Investment Syndication Research Articles

The value of a reputation for sustaining commitment in interfirm relationships: The inclusion of corporate venture capitalists in investment syndicates

We explore the importance of sustaining commitment in inter-firm relationships in the corporate venture capital setting. We find that a corporate investor's past behavior in terms of committing to investment relationships and not abandoning them prematurely confers reputational benefits that increase the likelihood of its participation in future investment opportunities. These reputational effects have a greater impact when the corporate investor has extensive patent stocks and has higher levels of potential slack. Our study highlights the value of sustaining commitment in interfirm relationships, and offers a deeper understanding of an important driver of corporate venture capital program investment opportunities.

Prior co-investments and exits: a study on European venture capital syndicates

ABSTRACT Building on recent developments in the literature, we investigated whether the practice of repeatedly investing with the same partners impacts outcomes for venture capital syndicates. Research shows that European venture capitalists have different attitudes to their American counterparts, which might result in a different ability in benefiting from prior co-investing activities. Hence, we analysed how successful prior collaborations and the concentration of prior ties in an investment syndicate affects the probability of successfully exiting an investment. We also examined the role of prior ties as a determinant of the time to successful exit. From an analysis of 922 first-ever syndicated rounds in Europe between 2000 and 2009, we find that prior ties are not a significant determinant of successful exits. However, prior successful collaborations do play a significant role, as does the concentration of prior ties. We also find that a U-shaped relationship links prior co-investments with the to time to exit. These results should be helpful for managers involved in inter-organisational investment collaborations and to policymakers looking for ways to spur the European venture capital ecosystem.

When Do Collaborative First Moves Diminish Nationality-Based Homophilic Preferences? An Examination of Chinese Venture Capital Investment Syndicates

We explore the interplay between homophilic preferences, reciprocity, and societal values in the formation of venture capital investment syndicates in China. Both Chinese and U.S. syndicate lead firms generally prefer including their fellow compatriot firms over comparable non-compatriots in the investment syndicates that they assemble. When a Chinese firm initiates a collaborative first move by including a U.S. firm in an investment syndicate, however, the U.S. firm no longer prefers comparably familiar U.S. firms over the Chinese firm when it subsequently chooses among prospective syndicate partner firms to include in its investment syndicates. In such cases, familiarity triggers impartiality; the experiential trust that was garnered from the collaborative first-move engagement initiated by the Chinese firm diminishes the nationality-based homophilic preferences of the U.S. firm. We do not find similar dynamics when the tables are turned. When a U.S. firm initiates a collaborative first move by including a Chinese firm in an investment syndicate, the Chinese firm subsequently remains partial to fellow compatriot firms that are otherwise comparable to the U.S. firm. The homophilic preferences and identity-based trust between Chinese firms grounded in shared nationality are resilient to any goodwill created by U.S. firms when they initiate collaborative first moves.

What differentiates angel investors in pre-seed versus seed-stage investments? Evidence from India

PurposeAngel investments are increasingly getting specialized. In recent years, start-ups are raising pre-seed funding before seed-stage funding. Investors in pre-seed and seed-stage companies commonly are angel investors. The purpose of this paper is to understand the differences between these two groups of angel investors.Design/methodology/approachData for this study obtained from angel funding deals from the sources such as Venture Intelligence, VCCEdge, Keiretsu Forum, Dealcurry and The Chennai Angels. A total of 732 angel investments made by 405 investors during 2014–18 were used in the analysis. Non-parametric tests and regression estimations were used to identify the differences between angel investors investing in pre-seed and seed-stage ventures. An index was developed to measure the extent of syndication in angel investments and used as an independent variable in the regression.FindingsThere are significant differences between angel investors investing in pre-seed and seed-stage ventures. The results show that angels with more industry-specific experience make a higher proportion of investment in seed-stage ventures. Seed-stage ventures attract investors from Tier-1 cities, whereas the pre-seed stage has higher investors from smaller cities. Though the investment size is smaller, the extent of syndication is greater in pre-seed stage investments.Originality/valueTo differentiate the angel investments between pre-seed and seed-stage funding, this study uses data from Indian start-ups. Further, this study develops a composite syndication index to measure the extent of syndication in angel investments and assesses its impact on an angel investor’s choice of pre-seed stage investments.

