
independent. Each firm would appear in four of the observations.
An approach that takes interdependence into account in some fashion is the
conditional logit. Implementing the model requires identifying, in each alliance, a
chooser and a set from which to choose. Using a conditional logit to estimate the
coefficient vector for the probability of choosing a particular alliance partner solves the
correlation problem for one side of the market. In the conditional logit, the probability is
written given the number of positive outcomes in a particular group, which in this case is
the number of alliances in the set of potential choices for a given choosing firm.
For each observed alliance pair d D, one of the companies in the pair, b(d) d,
is designated as the chooser. For each b(d), a subset of possible alliances S
d
S from
among which b might have chosen is constructed. The likelihood is then the product of
the probabilities for each group's outcome being its particular realized alliance out of the
set of possible choices. Define y
b(d)
as b(d)'s choice among the set of alternatives S
d
.
The unconditional likelihood can be written:
The probability for each group takes the exponential form as in the standard logit,
L ob y d
b d
d D
= =

Pr ( )
( )
Pr ( )
( )
ob y d
e
e
b d
X
X
s S
d
s
d
= =

14
The main drawback of the conditional logit is that the problem of a correlated
error structure is solved for only one of the economic agents at a time (conditional
independence). Economically, this assumption rules out very real possibilities. The first
is that a company only needed one alliance. A positive probability is placed on each
company forming an alliance with every other company that meets the particular data
construction criterion. This problem can be illustrated with an example competing firms.
If, for example, a small biotechnology company develops a cholesterol drug and markets
it through Pfizer, a company with a competing drug may be precluded from aligning with
Pfizer. Thus, in so far as it may be optimal for several firms to work with the same
company, that same company may only be able to work with one or a limited number of
firms.
The second drawback is related: results can vary depending on which firm is
designated as the chooser. Because the conditional logit does not fully account for the
interdependence among the choices, whatever designation is used will be unsatisfying.
Using the assumption that a firm with many alliances is a desirable alliance partner and,
therefore, may be a likely candidate to have bargaining power, I designate the company
with more alliances as the economic agent for each pair. Results based on an arbitrary
designation are similar. Recalling the definition of a feasible alliance, the companies
from which b(d) chooses must be in the same industry as b(d)'s actual alliance partner,
and each possible choice must have formed an alliance with a firm from b(d)'s industry.
3.2 Sequential Sampling
The goal is to develop a framework that takes the interdependence among the
choices into account. The data contain additional information that the traditional models
did not utilize. Because the alliance announcement date is observed, the order in which
the alliances occur can be used to specify how a particular alliance might affect future
alliances.
Suppose each alliance is selected from a large set of potential alliances consisting
of a group of firms that allied at least once. Imagine a sequential process, where, in the
first round, an alliance is selected at random based on characteristics of the pair. In one
15
version of the model, all unselected pairs remain potential alliances, except those
involving the selected entities (both actual and counterfactual). In the other, only the
selected alliance is removed from the set of potential alliances. In the next stage, another
pair is selected, and so forth, with pairs involving selected entities removed at each stage.
The likelihood function will simply be the joint probability of the observed events, where
the event probabilities are the probabilities of a particular alliance pair being chosen.
The framework applies to a variety of definitions for the set of feasible alliances,
S. In this implementation, recall that the set of feasible alliances, S, formed of pairs {a,b}
is feasible if and only if a formed an alliance with a firm in b's industry and b formed an
alliance with a firm in a's industry. So, for the set of software firms that allied with
hardware firms, each potential match is created. Likewise for the set of software firms
that allies with other software firms.
I parameterize each pair with a potentiality based on its characteristics at round t,
X
t
s
. Recall S
p
denotes the set of all possible pairs for a particular industry pair. Data
include (s
1
,,s
Np
), and s
t
is the t
th
pair realized. S
f
(s
1
,,s
n
) is the set of remaining
feasible pairs given s
1
through s
n-1
have been realized. For an industry pair, the
likelihood can be expressed as the product of N
p
terms:
Multiplying across all industry pairs,
L L s s
P
p P
N
p
=

( ,..., )
1
The two versions of this model differ in how S
f
(s
1
,,s
n
) is determined. I will illustrate
the differences below.
L
X
X
X
X
X
X
X
X
p s
s
t
s S
s
s
t
s S s
s
s
t
s S s s
s
t
s
t
s S
P Pf Pf
Np
Pf
=

exp( )
exp( )
exp( )
exp( )
exp( )
exp( )
...
exp( )
exp( )
( ) ( , ) (
1 2
1
3
1 2
1 2 3

ss s s
N
p
1 2 1
, ... )

16
3.2.1 Fixed Capacity
To illustrate this version, suppose there are only two industries, A and B, with
alliances between pairs of firms from each industry. The observed data can be depicted
by the grid below. There are alliances between the following firms: (a1,b2), (a2,b4),
(a3,b3), and (a4,b1). The associated boxes are marked by a dot.
Each potential alliance in the grid has a potential realization based on its characteristics
given by e
X
. In the first round, suppose the alliance chosen was (a1,b2). The probability
of that event was simply e
X
1
21
divided by the sum of all of the potentialities in the grid.
a1 a2 a3 a4
b1

Industry B b2

b3

b4

Industry A
a1 a2 a3 a4
b1
Industry B b2
b3
b4

Industry A
e
X
1
11
e
X
1
21
e
X
1
31
e
X
1
41
e
X
1
42
e
X
1
32
e
X
1
22
e
X
1
12
e
X
1
13
e
X
1
23
e
X
1
33
e
X
1
43
e
X
1
14
e
X
1
24
e
X
1
34
e
X
1
44
17
Because the alliance {a1,b2} has now been chosen, it is no longer an available
choice. Alliance capacity is fixed; neither firm a1 nor firm b2 can enter another alliance.
Thus, the potential alliances in the row and column of the chosen alliance must be
eliminated as well, represented by the shaded region.
In round 2, another alliance is selected from the remaining choices. Suppose the second
alliance formed is the alliance between firm a3 and b3. The probability of that event
would be e
X
2
33
divided by the sum of the remaining potentialities at the time the alliance
was drawn, which are the expressions in the unshaded boxes above.
a1 a2 a3 a4
b1

