Syndication Networks Research Articles

Venture capital: The effect of local and global social ties on firm performance

Firm financing literature has been dominated by a relatively ‘undersocialized’ and ‘aspatial’ view. We approach this gap by applying a social capital and economic geography informed lens to financial transactions. We explore if and how the early growth performance of venture capital backed organizations varies with the structural and physical location of their investors in syndication networks. Drawing on longitudinal data of Belgian firms and their venture capital investors, it is demonstrated that inter‐firm relational ties and, especially cross‐border linkages expand organizational outcome. In that, we show that not only social relations shape financial activity, but that also spatial patterns of co‐investment networks deserve notice.

Venture Capital Networks in Australia: Emerging Structure and Behavioural Implications

<p>Inter-firm collaboration and networking have significantly increased in the context of technological innovation, changing the business environment and contributing to rapid and global integration. Being at the heart of technological innovation and commercialization, the venture capital (VC) industry has adopted inter-firm alliance as a common practice on a global scale. The most common form of collaboration in the industry is investment syndication between firms which eventually leads to a network of syndication. Understanding drivers of syndication and its financial implications is no longer enough. The nature of the inter-firm collaboration networks can be influenced by location and industry characteristics, and in turn they can also influence the industry practices and change. This study investigates the emerging structure of the VC networks in technology ventures in Australia in order to capture key features of the Australian VC market. Using graph theory the paper presents syndication network graphs and analyses their structural properties. The connectivity and density analysis shows further scope for facilitating the flow of information and resources across the VC industry. Behavioural implications of the networks on the industry practices and viability are also analysed and questions raised about the VC industry’s contribution to supporting and mainsteaming sustainable technologies.</p>

The Determinants of Corporate Venture Capital's Syndicate Participation in a Subsequent Round (WITHDRAWN)

In this study, with the objective of developing a better understanding of the dynamics behind the penetration of syndication networks by corporate investors, we explore the conditions under which c...

Performance-Based Matching: The Impact of Performance Similarity on Collaboration Formation

Why do firms collaborate with particular others? Past studies have consistently suggested that resource complementarity, embeddedness, and status similarity are the critical matching criteria in inter-firm partner selection. This study considers performance similarity an understudied but potentially important matching rationale. Past performance is an important signal that is observable, is closely associated with the true quality, and thus has a great potential to guide and simplify the partner choice process. I propose that the exchange of performance signals results in performance-based matching where pairing occurs between firms with similar performance levels - between highly successful firms or between less successful firms. Empirical analysis on the context of the US venture capital industry and syndication networks therein during 1985 and 2013 provides support for this performance-based matching and reveals its important characteristics.

Syndication Networks and Investment Activity in the Venture Capital Industry

The wide-spread use of syndication among venture capital investors has led to the creation of extensive co-investment networks which may in turn affect syndication and investment activity. Using an extensive ten year panel data set of 3,797 venture capital and 1,290 angel investors, this study finds that investors with more direct contacts, in particular with later stage investors, exhibit higher deal flow and faster extend their network. Linking syndication motives to certain network structures allows for inferring on the significance of syndication rationales. Accessing (complementary) resources appears to be the strongest incentive to syndicate, whereas deal sourcing and especially reciprocity considerations appear relatively weak syndication motives. Thereby, using syndicated financing to overcome resource constraints appears even more pivotal for early stage angel investors.

Different Problem, Same Solution: Contract‐Specialization in Venture Capital

Real‐world financial contracts vary greatly in the combinations of cash flow contingency terms and control rights used. Extant theoretical work explains such variation by arguing that each investor finely tailors contracts to mitigate investment‐specific incentive problems. We provide overwhelming evidence from 4,561 venture capital (VC) contracts that this tailoring is overstated: even though there is broad variation in contracting across VCs, each individual VC tends to specialize, recycling familiar terms. In fact, a VC typically restricts contracting choices to a small set of alternatives: 46% of the time, a VC uses the same exact cash flow contingencies as in one of her previous five contracts. We document specialization in both aggregated downside protection, and in each individual cash flow contingency term. Such specialization remains economically and statistically significant even after controlling for VC and company characteristics. We also find that VCs learn to use new contractual solutions from other VCs in her syndication network. Our findings challenge the traditional premise that each investor selects from the universe of combinations of terms to match an investment's unique contracting problem. Rather, the cumulative evidence indicates that contract‐specialization arises because investors better understand payoff consequences of familiar terms, and are reluctant to experiment with unknown combinations.