Reducing National Tribalism Through Conciliatory Collaborative First Moves

Despite opportunities to choose among prospective collaborators from across the globe, firms may remain partial to those who share their nationality. We explore the notion of national tribalism in the context of venture capital funding in China and whether such tribalism can be diminished through conciliatory collaborative first moves. Based on the composition of the investment syndicates that they assembled between 1998 and 2017, both Chinese and US venture capital firms favored partnering with fellow compatriot firms over comparable non-compatriots. We find, however, such tribalism to be particularly strong among Chinese firms. More critically, we find that, when a Chinese firm makes a conciliatory first move by initially including a US firm in an investment syndicate, not only is the focal US firm inclined to reciprocate the focal Chinese firm when it subsequently assembles investment syndicates, but also the US firm is no longer partial to partnering with comparably familiar US firms over the focal Chinese firm. In effect, conciliatory first moves made by Chinese firms reduced US tribalism. We fail to find, however, similar dynamics among Chinese venture capital firms. Chinese national tribalism was resilient to conciliatory collaborative first moves made by US firms.

Dipping a Toe? The Relation between CVC Investments and Entry into New Technology Domains

Existing research has prescribed corporate venture capital (CVC) investments as effective tools for firms to explore new technologies. However, it remains unclear to what extent firms can use CVC investments to build capabilities to create technology in previously unfamiliar domains as this requires that they go through an extensive learning process. This paper argues that CVC investment not only allows exploring new technologies but sets in motion a chain of learning events linked by four stages in a knowledge absorption framework, and which is moderated by investee quality and the presence of other corporate investors. We test our propositions using a panel of 244 large pharmaceutical firms that make 847 unique CVC investments during 2000-2015 in ventures patenting in technology domains in which the firms were not active in the 5 years preceding the investment. We show that firms who make CVC investments in ventures active in technology domains which are unfamiliar to them, have a higher likelihood to subsequently start patenting in these new domains. Furthermore, we show that this likelihood is positively moderated by the average quality of the investee, the presence of investment syndicates and the the relatedness of the technology to the firm’s existing knowledge base. These results add to the literature on CVC investments and technological entry by furthering our understanding on the role of CVC investments not only as a tool for technological exploration, but also as an effective vehicle for technological exploitation through learning.

The influence of venture capital syndicate size on venture performance

ABSTRACT Venture capital (VC) syndicates pool diverse resources from their members to accomplish the common goal of nurturing new ventures for a successful exit. Although the size of syndicate is a fundamental attribute impacting performance, the influence of syndicate size is less understood in prior studies with mixed findings. To address the gap, we suggest that there is an inverted U relationship between a syndicate size and venture performance. As the number of partners in a VC syndicate increases, a syndicate can provide more heterogeneous resources that can help its portfolio company succeed, but coordination costs increase as well. We thus predict that the net effect combining these two countervailing effects yields an inverse-U relationship between syndicate size and performance. We further examine two boundary conditions under which the nonlinear relationship is likely to manifest. Analyzing 407 investment syndicates formed by 1,106 VC firms for new ventures in the U.S. information and communications technology sector between 1990 and 2006, we find that the relationship between syndicate size and performance is an inverse-U shape. We further find that geographic distance among syndicate partners flattens the inverse-U curve, whereas a strong reputation of the lead VC firms shifts the inverse-U curve to the right.

Fishing among sharks – GP-LP investment syndication in later-stage venture capital

Venture capital (VC) syndication mainly occurs to compensate for a lack of resources, whether financial or otherwise. The current literature does not sufficiently explore the extent to which the motives differ for syndication between general partners (GPs) or between GPs and limited partners (LPs). This paper investigates this matter, using a qualitative research design and focusing explicitly on heterogenous GP-LP syndicates. We document substantial differences between GPs and LPs in terms of syndication motives and criteria. For example, GPs aim to maximize influence by pooling control rights, while LPs wish to play a more passive role. More broadly, we find that the investment context, particularly the target company’s business model, presents another factor for determining the most effective syndicate setup.