Industry B b2

b3

b4

Industry A
a1 a2 a3 a4
b1
Industry B b2
b3
b4

Industry A
e
X
2
11
e
X
2
21
e
X
2
31
e
X
2
41
e
X
2
42
e
X
2
32
e
X
2
22
e
X
2
12
e
X
2
13
e
X
2
23
e
X
2
33
e
X
2
43
e
X
2
14
e
X
2
24
e
X
2
34
e
X
2
44
18
For round 3, the potential choices constructed from firms a3 and b3 must be
eliminated, leaving the potential alliances and associated probabilities given by the
unshaded boxes for round 4.
The process continues until the penultimate alliance is selected. If a firm has more than
one alliance, its row or column of potentialities is not eliminated until it forms its last
alliance. The actual cell of the alliance is eliminated. Suppose, for example, that both b3
a1 a2 a3 a4
b1
Industry B b2
b3
b4

Industry A
e
X
3
11
e
X
3
21
e
X
3
31
e
X
3
41
e
X
3
42
e
X
3
32
e
X
3
22
e
X
3
12
e
X
3
13
e
X
3
23
e
X
3
33
e
X
3
43
e
X
3
14
e
X
3
24
e
X
3
34
e
X
3
44
a1 a2 a3 a4
b1
Industry B b2
b3
b4

Industry A
e
X
3
11
e
X
3
21
e
X
3
31
e
X
3
41
e
X
3
42
e
X
3
32
e
X
3
22
e
X
3
12
e
X
3
13
e
X
3
23
e
X
3
33
e
X
3
43
e
X
3
14
e
X
3
24
e
X
3
34
e
X
3
44
19
and a3 enter additional alliances with other parties in later rounds. Because repeat
alliances are not considered, the grid would look as it did before the round with just the
cell of the alliance removed from the set of potentialities.
3
The main advantage of this model is that it accounts for the interdependence in
both dimensions simultaneously. It includes more information from the observable data
as well. The order in which the alliances occur is used to eliminate firms from the market
in a manner consistent with the data. This model also provides a rationale for including
only companies from the alliance database as eligible in constructing potential pairs. Any
firm not in the data presumably had no alliances, and therefore had capacity fixed at zero.
The model assumes nothing about firm preferences or the relative value of the matches to
the firm, but merely expresses what factors influence which alliances are likely to be
observed.
The weakness of the model is the extreme assumption of fixed capacity. It is a
natural extension of the conditional logit framework, however, which imposes the same
restriction in a single dimension. Because it is difficult to imagine that no firm in the
alliance database could have formed an additional alliance, the assumption is relaxed in
the next version of the model.
3.2.2 Variable Alliance Capacity
In this version of the model, there is no restriction on capacity. Instead, it allows
for the number of previous alliances to affect the probability of subsequent matches. This
model has the advantage of recognizing that the probability of forming an alliance may
change with each additional alliance formed while still placing a positive probability on a
company forming more than the number of alliances actually observed.
The model follows the same basic structure as the fixed alliance capacity model
outlined in the previous section. Companies can still be regarded as being chosen
sequentially from a set of potential alliances. The difference will be in the way the set of
potential alliances changes after each round. In this version, only the selected alliance is

3
An alternative method would be to treat multiple alliances for the same firm as separate entries in the
rows or columns of the grid, with the interpretation that each firm is searching for all alliance partners
simultaneously. Here, the interpretation is that the firm is looking for its next alliance.
20
removed from the set of potential alliances. The potential alliances constructed from the
selected entities are allowed to remain.
In the example in which there are two sets of firms, A and B, the initial set of
potentialities is represented by all of the boxes in the grid below.
After round one, in which firms a1 and b2 are chosen, all of the boxes except (a1, b2)
remain. For round 2, nature selects the pair a3 and b3 from the following set of potential
alliances:
a1 a2 a3 a4
b1
Industry B b2
b3
b4

Industry A
e
X
1
11
e
X
1
21
e
X
1
31
e
X
1
41
e
X
1
42
e
X
1
32
e
X
1
22
e
X
1
12
e
X
1
13
e
X
1
23
e
X
1
33
e
X
1
43
e
X
1
14
e
X
1
24
e
X
1
34
e
X
1
44
a1 a2 a3 a4
b1
Industry B b2
b3
b4

Industry A
e
X
2
11
e
X
2
21
e
X
2
31
e
X
2
41
e
X
2
42
e
X
2
32
e
X
2
22
e
X
2
12
e
X
2
13
e
X
2
23
e
X
2
33
e
X
2
43
e
X
2
14
e
X
2
24
e
X
2
34
e
X
2
44
21
Following round two, the previous choice of a3, b3 is removed from the set of potential
alliances.
In each of the sequential sampling variations, the examples are depicted in two
distinct sets. Suppose there are groups of alliances that occur between entities that are
not from distinct sets such as firms within same industry. In this case, the firms are not
permitted to self-match. In addition, since pairs are unordered, the redundant pairs are
eliminated.
The initial potential alliances for the first round are depicted by the unshaded
areas. The remainder of the process works exactly as it did before.
a1 a2 a3 a4
b1
Industry B b2
b3
b4

Industry A
e
X
3
11
e
X
3
21
e
X
3
31
e
X
3
41
e
X
3
42
e
X
3
32
e
X
3
22
e
X
3
12
e
X
3
13
e
X
3
23
e
X
3
33
e
X
3
43
e
X
3
14
e
X
3
24
e
X
3
34
e
X
3
44
a1 a2 a3 a4
a1
Industry A a2
a3
a4