Open Business Models and Venture Capital Finance

Do entrepreneurial ventures that adopt an open business model obtain VC finance from higher quality VC investors in comparison with entrepreneurial ventures that adopt a closed business model? Are VC investments in open business model ventures are more likely to be syndicated and more frequently staged? In this paper we consider these questions on a sample of 6,555 VC investments in 514 software entrepreneurial ventures that received the first round of VC finance in the period 1994-2008. Of these ventures, 124 adopted an open business model based on open source software (OSS) and the remaining ventures adopted a closed business model based on the development and sale of proprietary software. Our findings indicate that OSS entrepreneurial ventures received funding from higher quality VC investors, with VC quality being measured by general experience, industry-specialization, IPO success, raised capital and connectedness in syndication network. Also, VC investments in OSS entrepreneurial ventures were more frequently staged. Conversely, we do not find any difference between OSS and proprietary software entrepreneurial ventures as number of VC participated in syndication.

VC Firms’ Role in Portfolio Firms’ Inter-firm Collaboration: A Network Perspective

In this paper, we explore how VC firms’ network positions influence their portfolio firms’ alliance formation. Drawing on network theory, we suggest that network centrality and network density in the syndication networks provide VC firms with different information advantages, which are likely to facilitate portfolio firms’ alliance formation. In addition, we contend that such effects of network positions are weaker for corporate VC firms. We use a sample of 417 portfolio firms in the U.S. between 1997 and 2000 for empirical testing. Results generally support our hypotheses.

The Best of Both Worlds: Benefits of Specialized-brokered and Diverse-closed Syndication Networks

The social capital literature has featured a long-lasting debate on whether brokerage or closure represent higher-value information advantages. We maintain that this tension cannot be fully resolve...

Determinants of early entry: governance choices and syndicate networks in US venture capitals' Internet investments

This research addresses the issues of governance choices and attributes of network participants as determinants of early entry by integrating a network perspective into the strategic management literature. Our arguments are tested using data on 813 Internet portfolio companies' investments by the venture capitals (VCs), one of the most rapidly developing sectors of the financial service industry in the USA. The results provide little evidence that governance choices between sole investments and syndicate networks may affect the decision to invest in early movers in the Internet industry. Nevertheless, the attributes of VC investors in initial investments affect the likelihood of investing in early movers. The propensity for syndicate investments in early start-ups in the Internet industry increases with the presence of heterogeneous investors' attributes but decreases with the presence of homogeneous investors' attributes.

Signals across Multiple Networks: How Venture Capital and Alliance Networks Affect Interorganizational Collaboration

In this article, we examine the contingent effects of signals generated by different types of networks on new ventures' formation of future strategic alliances. We argue that the signaling value of a given tie in reducing adverse selection is more pronounced when another type of tie is lacking. In particular, we suggest that signals associated with (i) a new venture's affiliations with venture capitalists (VCs) that have prominent positions in syndicate networks and (ii) a new venture's prominent position in alliance networks resulting from previous alliances offer redundant benefits. As a result, the positive effect of VC prominence in determining a new venture's future alliance formation diminishes as the new venture's prominence in alliance networks increases. Evidence from biotech alliances between new ventures and established companies provides support for our theory.

Quality signals in early-stage venture capital markets

An integrated model of information signalling within a VC market is developed, drawing from the literature of networked value. Market participants include entrepreneurs, venture capitalists, institutional investors, and professional service firms. An analysis of private information among these participants is used to establish the economic value and potential rationales for the emergence of signalling between each pair of participants, and to suggest specific potential signals of quality within each day. These suggested signals are then used to develop ten propositions for market responses to quality signals by each market participant. This signalling model provides an important basis for better understanding potential strategies of market participants, and may better explain observed behaviours such as the upmarket movement of VCs with increasing experience, the formation of stable VC syndication networks, and the criteria by which entrepreneurs and VCs select their partners.

How useful is venture capital prestige? Evidence from IPO survivability

This study examines the effect of venture capitalist (VC) prestige on the post-issue survivability of IPOs and how VC characteristics influence the effect. We find that IPOs backed by prestigious VCs are less likely to delist for performance failure and have longer listing duration relative to those without VC backing; however, IPOs backed by ordinary VCs are as likely to delist as IPOs without VC backing. The finding is robust for Internet and high-tech firms. We further examine heterogeneous VC characteristics and find that the ability of prestigious VCs to improve IPO survival is a function of their investment experience and managerial ability. VC prestige characterized by industry specialization and syndication networks is not related to IPO survival. Overall, the results suggest that the VC characteristics that produce prestige, rather than the prestige itself, drive the long-term survival of IPOs.

Corporate Venturing Deal Syndication and Innovation: the Information Exchange Paradox

