Venture Capital Syndication Research Articles

The impact of corporate venture capital involvement in syndicates

PurposePrior literature indicates that syndication enhances the likelihood of ventures’ successful exits; however, it has neglected the differences among venture capital (VC) investor types. In fact, there are various types of VC investors with distinctive objectives. Therefore, by focusing on ventures backed by corporate venture capital (CVC) and independent venture capital (IVC) investors, the purpose of this paper is to investigate how the relative influence among a heterogeneous group of VC investors in a syndicate affects the likelihood of the venture’s successful exit.Design/methodology/approachA sample of 1,121 US ventures that received funding from both CVC and IVC investors during 2001 and 2013 are collected. Then, a Cox proportional hazards model is applied to analyze the likelihood of a successful exit (i.e. initial public offering or acquisition).FindingsThe relative reputation of CVC investors vis-à-vis their IVC co-investors in a syndicate is negatively associated with the likelihood of the venture’s successful exit. This negative relationship is exacerbated when CVC investors are geographically close to the focal venture, and it is weakened when CVC investors syndicate with IVC investors that they have collaborated in the past.Originality/valueFirst, this paper advances VC syndication literature by demonstrating that syndication does not positively affect the likelihood of a venture’s successful exit unless key syndicate members seek to pursue going public or acquisition strategy. Second, this paper also reveals when CVC is beneficial from the ventures’ perspective. CVC participation facilitates ventures’ successful exits as long as reputable IVC investors are present in the syndicate. Third, this study contributes to the multiple agency perspective by showing that formal governance mechanisms affect ventures’ conduct and performance as well as informal sources of power.

Influence of Venture Capital Syndication on Governance and Performance of New Ventures

We investigate the extent to which venture capital syndication influences governance and performance of new ventures. A multiple theoretical prospective is used to examine the impact of VC-Syndication on governance structures (CEO succession) in venture capital (VC)–backed technology-based new ventures that are not yet at the initial public offering stage. Survey data was used to test the hypotheses from new ventures that have VC investment. The research finds revealed that VC-Syndication and the involvement of foreign venture capitalists, not only results in changes to the CEO role but also influences the innovative and financial performance. However, changing the Founder-CEO reflects the strategic challenges new ventures face in their development.

When is Centrality-based Advantage Absent? The Case of Cross-Border Venture Capital Syndication

I re-evaluate the classic positive centrality-performance relationship in the setting of nascent venture capital (VC) industry in China, where foreign entrants from Western developed markets and indigenous firms born in the transitional economy operate in the same market space. Mixed methodologies are employed in this study. Network visualizations reveal two findings on macro-level structures of the industry network. First, a network structural change in the level of interaction between foreign VCs and domestic VCs in China happened when equity market -- the most import financial institution supporting VC, was installed. Second, during the low interaction stage, foreign VCs formed a highly interconnected sub-network, while domestic VCs’ sub-network remained fragmented. Further, regression analysis results from multi-year data show nuanced findings on the classic centrality- performance relationship. Firms reside in networks whose composition is heterogenous and therefore provide diverse information and resources would benefit from occupying central positions. When the composition of the network is homogenous, central firms in fragmented network would experience better performance, while central firms in highly interconnected network no longer show superior performance than their peers.

Cohesiveness or competitiveness: Venture capital syndication networks and firms' performance in China

We use a time-sequence dataset of 837 Venture Capital Firms in China to investigate how the social network characteristics of these VC firms affect their performance. We identified three network positional features: degree centrality, Eigen-value centrality, and efficiency that hypothetically are consequential to a VC firm's performance. Our data analysis reveals that network efficiency is a significant but negative determinant of a VC firm's performance – the network inefficiency, measured by the extent to which the alter firms of an ego firm are connected with each other boosts the ego firm's performance. We discuss such findings by contextualizing them in the unique institutional environment and emerging market of China.

Founders Matter! Serial Entrepreneurs and Venture Capital Syndicate Formation

Although founders are responsible for soliciting venture capital (VC) funding, their influence over VC syndicate formation has largely been neglected in the extant literature. This article fills this gap by comparing serial and novice entrepreneurs. Using the information asymmetry argument as our guiding framework, we argue that when potential investors face diminished information asymmetry, entrepreneurs are more likely to form VC syndicates that are more beneficial to ventures—providing entrepreneurs with greater and more diverse resources and to some extent reducing entrepreneurs’ loss of control. Enriched by qualitative evidence from fieldwork, a quantitative analysis of 351 ventures shows general support for our argument and reveals unexpected nuances.