Industry A
e
X
11

e
X
21

e
X
31

e
X
41

e
X
42

e
X
32

e
X
22

e
X
12

e
X
13

e
X
23

e
X
33

e
X
43

e
X
14

e
X
24

e
X
34

e
X
44

e
X
1
11
e
X
1
21
e
X
1
31
e
X
1
41
e
X
1
42
e
X
1
32
e
X
1
22
e
X
1
12
e
X
1
13
e
X
1
23
e
X
1
33
e
X
1
43
e
X
1
14
e
X
1
24
e
X
1
34
e
X
1
44
22
4. Empirical Results
The empirical task is twofold. The first is to test for the presence of a keiretsu
effect using the three estimation methods outlined above. The second is to test
hypotheses about the keiretsu effect that can offer suggestive evidence about the role of
the venture capitalist plays in the phenomenon. For the second portion, only results from
the sequential sampling models are presented since the standard errors in the conditional
logit are likely understated.
4.1 Main Models
Table IV presents the results of the conditional logit regressions. The keiretsu
variable is positive and statistically significant in both specifications, meaning that a
sharing a common venture capitalist increases the probability that two firms form an
alliance. The odds ratio is 1.34 in the first specification and 1.4 in the second. There is
also an increase in probability if the two firms are publicly traded and if the two firms are
headquartered in the same state. The conditional logit implies that there is no increase in
the likelihood of forming an alliance with a company who is venture-backed unless that
company shares a common investor. Adding the venture capital portfolio controls
increases the point estimate on the keiretsu coefficient, but the results are generally
similar. Note that the number of observations is large, with 665,846 feasible alliance
pairs for 11,363 "choosing" firms.
Table V presents the results of the fixed capacity estimation. Here, an
observation is a realized alliance. There are 20,872 observations. The coefficient vector
can be thought of as measuring factors that influenced the realization of a particular pair
relative to the set of potential pairs in that alliance market. The point estimates for the
keiretsu variable are positive. The interpretation of the magnitudes is not comparable to
the previous model because they express a measure for the likelihood of a pairing rather
than one firm's choice of another firm. The coefficients are not statistically different
from 0, suggesting that the precision for the keiretsu effect estimated in the conditional
logit framework might indeed overstate the independence of observations. (In later
specifications, a keiretsu effect can be detected under the fixed capacity assumptions in
23
particular subsets of the data.) Also, the control for one firm being venture-backed is of a
different sign in this model, as is the coefficient for the number of VCs involved in the
two firms' financing. The coefficients for both firms being publicly traded change signs
as well. The venture capital controls Number of IPOs and VC Experience, if framed as
reputation variables, have non-intuitive signs. This result may stem from the fact that the
analysis is conditional on a firm having formed an alliance. A less reputable venture
capital firm may have several excellent firms in its portfolio that enter the alliance
market.
Table VI presents the results of the maximum likelihood estimation of the
sequential model with no restriction on capacity. The coefficient for the keiretsu variable
is positive and statistically significant in both specifications. The other coefficients are
quite similar to the model where capacity is fixed. The coefficient for the variable
measuring previous alliance activity is also positive. This result could mean that
characteristics that make a firm a more likely alliance partner are being captured by
previous alliance activity. Alternatively, the coefficient could be interpreted as evidence
of learning, consistent with previous literature on strategic alliances.
4.2 Extensions
All of the estimation procedures above produce a positive keiretsu coefficient, but
the weakness of the conditional logit model means that there is ambiguity at this stage as
to whether the coefficient is different from zero. By allowing the keiretsu effect to differ
between private and public firms, firms from different industries, and firms in particular
alliance types, one can learn if a keiretsu effect is confined to certain areas and draw
conclusions about the channels that may have produced it.
I will first test whether the effect is stronger for private or public firms. If the
venture capital community were involved in fostering relationships, one would expect
this pattern to begin while the company is still private. Further, the informational
advantages are more likely in this setting. Table VI shows the results of each sequential
sampling model with the keiretsu variable divided into separate variables for public and
private firms. In the first specification for each model, the private keiretsu variable is
takes a value of one if at least one firm in the pair is private. In the second column, the
24
variable is divided into three groups: both firms are private, one firm is private and the
other is public, and both firms are public.
The keiretsu effect is positive and statistically significant for alliances involving
private firms in the model with variable capacity. In the model with fixed capacity, all
estimates are positive, but the coefficient on keiretsu term interacted with an indicator for
both firms being private is not statistically significant. For alliances with at least one
private firm, the model does measure a keiretsu effect. In no case does the effect extend
to public firms. In each case where the coefficient is positive and significant, it is
statistically different from the public firm keiretsu coefficient at 99% confidence. The
coefficients for the keiretsu effect where both firms are private are not statistically
different from the coefficient where only one is private.
The keiretsu effect might also vary depending on the industry pairs involved in
the alliance. If a company is collaborating with a firm in its same industry, the firms may
be more concerned about competitive threats from the sharing of information and thus
more worried about opportunistic behavior following the alliance. In this case, one
would expect the certification role of the venture capitalist to be more important in
alliances involving firms from the same industry and less important when involving firms
that do not compete directly.
In table VII, the keiretsu variable is interacted with an indicator for pairs between
the same industry and again for pairs involving different industries. In both models, the
coefficient on the cross-industry keiretsu effect is statistically insignificant. For the same
industry coefficient, both models produce a positive coefficient. The estimate is
statistically significant at the 99% level. The keiretsu coefficients in each model are
statistically different from one another as well, with the fixed capacity model at 99% and
the variable capacity at the 95% confidence level.
One can construct a similar explanation for why the keiretsu effect might differ by
alliance type. In settings where there is a higher probability of unforeseen contingencies
over which firms cannot contract, there is greater risk of one firm taking advantage of the
other. Research and Development is one obvious area where such contingencies are
likely to arise. Marketing arrangements might also contain such risks. Results are
reported in Table VIII. I find that the keiretsu effect is greater in each of these areas.
25
5. Expanding the Set of Possible Alliance Partners
The analysis up to this point has been conditional on a firm forming an alliance.
All of the counterfactual choices have come from the set of firms that were active in the
alliance market. It would be desirable to extend the results to the unconditional setting,
which would test of the presence of a keiretsu effect among all firms, not just those that
had an alliance. I do not, however, observe a set of firms, both public and private,
venture-backed and not, which both enter and do not enter the alliance market.
Conditioning on venture capital financing, however, there is a set of firms to compare.
The data contain the full set of firms financed by venture capital firms regardless of
whether they formed an alliance.
For each venture capital firm, I calculate and compare two ratios. The first is the
Alliance Ratio. This measure is meant to capture the extent to which companies within a
given portfolio form strategic alliances or joint ventures. It will count all alliances for the
portfolio, both those that involved venture-backed firms external to the portfolio and
those within it. In assigning a particular alliance to a particular portfolio, it is useful to
think of participating companies as the originating nodes of the alliance. Thus, it is not
alliances that are counted, but companies that entered a particular alliance. Each
company can be counted more than once: it will be counted as many times as unique
alliance partners it had. This number will be normalized by the possible number of such
alliance origination nodes for the portfolio.
Let j index each venture capital firm. Define n
j
as the number of companies in j's
portfolio and n as the total number of venture-backed firms. The Alliance Ratio is
defined as:
A
n n
j s
j
j
( )
=

