Fund size and the syndication of venture capital investments

Abstract

This article argues that the structure of a country's venture capital (VC) sector is a critical factor in the effectiveness of the sector. In particular, it is argued that the balance between small funds and large funds is important: that a preponderance of small VC funds leads to excessive syndication which compromises firm and fund performance, reduces the ability to raise additional capital and leads to a reliance on foreign investors. This implies that public policies that seek to stimulate early-stage VC can lead to a VC sector that is bottlenecked in the sense that the successful portfolio firms may be unable to obtain late-stage investment capital and may be forced to rely on foreign investors. This work tests this premise empirically using data for the Canadian setting and finds results consistent with these expectations.