Searching Beyond the Horizon: Opportunity and Motive in CVC Investments

We examine how corporate firms deal with the competitive effects of technological change by utilizing corporate venture capital (CVC) investment opportunities to source external knowledge. Whereas previous scholarship has largely focused on the composition of CVC investment portfolios to predict performance outcomes, we examine organizational level drivers of CVC investment behavior. We contend that CVC investment behavior is influenced by the interaction between two fundamental considerations: the supply of investment opportunities made available to the corporate firm because of its position in the environment; and the demand for new technological investments deriving from the need to cope with technological change. We argue that the degree to which CVC programs place bets on external startup ventures with uncertain prospects depends not only on their position in investment syndicate networks but also on how organizational attention is systematically guided by the threats posed by technological change. We analyze investments made by CVC programs of 209 publicly traded firms over 20 years and find that more centrally placed corporate firms in the VC investment syndicate have higher investment rates. We find that greater focus of the corporate firm’s technological capabilities induce them to take advantage of the investment opportunities that arise from a central position in syndication networks. Our findings imply that CVCs serve as a “window on technology” only to the extent that technological positions of corporate firms direct attention to choices within the opportunity set that is determined by the corporate firm’s network of investment relations.

Investment Syndication Networks and International Differences in Legal Enforcement and Culture

Being part of an investment syndicate offers various network benefits, but also exposes risks that someone in the network acts in a manner that violates securities laws. These risks differ depending on the ways in which securities laws are enforced. Public enforcement, with strong investigative powers and strong group sanctions, discourages the formation of syndication networks. Private enforcement, with strong disclosure and liability standards, encourages the formation of syndication networks. We present evidence strongly consistent with the negative impact of public enforcement on network density, and partial support for the positive impact of private enforcement depending on cultural conditions.

Performance of Firms with Withdrawal of Venture Capital Investment Ties

This paper examines the performance consequences for venture capital-backed (VC-backed) firms when one of their existing VCs withdraws from the investment syndication in the follow-on round. After controlling for the endogeneity of VC withdrawal of follow-on investment, we find that such event decreases the amount of follow-on investment by about 60% and adversely influences the quality of VCs who join the syndication in the follow-on round of investment. The negative signal of VC withdrawal increases information asymmetry, thereby increasing adverse selection risk for follow-on VCs. General-stage VCs and high-status VCs that withdraw send a stronger negative signal compared with VCs specializing in early-stage investing and low-status VCs. Our results show how the dynamics of VC syndication contribute to the valuation of new firms.

Syndication Networks and Legal Enforcement

This study investigates whether international differences in legal enforcement are associated with venture capital (VC) syndication networks, and whether culture moderates this relationship. We conjecture that public enforcement, with strong investigative powers against any syndicate member and strong group sanctions, increases the costs of VC syndication and discourages the formation of dense syndication networks. By contrast, private enforcement, with strong disclosure and liability standards, encourages the formation of denser VC syndication networks, through clarification of liability rules, standardizing securities contracts, and cost sharing amongst those belonging to the investment syndicate. Based on data from 31 countries involving 201,552 VC-investee firm relationships, the evidence is consistent with the negative impact of public enforcement on VC network density, and partially supports the positive impact of private enforcement depending on cultural conditions.

Selection and Redistribution in the Irish Tontines of 1773, 1775, and 1777

AbstractWe construct and analyze a new data set on the mortality experience of the nominees of the 1773, 1775, and 1777 Irish tontines. The active participation of Genevan speculators in these Irish tontines has been well documented. We use our new data to quantify both the extent to which these nominees were longer‐lived and the financial consequences of their enhanced longevity. The Genevan nominees were indeed notably longer‐lived than non‐Genevan nominees—particularly so for the 50 nominees selected by a Genevan investment syndicate. Their enhanced longevity had only trivial financial consequences for the issuer, but it led to significant redistribution from non‐Genevan to Genevan investors. We highlight the implications of this across‐group distributional risk for modern proposals to introduce tontine‐like elements into modern retirement pensions.

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

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.

The Inclusion of Corporate Venture Capitalists in Investment Syndicates

This paper proposes that transaction cost economics offers a complementary lens to appropriation theories and adds richness to the understanding of when and why incumbent firms will be able to util...