1
alliance nodes in portfolio
possible number of alliance nodes
The second ratio will be the Keiretsu Ratio. The numerator again counts
companies as originating points in an alliance, but only considers alliances that occur
between two firms in the same portfolio. Define the Keiretsu Ratio as:
26
K
n n
j s
j s
j
j j
( )
=

1
alliance nodes that begin and end in portfolio
possible number of alliance nodes within portfolio
If the keiretsu ratio is larger than the alliance ratio, there are disproportionately more
alliances occurring within the venture capital portfolios. Table IX shows the results of
the paired t-test between the ratios for each venture capital portfolio. The keiretsu ratio is
small, at .25%, but two orders of magnitude above the baseline measure. The difference
is statistically significant at 99%. The small magnitude of the two ratios should not be
surprising. Many of these venture-backed firms never become viable companies, so one
would not expect them to form strategic alliances. Nor would one expect a large fraction
of the number of theoretically possible alliances to take place. An alliance ratio of 1
would mean that each company formed an alliance with every other company. With this
univariate test, evidence of the keiretsu effect is extended to a setting where having
formed an alliance is not a prerequisite to being considered a potential alliance partner.
6. Conclusion
This paper uses a unique database to explore the role that venture capitalists play
in facilitating contacts for their portfolio firms. With an estimation framework that
allows one company's choice of alliance partner to affect the probability of remaining
available choices, I test for a keiretsu effect. I find evidence that the presence of a
common venture capitalist increases the probability of two firms collaborating through a
joint venture or strategic alliance.
Though the sequential sampling with fixed capacity model does not show a
statistically significant effect in the keiretsu variable, the coefficient is positive and
statistically significant for alliances involving private firms, where venture capitalists
should have the strongest role. That the keiretsu effect is confined to alliances involving
at least one private firm in both specifications is consistent with the venture capitalist
providing an information mediation role. Further, there may be support for venture
capitalists enabling companies from the same industry, where risk of expropriation might
27
be greater, to collaborate. The results from examining marketing and research and
development alliances provide similar support for a certification role.
This is the first paper to empirically evaluate the role of venture capitalists in
facilitating contacts for their portfolios. The confirmation that there are a
disproportionate number of alliances within a VCs portfolio suggests that VCs do play a
role in fostering relationships. This finding is of particular importance to entrepreneurs
who anticipate needing access to alliance partners. It also has implications for which
companies are funded by which venture capital firms. It is likely that venture capitalists
consider their existing network of resources in making funding decisions and that,
holding all else constant, a company for whom it is cheaper to provide resources would
receive funding.
These findings contribute to the literature of how venture capital extends the role
of a financial intermediary into non-traditional avenues. It also provides empirical
support for the information mediation role of the venture capitalist to other firms. It is
consistent with the literature describing the certification role of venture capitalists and the
value of alliance partners.
In addition, this study can be instructive for governments and policy-makers
attempting to develop venture capital markets abroad. At the most basic level, it offers
additional evidence that VCs are active investors, such that establishment of a conduit for
risk capital is not sufficient in replicating a US-style venture capital industry. Also,
because network externalities increase exponentially with size, it indicates that the size of
each venture capital firm may be important in exploiting value-enhancing opportunities
with other firms.
Further, many keiretsu alliances involve one public and one private firm,
suggesting that the capabilities of more mature firms are important in strategic alliances
with private firms. Thus, any country wishing to establish a VC industry should consider
how the industry practitioners and their fledgling firms would be received by existing
firms. Without a history of relationships with more mature firms, it may be more
difficult for a new venture capitalist to provide the resources needed for a successful
start-up.
28
Finally, this paper makes a methodological contribution. The analytical
framework developed can be applied in a variety of settings where the order of
observations is observed. In any application where there are two decision makers (firms
employing workers, banks lending to firms, firms seeking underwriters), the assumptions
of traditional discrete choice models involving independence of counterfactual choices is
problematic. Modeling the dependence more structurally is an alternative; this
probability approach assumes nothing about preferences or market equilibrium, is easy to
implement, and provides estimates for factors that are important in determining the
matches observed while allowing for interaction between firms.
29
