Venture Capital Syndication Research Articles

Evolution Of Venture Capital Syndicates over Rounds: Who May Be The New Comer?

This paper focuses on multi-firm venture capital (VC) syndicates and examines when a VC firm that is new to most preexisting investors in a ventures joins them in a subsequent-round syndicate. As r...

Are Indirect Ties Always Helpful For Partnership Formation?

Cohesion and structural equivalence arguments offer different predictions regarding the impact of indirect ties on new tie formation. The cohesion argument proposes a positive influence of indirect ties, while the structural equivalence perspective suggests a negative impact. Meanwhile, the empirical results are not consistent. This paper aims to reconcile the controversies in both theoretical and empirical fields by decomposing indirect ties into different types and investigating their impact on new tie formation in the context of multi-firm syndicates. Using Venture Capital (VC) syndication data 1985–2010, this paper finds that indirect ties through common third parties in the syndicate will facilitate new partnership formation, but indirect ties through common partners who are not syndicate participants will negatively influence new partnership formation.

Does the Internationalization of Investors Provide Value for Private Firms?

We examine the impact of internationalizing the investor base of private firms through international venture capital syndication on portfolio company exit and exit success. Our empirical results suggest that an international scope in venture capital syndicates plays an important role in both portfolio firm outcome and exit success. Specifically, we find that relative to deals in which the investor base is purely domestic, private firms that have an international venture capital syndicate have a higher probability of exiting via IPO, higher total deal value when exiting via M&A and higher proceeds when exiting via IPO. Importantly, the amount of internationalization is important. In many cases, the relationship between internationalization and portfolio company outcome and exit success is nonlinear.

Do International Investors Enhance Private Firm Value?

We examine the impact of international venture capital investors on private firm success spanning 69 countries over the years 1995-2010. The data examined indicate that, relative to deals in which the investor base is purely domestic, private firms that have an international venture capital syndicate have a higher probability of exiting via IPO and higher IPO proceeds, as well as higher total deal M&A values. These relationships, however, depend on the level of internationalization and hence imply a tradeoff between the strategic benefits associated with international investors and the costs associated with geographic, cultural and legal differences across countries.

A Signaling Perspective on Partner Selection in Venture Capital Syndicates

This paper analyzes the factors impacting partnering decisions in venture capital syndicates using a unique data set of 2,373 venture capitalist (VC) transactions in Germany. We employ a signaling perspective to partner–selection strategies within VC syndicates. By including time–varying information about industry experience and cooperation patterns, we explicitly take into account not only the changing social context for partner selection, but also the dynamic nature of signals sent and received. Our analysis documents that the informativeness of investment experience as a signal depends on the existence and frequency of previous joint deals with the lead VC. Experience becomes a much stronger signal if previous invitations to syndicates are bilateral rather than unilateral. The willingness to invite others to deals signals the ability to reciprocate through one's own deal flow. Moreover, we show how the value of signals erodes over time, that is, information from the previous year carries more informational value than signals from more distant years. In sum, the data reveal that different signals carry weight for lead VCs, and that the frequency of signals sent and the stage of development of the portfolio firm positively moderate the value and relevance of signaling behavior. While early stage investments are mainly characterized by need to diversify and to spread risks, value–added advice is necessary in later rounds, and hence, the strength of the signals sent and received gain in relevance and in value.

Firm Performance and the Evolution of Cooperative Interfirm Networks: UK Venture Capital Syndication

AbstractInterfirm networks improve performance outcomes and higher performance is contagious between cooperating firms.

The Impact of Investment Networks on Venture Capital Firm Performance: A Contingency Framework

Venture capital (VC) syndicates involve repeated transactions among partners and, therefore, they possess network-like characteristics. Although networks provide access to important resources, extant literature did not study the impact of the focal firm’s resource endowment on the performance benefits arising from different network structures. We investigate the moderating impact of firm’s maturity and status as proxies for internal and external resources on the relationship between network cohesion and VC performance. Analyzing a dataset of UK VC investments (1998-2012) we find that mature and high status VCs benefit less from network cohesion. We also show that these moderating effects are reinforcing each other.

