Venture Capital Communities

Abstract

Syndicates account for two-thirds of the capital invested by venture capital (VC) firms. The structure of syndicates is far from random. VCs tend to form communities such that within – community VCs are more likely to syndicate with each other than with outside VCs. We identify VC communities using a flexible algorithm that does not constrain the number of communities per period. The data reveal between 12 to 35 communities of size greater than five VCs in each of sixteen 5-year rolling periods. Communities comprise VC firms with similar attributes and concentrate on specific industries, locations, as well as financing stages. Community membership is associated with positive economic outcomes for portfolio firms with a greater likelihood of quicker exit, especially for young enterprises that most need venture capital support. The results show that besides endowing select VCs with positions of influence, networking among VCs also results in social interactions that delivers additional performance for funded firms.