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30
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31
Figure I
Initial Alliances By Year
Figure I shows the number of alliances in each year, defined as initial bilateral pairs, from 1987 to June
2001. The bottom portion of each bar represents alliances where neither party received venture financing,
the middle portion represents the number of alliances where one party is venture backed, and the top
portion represents the number of pairs where both received venture financing.
0
500
1000
1500
2000
2500
3000
3500
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
BothVC
One VC
No VC
32
Figure II
Alliance Composition by Public Status
Figure II shows the composition of alliances in each year by public status of the companies. The bottom
portion of each bar represents alliances where both companies are private, the middle portion represents the
percentage of alliances where one party is private and the other is public, and the top portion represents the
percentage of pairs where both are publicly traded.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Both Private Mi x Both Public
33
Figure III
Alliance Composition by Purpose
Figure III shows the composition of alliances by alliance purpose. The possible categories are Marketing,
Manufacturing, Licensing, Royalty, Funding, R&D, Supply, Original Equipment Manufacturing, Joint
Venture, and Unknown.
Unknown
23%
R&D
10%
Funding
1%
Royalty
0%
Licensing
13%
Manufacturing
3%
Marketing
23%
Supply
2%
OEM
2%
Joi ntVenture
23%
34
Table I
Top 10 Industry Pairs
SIC Code Description SIC Code Description Frequency
1 7372 Prepackaged Software 7372 Prepackaged Software 8 6 1
2 3571 Prepackaged Software 7372 Electronic Computers 6 6 8
3 2834 Pharmaceutical Preparations 2834 Pharmaceutical Preparations 4 1 1
4 7372 Prepackaged Software 7371 Computer Programming Services 3 8 1
5 7372 Prepackaged Software 7375 Information Retrieval Services 3 4 6
6 7372 Prepackaged Software 7373 Computer Integrated Systems Design 2 7 2
7 8731 Commercial Physical and Biological Research 2834 Pharmaceutical Preparations 2 6 4
8 7375 Information Retrieval Services 7375 Information Retrieval Services 2 4 3
9 3571 Electronic Computers 3577 Semiconductors and Related Devices 1 8 0
1 0 7372 Prepackaged Software 3577 Semiconductors and Related Devices 1 6 8
35
Figure IV
Alliance Composition by Industry Pairs
Figure II shows the composition of alliances in each year by public status of the companies. The bottom
portion of each bar represents alliances where both companies are private, the middle portion represents the
percentage of alliances where one party is private and the other is public, and the top portion represents the
percentage of pairs where both are publicly traded.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Same Cross
36
Table II
Summary Statistics
Table II shows summary statistics for the alliances. Keiretsu is dummy variable that takes the value 1 if the
company pair shared a common investor; 0 otherwise. Both VC is dummy variable indicating both
companies were venture-backed; 0 otherwise. One VC is a dummy variable indicating that at least one firm
in the company pair was venture-backed; 0 otherwise. Both Public is a dummy variable indicating that
both firms were publicly traded at the time of initial pairing, 0 otherwise. One Public is a dummy variable
indicating at least one firm in the company pair was publicly traded at the time of the initial pairing; 0
otherwise. Same State is a dummy variable that takes a value of 1 if the companies in the pair are in the
same state, 0 otherwise. Number VCs is the sum of the total number of Venture Capital (VC) firms
involved in funding each of the alliance participants. VC Experience is the sum of the ages, in years, of the
funding VC firms calculated from their first entry into the venture economics database. Num Industry is
the number of companies the funding VCs had in the alliance participant's industry at the 2-digit SIC code
level. Number IPOs is the number of companies in the funding VCs portfolios that eventually had a public
offering. Num EarlyStage is the total number of companies in which the funding VCs invested at an early
stage.
Variable Name
Number Of
Observations Mean
Standard
Deviation Mi ni mum Maximum
Keiretsu 24311 0. 0234 0. 1513 0 1
Both VC 24311 0. 1043 0. 3056 0 1
One VC 24311 0. 4412 0. 4965 0 1
Both Public 24311 0. 2456 0. 4304 0 1
One Publoc 24311 0. 7133 0. 4522 0 1
Same State 20872 0. 2381 0. 4259 0 1
Number Vcs 24311 0. 7321 3. 4239 0 4 6
VC Experience 24311 3. 8961 18. 5058 0 2 4 0
Num Industry 24311 44. 2344 226. 7755 0 3381
Number IPOs 24311 31. 6916 151. 6652 0 1960
Num EarlyStage 24311 70. 9094 341. 0700 0 4507
37
Table III
Conditional Logit Estimates
Table III presents the results of a Conditional Logit regression. The dependent variable is ALLIANCE,
which takes the value 1 if the company pair formed an alliance; 0 otherwise. The independent variables are
Keiretsu, a dummy variable that takes the value 1 if the company pair shared a common investor; 0
otherwise; One VC, a dummy variable indicating at least one firm in the company pair was venture-backed,
0 otherwise, Both VC, a dummy variable indicating both companies were venture-backed; 0 otherwise,
Same State, which takes a value of 1 if the companies in the pair are in the same state, 0 otherwise; One
Public, a dummy variable indicating at least one firm in the company pair was publicly traded; 0 otherwise,