Many incumbent corporations make equity investments in young technological start-ups to enhance their innovation effectiveness, and the great majority syndicate at least some of their investments with other incumbents. While syndication is generally held to benefit incumbent corporations, this study demonstrates that it may also be detrimental to corporate innovation, by elaborating the notion of an information exchange paradox – essentially, that information exchanges within CVC networks must, somehow, be both open and closed at the same time. Corporations must try to appropriate the knowledge championed by their investees and fellow-investors, but also protect their own know-how from leaking to competitors. Unlike prior CVC research, we demonstrate that knowledge sharing in open innovation forums may be counterproductive. Using a unique data set of the investment decisions made by 163 corporations over four years we show that, for some, participating in syndicate networks may involve losses that outweigh their gains. Our analysis establishes two key findings. First, corporations need to consider the trade-off between the number of ventures they support and the position they take in their syndication networks. The best strategies appear to be maximizing isolationist (supporting many ventures but staying away from the network centre) or minimizing centralist (supporting few ventures, but occupying a central network position) – the other two options (maximizing centralist and minimizing isolationist strategies) are far less effective in converting CVC investments into corporate innovation. Second, this picture is particularly applicable to highly concentrated industries dominated by several powerful incumbents: in fragmented industries these strategy differences are far less pronounced, so the choice of CVC syndication strategy will depend on other considerations. This supports a contingency view of syndication, implying that ensuring incumbent corporations really benefit from equity investments in start-ups is a not a trivial task for their managers.

A spatial investigation of venture capital investment in the US biotechnology industry, 1995–2008

The objective of this research is to investigate the role of geography in the venture capital investment in the US biotechnology industry. Data include 4,409 quarterly investment deals from the MoneyTree Survey during 1995 and 2008. Strong spatial concentration patterns are identified. Using both ordinary squares regressions and geographically weighted regressions, we find that as the geographic distance between biotechnology firms and their investors decreases, deal size increases. Location in established biotechnology clusters, such as New England and California, helps to bring a larger deal into individual firms as well. Also, the impact of distance decay in these two clusters is more significant than that in other regions. In addition, we find that a global venture capital investing syndication network brings large deals. Furthermore, firms in later stages of development, and/or with few financing rounds, tend to receive more capital per deal.

Unique Resources of Corporate Venture Capitalists as a Key to Entry into Rigid Venture Capital Syndication Networks

We investigate how corporate venture capitalists (CVCs) can rapidly attain central positions in venture capital syndication networks. Using data of CVC investments by U.S. corporations between 1996 and 2005, we complement prior research, which suggests that centrally positioned VCs predominantly invest together with other centrally positioned VCs. While we find clear support for the social network theory arguments that prior central positions in syndication networks significantly explain future network positions of CVCs, we also find a negative interaction effect between past centrality and corporate resources. This finding implies that resources of CVCs can substitute for their lack of prior centrality and allow them to gain rapidly central positions in rigid VC syndication networks.

External Venturing for Strategic Renewal: Towards Understanding Who Makes Corporate Venture Capital Investments and Why

This study examines the conditions under which firms participate in corporate venture capital (CVC), an important mode of exploration and strategic renewal. In developing our theory, we integrate insights from our field research with the resource-based view of interfirm collaboration and emphasize the strategic flexibility inherent in CVC relationships. We use longitudinal data on 477 firms from the 1990 Fortune 500 list for the period 1990-2000 to test our hypotheses. We find that firms in industries with rapid technological change, high competitive intensity and weak appropriability engage in greater CVC activity. We also show that firms that possess strong technological and marketing resources and resources developed from prior venturing experience engage in greater CVC activity. Finally, we find that these firm resources moderate the influence of the observed industry effects. Our findings suggest the exploration of new competences involves the exploitation of established resources and capabilities. These results contribute to an understanding of the antecedents of CVC and have implications for research into corporate entrepreneurship, interorganizational relationship formation, and VC syndication networks.

The Syndication Network and Deal Flow of Venture Capital Firms

This paper analyzes the positions that Venture Capital firms hold in a syndication network and determines the effect that network positions have on generating deal flow quantity and quality. Using data on syndicated investments in the German venture capital market and data on the deal flow of the firms, we show that those firms that hold network positions characterized by network openness have a higher deal flow quantity and quality.

Industry Concentration, Syndication Networks and Competition in the UK Private Equity Market for Management Buy-Outs

A largely neglected question in the literature on private equity investing is how the competitive environment influences the activities of private equity firms. In this study, we examine the impact of market concentration and interfirm networking through syndication on the price private equity firms pay to acquire investment targets. As such, we provide insights on the sources of returns in the private equity market. We test our hypotheses by studying the price private equity firms pay to acquire buyout targets using a unique hand-collected dataset of UK buyout transactions in the period 1993 to 2002. Our results show that lower levels of market concentration in the market for private equity increase the price private equity investors pay to acquire target firms. Our results did not indicate a consistent effect from the extent of interfirm networking through syndication. Implications for theory and practice are suggested.

Interorganizational Commitment in Syndicated Cross–Border Venture Capital Investments

Cross–border venture capital has become increasingly common in recent years. Little is known, however, about the antecedents of venture capitalists’ commitment to portfolio firms in international settings. We used a multiple case study to build a grounded model of interorganizational commitment in cross–border syndication networks. The model proposes that changes in a venture's prospects influence investors’ commitment levels. This relationship is amplified by the remoteness of the investor and is mitigated by the investor's embeddedness in local syndication networks and the relative investment size. The model contributes to the literature on cross–border venture capital and interorganizational commitment in international settings.