Exit Uncertainty and the Syndication in Venture Capital Investments: Evidence from the Quasi-Natural Experiments for the Suspension of IPOs in China

Abstract

Syndication is a very common form of investments in the financial market. It can often make full use of the resource advantages of various institutions and achieve better investment efficiency. The literature believes that venture capital institutions（VCs）often invest jointly in a company in the form of syndication, so that they can not only have more opportunity to invest better startup companies, but also take advantage of syndicated investments to achieve better investment return. However, the existing studies cannot explain why the VCs take the difference in the proportion of syndicated investments in different countries and regions, and how uncertainty affects VCs’ investment syndication behaviors. This article focuses on the impact of exit uncertainty on investment behaviors and successful exit of venture capital institutions, and proposes the issue that exit uncertainty may affect the syndication behavior of venture capital institutions. The investment practice activities of venture capital institutions follow the value discovery-value creation-value realization” of investment, monitoring, exit” trilogy cycle, and the exit” stage is the most critical link for VCs to achieve investment returns. Due to the relatively immature environment of China’s securities market, and even the policy shocks of nine times IPOs suspension, this will cause VC institutions to face increasing uncertainty in their exit. It also provides a rare quasi-natural experiment for us to investigate the exit uncertainty of venture capital institutions. This article proposes a quasi-natural experiment of China’s IPOs suspension to measure the exit uncertainty. It takes the investment events of venture capital firms investing in startup companies from 2002 to 2015 as research samples, and empirically tests the impact of exit uncertainty on syndication in venture capital investments. The empirical results are as follows: First, the fact that exit uncertainty will reduce the possibility of venture capital institutions takes syndicated joint investments. Second, exit uncertainty will also reduce the investment willingness of VCs, and the amount of financing capital obtained by start-up companies will also be significantly reduced. Third, the evidence shows that the investment syndication style and the willingness of investments for VCs have a positive impact on the exit performance. This means that exit uncertainty will affect and change the investment behavior and willingness for VCs. Thus it will affect the economic efficiency of the VC-backed companies. Due to the differences in laws, regulations, market maturity, and so on, it may lead to heterogeneous exit uncertainty in venture capital markets in different countries and regions. This may also be the reason why there is a market gap in the syndicated joint investment ratio. All in all, this paper proposes a research perspective on the impact of exit uncertainty on investment syndication. It enriches and expands the research content and foundation of investment syndication for VCs, and also provides empirical evidence on the economic performance of policy interventions.