Both Public, indicating that both firms were publicly traded, 0 otherwise. Number VCs is the sum of the
total number of Venture Capital (VC) firms involved in funding each of the alliance participants. VC
Experience is the sum of the ages, in years, of the funding VC firms calculated from their first entry into
the venture economics database. Num Industry is the number of companies the funding VCs had in the
alliance participant's industry at the 2-digit SIC code level. Number IPOs is the number of companies in
the funding VCs portfolios that eventually had a public offering. Num EarlyStage is the total number of
companies in which the funding VCs invested at an early stage. Standard errors are in parentheses. *, **
or *** mean the coefficient is statistically significant at 10%, 5% or 1% level.
Independent Variables
Keiretsu 0. 2929
* * *
0. 3353
* * *
(0. 1062) (0. 1101)
Both VC 0. 0614 0. 0710
(0. 0581) (0. 0685)
One VC - 0. 1127
* * *
- 0. 1132
* * *
(0. 0433) (0. 0433)
Both Public 0. 2312
* * *
0. 2351
* * *
(0. 0418) (0. 0418)
One Public 0. 0549 0. 0555
(0. 0475) (0. 0474)
Same State 0. 6911
* * *
0. 6926
* * *
(0. 0410) (0. 0410)
Number VCs - 0. 0299
* *
(0. 0124)
VC Experience 0. 0017
(0. 0019)
Industry 0. 0005
* * *
(0. 0002)
Number IPOs - 0. 0014
(0. 0010)
EarlyStage 0. 0005
(0. 0004)
Prob > chi-squared 0. 0000 0. 0000
Pseudo R-squared 0. 0105 0. 0110
Number of Observations 665846 665846
Number of Groups 11373 11373
Dependent Variable: Al l i ance
38
Table IV
Sequential Sampling with Fixed Alliance Capacity
Table IV presents the results of the maximum likelihood estimation of the Sequential Sampling with
Fixed Alliance Capacity model. The variables are Keiretsu, a dummy variable that takes the value 1 if the
company pair shared a common investor; 0 otherwise; One VC, a dummy variable indicating at least one
firm in the company pair was venture-backed, 0 otherwise, Both VC, a dummy variable indicating both
companies were venture-backed; 0 otherwise, Same State, which takes a value of 1 if the companies in the
pair are in the same state, 0 otherwise; One Public, a dummy variable indicating at least one firm in the
company pair was publicly traded; 0 otherwise, Both Public, indicating that both firms were publicly
traded, 0 otherwise. Number VCs is the sum of the total number of Venture Capital (VC) firms involved in
funding each of the alliance participants. VC Experience is the sum of the ages, in years, of the funding VC
firms calculated from their first entry into the venture economics database. Num Industry is the number of
companies the funding VCs had in the alliance participant's industry at the 2-digit SIC code level. Number
IPOs is the number of companies in the funding VCs portfolios that eventually had a public offering. Num
EarlyStage is the total number of companies in which the funding VCs invested at an early stage. Standard
errors are in parentheses. *, ** or *** mean the coefficient is statistically significant at 10%, 5% or 1%
level.
Independent Variables
Keiretsu 0. 0820 0. 0515
(0. 0530) (0. 0557)
Both VC 0. 0201 0. 1009
* * *
(0. 0300) (0. 0361)
One VC 0. 0989
* * *
0. 1019
* * *
(0. 0209) (0. 0209)
Both Public - 0. 1491
* * *
- 0. 1566
* * *
(0. 0213) (0. 0214)
One Public 0. 0083 0. 0133
(0. 0232) (0. 0232)
Same State 0. 0031 0. 0044
(0. 0204) (0. 0204)
Number VCs 0. 0184
* * *
(0. 0063)
VC Experience - 0. 0062
* * *
(0. 0009)
Industry 0. 0001
(0. 0001)
Number IPOs - 0. 0017
* * *
(0. 0005)
EarlyStage 0. 0008
* * *
(0. 0002)
Prob > chi-squared 0. 0000 0. 0000
Number of Observations 20872 20872
39
Table V
Sequential Sampling with Variable Alliance Capacity
Table IV presents the results of the maximum likelihood estimation of the Sequential Sampling with
Variable Alliance Capacity model. The variables are Keiretsu, a dummy variable that takes the value 1 if
the company pair shared a common investor; 0 otherwise; One VC, a dummy variable indicating at least
one firm in the company pair was venture-backed, 0 otherwise, Both VC, a dummy variable indicating both
companies were venture-backed; 0 otherwise, Same State, which takes a value of 1 if the companies in the
pair are in the same state, 0 otherwise; One Public, a dummy variable indicating at least one firm in the
company pair was publicly traded; 0 otherwise, Both Public, indicating that both firms were publicly
traded, 0 otherwise. Number VCs is the sum of the total number of Venture Capital (VC) firms involved in
funding each of the alliance participants. VC Experience is the sum of the ages, in years, of the funding VC
firms calculated from their first entry into the venture economics database. Num Industry is the number of
companies the funding VCs had in the alliance participant's industry at the 2-digit SIC code level. Number
IPOs is the number of companies in the funding VCs portfolios that eventually had a public offering. Num
EarlyStage is the total number of companies in which the funding VCs invested at an early stage. Standard
errors are in parentheses. *, ** or *** mean the coefficient is statistically significant at 10%, 5% or 1%
level.
Independent Variables
Keiretsu 0. 1720
* * *
0. 1363
* *
(0. 0538) (0. 0561)
Both VC 0. 0217 0. 1018
* * *
(0. 0300) (0. 0361)
One VC 0. 0999
* * *
0. 1015
* * *
(0. 0209) (0. 0209)
Both Public - 0. 1534
* * *
- 0. 1621
* * *
(0. 0213) (0. 0214)
One Public 0. 0063 0. 0073
(0. 0232) (0. 0232)
Same State 0. 0020 0. 0044
(0. 0204) (0. 0204)
Number VCs 0. 0158
* *
(0. 0063)
VC Experience - 0. 0063
* * *
(0. 0009)
Industry 0. 0001
(0. 0001)
Number IPOs - 0. 0016
