How Does Network Structure Impact Follow-On Financing through Syndication? Evidence from the Renewable Energy Industry

Abstract

Venture capital (VC) is a critical source of finance for renewable energy ventures. Importantly, VC investments are made in rounds. In higher rounds: (1) the availability of capital drops—we find that less than 50% of renewable energy ventures receive “follow-on” financing—and (2) the rate at which VC firms co-invest increases—we find that 75% of “follow-on” investments are “syndicated”, co-investments. We argue that the way in which VC firms co-invest—in terms of how and to whom they are connected—is critical to understanding which projects are financed. Using data on 760 firm-deal observations, we examine how the VC firm’s direct ties (ego network) create trust (which we measure using the clustering coefficient) and improve access (structural holes) to important investment information. We consider too how the “small-world” nature of the global VC industry network (small-world quotient) improves “information reachability”. Finally, we consider the way in which these features interact with each other—specifically, when they can be substitutes and when they are complements—in explaining which projects do and do not receive follow-on financing through syndication. We conclude by reflecting on the implications of our findings for VC syndication and sustainable entrepreneurship in the renewable energy industry.