Research on the Trust Governance in the Venture Capital Syndication: An Evolutionary Game Model

Venture capital is a risky and long-term equity investment activity, and venture capitalists widely use the syndication, a jointly investment model, to finance entrepreneurial start-ups. And, the syndication’s successful operation is inseparable from trust between participants. Our paper focuses on trust governance between the leader and the follower, players in the syndication, through constructing an evolutionary game model. In the model, both players adopt Replicator-Dynamics-based learning rules and their strategy space is Trust, No-Trust. The trust governance mechanism contains two aspects: punishment and reward, both of whose intensity are categorized into three levels, low, middle, and high level. After comprehensively computing and comparing players’ evolutionary stable strategy (ESS), we find relationships between the trust governance mechanism and players’ ESS. If both of the intensities of reward and punishment are at low level, then both the leader and the follower choose “No-Trust”. If both of the intensities of reward and punishment are at high level, then both the leader and the follower choose “Trust”. If the intensity of punishment is at low or middle level, and the intensity of reward is at middle level, then the leader chooses “Trust” and the follower does not. In the intensity of punishment is at middle level, and the intensity of reward is at low or middle level, then the leader chooses “Trust” and the follower does not. If the intensity of punishment is at low level and the intensity of reward is at high level, or if the intensity of punishment is at high level and the intensity of reward is at low level, player’s ESS combination shows a rather varied changes.

Relational venture capital financing of serial founders

Abstract I study how often and why a serial founder receives financing for his new company from a venture capital (VC) firm that also invested in his previous company. One in 10 VC investments leads to a repeated relationship and one in three serial founders enters into a repeated relationship with any previous VC firm. A repeated relationship is more likely when the relational VC firm has acquired more private information about the founder, but less likely if the founder’s new venture has a bad fit with the VC firm’s geographic or industry focus. My findings add to the literature on relational financing by showing that the preservation of information is an important motivation for relational financing when screening and monitoring costs are high. Yet, repeated relationships are discontinued because investors also respond to information problems by specializing in certain types of firms. Finally, I find evidence of non-relational investments being passed onto trusted VC syndication partners.

Unraveling the mechanisms of reputation and alliance formation: A study of venture capital syndication in China

Extant research shows that resources are significant to a firm's choice of alliance formation. We focus on an important form of intangible resource�firm reputation�and examine how it affects a firm's propensity to form alliances. We propose an inverted U-shaped relationship between a firm's reputation and its likelihood of alliance formation, resulting from the opposing mechanisms of opportunity and need. We also examine how this relationship may vary across two contingencies: (1) foreign and domestic firms; and (2) different levels of institutional development. Empirical analyses of China's venture capital (VC) industry provide support for our hypotheses.

Speed of Venture Financing for Emerging Technology‐Based Entrepreneurial Firms as a Function of Founder Reputation

One of the major commercialization hurdles for technology‐based entrepreneurial enterprises is financing and the speed of its acquisition. This is compounded in the case of emerging technology‐based enterprises by the nature of their technology acquisition and founding team structure. Many of these firms do not have founders with extensive reputations in the financial community. If founder reputation is important to funding sources with regard to speed and access, and emerging technology commercial development is important for solving twenty‐first‐century problems and generating economic growth, then there is cause for concern. Here we build on prior research and data from 140 Internet‐based firms to examine the effect that founder reputation has on the ability of an enterprise to swiftly obtain financing. Our results suggest that founder reputation expedites ventures' quick access to public but not to private financing. In addition, our results demonstrate that venture capital financing obtained early on and financing by large venture capital syndicates delay access to public financing for founders with extensive reputations.

How Does Uncertainty Resolution Affect VC Syndication?

We use the external certification due to the FDA 510(k) clearance process in the medical device industry as a natural experiment and analyze the dynamics of the syndicate formation of venture capital (VC) firms under various levels of uncertainty. We test several nonmutually exclusive hypotheses on project selection, second opinion, collusion, and diversification. Our results suggest that FDA 510(k) clearance serves as an outside certification and reduces uncertainty leading to greater amounts of capital flowing into the company from a larger group of investors. Our results also suggest that experienced VC firms are able to identify promising projects early on without the need for external 510(k) certification or second opinion.