* * *
(0. 0005)
EarlyStage 0. 0008
* * *
(0. 0002)
Previous Alliances 0. 3426
* * *
0. 2908
* * *
(0. 0956) (0. 0887)
Prob > chi-squared 0. 0000 0. 0000
Number of Observations 20872 20872
40
Table VI
Variation of Keiretsu Strength By Public Status
Table VI presents the results of the maximum likelihood estimation of the Sequential Sampling with
Fixed Alliance Capacity and Sequential Sampling with Variable Alliance Capacity model. The
Keiretsu variable is split into separate effects by its status as a public or private firm. The control variables
are One VC, a dummy variable indicating at least one firm in the company pair was venture-backed, 0
otherwise, Both VC, a dummy variable indicating both companies were venture-backed; 0 otherwise, Same
State, which takes a value of 1 if the companies in the pair are in the same state, 0 otherwise; One Public, a
dummy variable indicating at least one firm in the company pair was publicly traded; 0 otherwise, Both
Public, indicating that both firms were publicly traded, 0 otherwise. Number VCs is the sum of the total
number of Venture Capital (VC) firms involved in funding each of the alliance participants. VC
Experience is the sum of the ages, in years, of the funding VC firms calculated from their first entry into
the venture economics database. Num Industry is the number of companies the funding VCs had in the
alliance participant's industry at the 2-digit SIC code level. Number IPOs is the number of companies in
the funding VCs portfolios that eventually had a public offering. Num EarlyStage is the total number of
companies in which the funding VCs invested at an early stage. Standard errors are in parentheses. *, **
or *** mean the coefficient is statistically significant at 10%, 5% or 1% level.
Independent Variables
Keiretsu*Private (both) 0. 2266 0. 5904
* * *
(0. 1996) (0. 1933)
Keiretsu*Private (at least one) 0. 2387
* * *
0. 3916
* * *
(0. 0795) (0. 0800)
Keiretsu*Private (exactly one) 0. 2407
* * *
0. 3613
* * *
(0. 0852) (0. 0852)
Keiretsu*Public (Both) - 0. 0668 - 0. 0666 - 0. 0126 - 0. 0140
(0. 0686) (0. 0687) (0. 0682) (0. 0682)
Both VC 0. 1055
* * *
0. 1056
* * *
0. 1081
* * *
0. 1074
* * *
(0. 0361) (0. 0361) (0. 0360) (0. 0360)
One VC 0. 1003
* * *
0. 1004
* * *
0. 0995
* * *
0. 0991
* * *
(0. 0209) (0. 0209) (0. 0209) (0. 0209)
Both Public - 0. 1423
* * *
- 0. 1423
* * *
- 0. 1428
* * *
- 0. 1436
(0. 0219) (0. 0219) (0. 0219) (0. 0219)
One Public 0. 0114 0. 0113 0. 0044 0. 0072
(0. 0232) (0. 0234) (0. 0232) (0. 0234)
Same State 0. 0037 0. 0036 0. 0036 0. 0037
(0. 0204) (0. 0204) (0. 0204) (0. 0204)
Number VCs 0. 0193
* * *
0. 0193
* * *
0. 0166
* * *
0. 0171
* * *
(0. 0063) (0. 0063) (0. 0063) (0. 0063)
VC Experience - 0. 0065
* * *
- 0. 0065
* * *
- 0. 0067
* * *
- 0. 0068
* * *
(0. 0009) (0. 0009) (0. 0009) (0. 0009)
Industry 0. 0001 0. 0001 0. 0001 0. 0001
(0. 0001) (0. 0001) (0. 0001) (0. 0001)
Number IPOs - 0. 0017
* * *
- 0. 0017
* * *
- 0. 0016
* * *
- 0. 0016
* * *
(0. 0005) (0. 0005) (0. 0005) (0. 0005)
EarlyStage 0. 0008
* * *
0. 0008
* * *
0. 0008
* * *
0. 0008
* * *
(0. 0002) (0. 0002) (0. 0002) (0. 0002)
Previous Alliances 0. 2538
* * *
0. 2440
* * *
(0. 0882) (0. 0890)
Prob > chi-squared 0. 0000 0. 0000 0. 0000 0. 0000
Number of Observations 20872 20872 20872 20872
Fixed Capacity Variable Capacity
41
Table VI-b
Variation of Keiretsu Strength By Public Status
Table VI-b presents a Wald test for linear restrictions on the coefficients from the estimation results
presented in Table VI. The Keiretsu variable is split into separate effects by its status as a public or private
firm. *, ** or *** mean the difference in coefficients is statistically significant at 10%, 5% or 1% level.
Keiretsu*Private(at least one)-Keiretsu*Public=0
Chi-squared (1) 10. 02
* * *
17. 91
* * *
Prob > chi-squared 0. 0016 0. 0000
Keiretsu*Private(both)-Keiretsu*Private(exactly one)=0
Chi-squared (1) 0. 00 1. 25
Prob > chi-squared 0. 9474 0. 2639
Kei ret su*Pri vat e(bot h)-Kei ret su*Publ i c(bot h)=0
Chi-squared (1) 1. 97 9. 01
* * *
Prob > chi-squared 0. 1604 0. 0027
Keiretsu*Private(exact;y one)-Keiretsu*Public(both)=0
Chi-squared (1) 9. 35
* * *
14. 22
* * *
Prob > chi-squared 0. 0022 0. 0002
Fixed Capacity Variable Capacity
42
Table VII
Variation of Keiretsu Strength By Industry Pairs
Table VI presents the results of the maximum likelihood estimation of the Sequential Sampling with
Fixed Alliance Capacity and Sequential Sampling with Variable Alliance Capacity model. The
Keiretsu variable is split into separate effects by the type of industry pairing in the alliance. The control
variables are One VC, a dummy variable indicating at least one firm in the company pair was venture-
backed, 0 otherwise, Both VC, a dummy variable indicating both companies were venture-backed; 0
otherwise, Same State, which takes a value of 1 if the companies in the pair are in the same state, 0
otherwise; One Public, a dummy variable indicating at least one firm in the company pair was publicly
traded; 0 otherwise, Both Public, indicating that both firms were publicly traded, 0 otherwise. Number VCs
is the sum of the total number of Venture Capital (VC) firms involved in funding each of the alliance
participants. VC Experience is the sum of the ages, in years, of the funding VC firms calculated from their
first entry into the venture economics database. Num Industry is the number of companies the funding VCs
had in the alliance participant's industry at the 2-digit SIC code level. Number IPOs is the number of