Syndication in Venture Capital Investment in India: An Empirical Study

Indian economy witnessed high inflow of capital for start-ups in current fiscal year through venture capital (VC) investment. From different Indian VC deals, it is evident that VC investors prefer to invest jointly. In other words, joint investment or co-investment or syndication is a common trend in Indian VC industry. VCs adopt this strategy to minimise their future uncertainties as a part of the control mechanism. In this study, an attempt is made to find out different determinants of this syndication strategy. The samples taken in this study are retrieved from Venture Intelligence database for the period 2005–2014. The data are analysed through linear regression and binomial logistic regression. Two empirical models have been developed. The derived models validate different control variables and deal with specific characteristics to comprehend the rationale of syndication mechanism. The findings of the study indicate that the past experience and the number of industry exposure of a VC in IT and ITES industry are the major predictors for a syndication decision. Subsequently, the precautionary investment attributes like number of investment round, stage funding, etc. draw the interest of potential co-investors in a syndicated deal. Syndication mechanism benefits the VC investors through sharing of risk of investment in a start-up and preparing them for a successful exit. Extant literature supports the results as Indian VC investors prefer to share the risk profile of a start-up business and adopt different risk diversion mechanisms to attract co-investors in the deal. Furthermore, the joint investment by investors drag more funding amount and also create more human capital for efficient management of the investment in VC-backed portfolio.

FUNDING LIQUIDITY RISK, SYNDICATION BEHAVIOR AND THE RISK CULTURE OF THE AUSTRALIAN VENTURE CAPITAL INDUSTRY

Venture capital (VC) is usually invested in high risk technology companies at their early stages of development. In response to the industry risk environment, the VC fund managers have developed a set of risk management practices appropriate for the industry which include investment syndication. Furthermore, the VC funds are supplied by individual and institutional investors with different risk profiles and investment focus, usually in finite amounts and for a limited period of time. The funding agreement between the VC firms and the fund investors combined with the limited amount and time can lead to additional funding liquidity risks as the VC funds are invested in the portfolio companies. In this paper, we develop a simple two period model from a VC firm’s perspective with funding liquidity constraints to demonstrate how funding liquidity risk can influence syndication decisions. We subsequently analyze the implication of the model, derive a set of predictions and validate them with VC investment data from Australia. The analysis shows that syndication has both instrumental function in risk management and behavioral implications on risk culture essential for addressing the emerging frontiers of sustainability risks.

Complementary or conflictory?: the effects of the composition of the syndicate on venture capital-backed IPOs in the US stock market

This study investigates how syndicated investment among financial and strategic investors, such as independent venture capitalists (IVCs) and corporate venture capitalists (CVCs), affects the performance of the investee firms. While these different types of investors provide different but complementary non-financial value-added to the investee firms, their inherent differences in motives and objectives of the investment can also lead to conflict about the operational controls of the investee firms. Using a sample of VC-backed IPOs in the US stock market, we analyze how the composition of the investment syndicate influences the investee’s exit through IPO. Empirical results indicate that IVCs and CVCs could face increasing conflicts when they syndicate their investment with a balanced distribution of ownership. As a result, investees backed by these syndicates can incur delays to their IPO exit. By addressing the syndicate investment among different types of investors and its impact on the performance of the investee, this study complements the literature on entrepreneurial finance and IPOs.

Investor experience in biotechnology

Biotechnology is viewed as an industry that combines scientific innovation, entrepreneurial management and experienced investment to drive innovation, primarily in biomedicine. This paper examines the third of these assumed preconditions. We find that the majority of investors in biotechnology companies over the last decade by number or by value have not been experienced, and that the majority of investors in biotechnology companies have invested in less than three such companies in the decade, suggesting that they have very limited experience of biotechnology. 13% of investment syndicates contain no investors who have made more than three biotechnology investments. Investor inexperience is disproportionately high in Seed and Series A rounds, but has little correlation with amount invested. Investor inexperience is found in all categories of investors and all territories, although US investors tend to have greater experience than those outside North America. The banking crisis of 2008-11 has not materially changed this. We suggest that the conventional image of biotechnology investment as the careful selection and nurturing of young companies by experienced investors is incomplete. This has implications for candidate investor selection by entrepreneurs, and for government support of biotechnology by supporting investors or investment mechanisms.

Syndication and Foreignness: Venture Capital Investments in Emerging and Developed Markets

Abstract This paper aims to understand when foreign and domestic firms have different likelihoods of syndication in venture capital investments. Although current theory may imply that foreign firms face the liability of foreignness that constrain their syndication opportunities, empirical studies provide quite mixed evidence. To address this issue, this study emphasizes the contingency roles of settings, experience, and reputation. In particular, I argue that foreign firms are more likely to syndicate, compared with domestic ones, when focal investments are less mature, or when local markets are colder and less capitalized. However, the difference in syndication between foreign and domestic firms decreases when they accumulate more experience or when they acquire higher reputation. I find empirical evidence from a sample of venture capital investments in China, UK, and the Netherlands. Theoretical and practical implications are discussed at the end.