Venture Capital Syndication and IPO Underpricing

Venture Capital Syndication and IPO Underpricing

Venture Capital Syndication and Firm Entry: Theory and Evidence

This paper develops a theory and provides empirical evidence on the interaction between venture capital syndication and …rm entry. When deciding whether to syndicate an investment, a venture capital (VC) …rm faces the following trade-o¤: on the one hand, syndication is useful to obtain a second opinion about an investment opportunity; on the other hand, sharing information with another VC is risky because it increases the likelyhood that the latter invests in other similar deals, thereby increasing competition in the industry and reducing investment returns. Thus, syndication may increase entry. However, since VC …rms’ pro…ts are very sensitive to investment returns, the lead VC …rm in a syndicate may actually discourage the

Power Source Mismatch and the Effectiveness of Interorganizational Relations: The Case of Venture Capital Syndication

This study explores the impact of the mismatch between two sources of power, ownership and status, on the effectiveness of interorganizational relations. We characterize three types of dyadic ownership-status relationships and examine their relative mixes at the group level: (1) power source match (A's ownership and status are both higher than those of B); (2) ownership-dominated power source mismatch (A's ownership advantage over B is greater than B's status advantage over A); and (3) status-dominated power source mismatch (A's ownership advantage over B is less than B's status advantage over A). We found that power source match enhanced the effectiveness of venture capital (VC) syndication, and that ownership-dominated power source mismatch strengthened the positive effect of power source match because the syndicate could maintain legitimate ownership order and benefit from diverse inputs. By contrast, status-dominated power source mismatch weakened the positive effect of power source match, because it may have created disorderly interaction. Moreover, familiarity between participating VC firms diminished the negative moderating effect of status-dominated mismatch, because mutual trust helped organize group interaction, and entrepreneurial performance fulfilled a similar function, as the autonomy of entrepreneurs from the VC syndicate buffered turbulences caused by interaction problems among VC investors.

The Influence of VC Syndicate Density on Startup Company Performance

Venture Capital (VC) firms often form syndicates to back up startup companies. However, despite the importance of such financial groups, the influence of VC syndicate attributes is not well underst...

Venture Capital Syndication: Synthesis and future directions

This paper reviews and synthesizes the extant literature on venture capital syndication. By considering the questions of how, why and when syndication affects the performance of venture capitalist (VC) firms and their portfolio ventures, a schematic structure of the syndication literature is formed and areas for further research are identified. The results of the review show that, while the venture‐level aspects are relatively well understood, the current literature lacks an understanding of how and why syndication affects the performance of VC firms. This suggests that more attention should be directed towards syndication as a component of the overall strategy of VC firms.

The effects of venture capital syndicate diversity on earnings management and performance of IPOs in the US and UK: An institutional perspective

This study examines the extent to which principal–principal agency conflicts within venture capital (VC) syndicates lead to additional principal–agent conflicts in IPO firms in two institutional contexts. Using a matched sample of 274 VC-backed IPOs in the US and the UK, it shows that the diversity of a VC syndicate increases pre-IPO discretionary current accruals, used as a proxy for earnings management, but the impact of such diversity is higher in the US. There is also evidence of higher underpricing and lower aftermarket performance in firms with higher earnings management and VC diversity, and these negative performance effects are also higher in the US. Our findings indicate that local and informal institutions have a significant effect on multiple agency conflicts in IPO firms and performance outcomes.

The Pivotal Role of Ownership

The Pivotal Role of Ownership

The Role of Venture Capital Syndication in Value Creation for Entrepreneurial Firms*

This paper provides evidence that venture capital (VC) syndication creates value for en- trepreneurial firms in two dimensions. First, VC syndication creates product market value for their portfolio firms. Specifically, VC syndicates invest significant amounts in younger firms, in earlier financing rounds, and in early stage firms. Further, VC syndicates nurture innovation of their portfolio firms and help them achieve better post-initial public offering operating performance. Second, VC syndication creates financial market value for their portfolio firms. Specifically, VC syndicate-backed firms are more likely to have as uccessful exit, enjoy a lower initial public offering (IPO) under- pricing, and receive a higher IPO market valuation. The findings are robust to a variety of alter- native syndication measures, subsamples, econometric models, and controlling for endogeneity in VC syndication.