companies in the funding VCs portfolios that eventually had a public offering. Num EarlyStage is the total
number of companies in which the funding VCs invested at an early stage. Standard errors are in
parentheses. *, ** or *** mean the coefficient is statistically significant at 10%, 5% or 1% level.
Independent Variables Fixed Capacity Variable Capacity
Keiretsu*Same Industry 0. 2754
* * *
0. 3507
* * *
( 0. 1006) ( 0. 0999)
Keiretsu*Different Industry - 0. 0180 0. 0723
( 0. 0620) ( 0. 0623)
Both VC 0. 1050
* * *
0. 1027
* * *
( 0. 0361) ( 0. 0361)
One VC 0. 1002
* * *
0. 1012
* * *
( 0. 0209) ( 0. 0209)
Both Public - 0. 1577
* * *
- 0. 1619
* * *
( 0. 0214) ( 0. 0214)
One Public 0. 0089 0. 0066
( 0. 0232) ( 0. 0232)
Same State 0. 0043 0. 0035
( 0. 0204) ( 0. 0204)
Number VCs 0. 0189 0. 0164
* * *
( 0. 0063) ( 0. 0063)
VC Experience - 0. 0063
* * *
- 0. 0064
* * *
( 0. 0009) ( 0. 0009)
Industry 0. 0001 0. 0001
( 0. 0001) ( 0. 0001)
Number IPOs - 0. 0017
* * *
- 0. 0016
* * *
( 0. 0005) ( 0. 0005)
EarlyStage 0. 0008
* * *
0. 0008
* * *
( 0. 0002) ( 0. 0002)
Previous Alliances 0. 2968
* * *
( 0. 0882)
Prob > chi-squared 0. 0000 0. 0000
Number of Observations 20872 20872
43
Table VII-b
Variation of Keiretsu Strength By Industry Pairs
Table VII-b presents a Wald test for linear restrictions on the coefficients from the estimation results
presented in Table VII. The Keiretsu variable is split into separate effects by whether the alliance
participants have the same four-digit SIC code. *, ** or *** mean the difference in coefficients is
statistically significant at 10%, 5% or 1% level.
Fixed Capacity Variable Capacity
Keiretsu*Same Industry-Keiretsu*Different Industry=0
Chi-squared (1) 6. 96
* * *
6. 38
* *
Prob > chi-squared 0. 0083 0. 0115
44
Table VIII
Variation of Keiretsu Strength By Alliance Type
Table VI presents the results of the maximum likelihood estimation of the Sequential Sampling with
Fixed Alliance Capacity and Sequential Sampling with Variable Alliance Capacity model. The
Keiretsu variable is split into separate effects by alliance purpose. The control variables are One VC, a
dummy variable indicating at least one firm in the company pair was venture-backed, 0 otherwise, Both
VC, a dummy variable indicating both companies were venture-backed; 0 otherwise, Same State, which
takes a value of 1 if the companies in the pair are in the same state, 0 otherwise; One Public, a dummy
variable indicating at least one firm in the company pair was publicly traded; 0 otherwise, Both Public,
indicating that both firms were publicly traded, 0 otherwise. Number VCs is the sum of the total number of
Venture Capital (VC) firms involved in funding each of the alliance participants. VC Experience is the sum
of the ages, in years, of the funding VC firms calculated from their first entry into the venture economics
database. Num Industry is the number of companies the funding VCs had in the alliance participant's
industry at the 2-digit SIC code level. Number IPOs is the number of companies in the funding VCs
portfolios that eventually had a public offering. Num EarlyStage is the total number of companies in which
the funding VCs invested at an early stage. Standard errors are in parentheses. *, ** or *** mean the
coefficient is statistically significant at 10%, 5% or 1% level.
Independent Variables Fixed Capacity Variable Capacity
Keiretsu*Marketing 0. 2513
* * *
0. 3089
* * *
( 0. 0879) ( 0. 0872)
Keiretsu*R&D 0. 4366
* * *
0. 5501
* * *
( 0. 1035) ( 0. 1020)
Keiretsu*Other - 0. 1612
* * *
- 0. 0812
( 0. 0718) ( 0. 0716)
Both VC 0. 0971
* * *
0. 0951
* * *
( 0. 0361) ( 0. 0361)
One VC 0. 1005
* * *
0. 1014
* * *
( 0. 0209) ( 0. 0209)
Both Public - 0. 1586
* * *
- 0. 1627
* * *
( 0. 0214) ( 0. 0215)
One Public 0. 0095 0. 0072
( 0. 0232) ( 0. 0232)
Same State 0. 0054 0. 0047
( 0. 0204) ( 0. 0204)
Number VCs 0. 0179
* * *
0. 0158
* *
( 0. 0063) ( 0. 0063)
VC Experience - 0. 0059
* * *
- 0. 0060
* * *
( 0. 0009) ( 0. 0009)
Industry 0. 0001 0. 0001
( 0. 0001) ( 0. 0001)
Number IPOs - 0. 0018
* * *
- 0. 0017
* * *
( 0. 0005) ( 0. 0005)
EarlyStage 0. 0008
* * *
0. 0008
* * *
( 0. 0002) ( 0. 0002)
Previous Alliances 0. 2656
* * *
( 0. 0897)
Prob > chi-squared 0. 0000 0. 0000
Number of Observations 20872 20872
45
Table VIII-b
Variation of Keiretsu Strength By Alliance Type
Table VIII-b presents a Wald test for linear restrictions on the coefficients from the estimation results
presented in Table VIII. The Keiretsu variable is split into separate effects by the type of alliance between
the two firms: marketing, research and development, or other. *, ** or *** mean the difference in
coefficients is statistically significant at 10%, 5% or 1% level.
Fixed Capacity Variable Capacity
Kei retsu*Marketi ng-Kei retsu*Other=0
Chi-squared (1) 15. 26
* * *
13. 92
* *
Prob > chi-squared 0. 0001 0. 0002
Kei retsu*R&D-Kei retsu*Other=0
Chi-squared (1) 25. 36
* * *
29. 36
* * *
Prob > chi-squared 0. 0000 0. 0115
46
Table IX
Test of Equality: Keiretsu Ratio vs. Alliance Ratio
Table IX provides a paired t-test between a VCs keiretsu ratio and its alliance ratio. The keiretsu ratio is
the number of within-portfolio alliance nodes within the VCs own portfolio divided by the number of
possible nodes (N
2
-N). The portfolio alliance rate is the total number of alliance nodes in the VCs
portfolio divided by the possible number of such nodes.
Variable Mean Standard Error
Number of
Obsevations
Keiretsu Ratio 2.43E-03 5.99E-04 2521
Portfolio Ratio
1.59E-05 9.30E-07 2521
t -val ue 4. 0374 p-val ue 0. 0001