Foreign Business Activities, Foreignness of the VC Syndicate, and IPO Value

This article examines the role played by foreign venture capital (VC) firms in U.S. initial public offerings (IPOs). We find that U.S. VC–backed IPOs benefit from the foreignness of the VC syndicate. Specifically, jointly with domestic VC firms, foreign VC firms certify the quality of their portfolio companies at the time of the IPO, which increases their IPO premium. Foreign VC firms also play an advisory role, enhancing the foreign business activities of their U.S. investees, thereby increasing the IPO premium. Finally, value added by foreign VC firms is greater through their monitoring role if they originate from countries where the investee has foreign business activities.

Performance feedback as a cooperation “switch”: A behavioral perspective on the success of venture capital syndicates among competitors

Research Summary: This study draws on the performance feedback theory to advance a behavioral perspective on the dynamics of cooperation among competitors in venture capital (VC) syndicates. Analyzing VC syndicates over a 33‐year period, I find that firms’ performance relative to historical and social aspirations acts as a switch in firms’ behavior with respect to dual goals of cooperation and competition in syndicates with competitors. Competition among firms in a syndicate negatively affects the probability of an IPO, but syndicates composed of firms underperforming their aspirations have a better chance of an IPO than syndicates of firms outperforming their aspirations, ceteris paribus. This effect is stronger when firms’ goals in a syndicate are symmetrical or when firms’ motivations based on both historical and social aspirations are aligned. Managerial Summary: Competition among VC syndicate members negatively affects a syndicate’s prospects of achieving an IPO because syndicate members hold back resources for fear of their appropriation by competing partners. However, firms underperforming their track record or peer firms shift their priorities toward syndicate success and allocate more resources to their syndicates, thereby reducing the negative effect of competition. These results suggest that start‐up companies seeking VC investors, VC firms seeking co‐investors, and limited partners providing funds to VC firms all need to look beyond the capabilities of VC firms in a syndicate or their complementarity and also consider firms’ relative performance. VC syndicates comprised of firms striving to correct temporary underperformance are likely to show superior results due to those firms’ added motivation.

Founders’ Commitment and Firm Financing: Multiple 'Skins in the Game' as a Signal to Investors

A new method of financing known as equity crowdfunding, propelled by internet technology and deregulation, has emerged rapidly as a promising new source of startup financing and a window into early-stage investment process. By studying companies raising funds on one of the largest US equity crowdfunding platforms, this study finds that companies with multiple founders with prior personal financial commitment (“Skin in the Game” (SITG)) raise more funds, suggesting a signaling mechanism to investors of founders’ cross-validation of the project’s prospects. Single founders lack such mechanism. The study uncovers a link between the team structure, a key organizational aspect, and signaling to future stakeholders. The same mechanism may be at work in other contexts, such as venture capital syndication and mutual fund management decisions. In addition, the work offers insights into the potential of crowdfunding.

Network Structure, Partner Features and Performance: Evidence from Venture Capital Syndicates

Although many research has been done to understand the consequence of network structure on performance at the firm level, we have limited knowledge regarding how network structures influence alliance performance and how they interplay with partner attributes in this process. Focusing on the venture capital (VC) syndicate networks, we argue and show evidence for the positive influences of internal network density and external network structural hole on the performance of the investee startups. Moreover, we investigate how the features of lead and non-lead VC firms interact with the two network structural variables. The findings suggest that a big syndicate team augments the benefits of cooperation and coordination from a dense internal network, but a lead VC firm with high network status strengthens the information benefits from a high level of external network structural holes. Our cross-level research offers important implications on partner selection in strategic alliance research and the roles of lead and non- lead VC firms in VC studies.

Venturing into the unknown with strangers: Substitutes of relational embeddedness in cross-border partner selection in venture capital syndicates

Syndicating with prior partners through relationally embedded ties may be widespread, but not always optimal when investing across borders especially if few prior partners operate in the focal market. However, the substitutes of relational embeddedness for trust creation in cross-border partner selection are poorly understood. We develop and test a model of how relational embeddedness interacts with structural embeddedness and legal and normative institutions and how relational embeddedness and these three substitutes jointly affect cross-border partner selection in venture capital syndicates. We test the hypotheses in the context of cross-border venture capital syndication in 12 European countries. Our findings based on a case-control analysis suggest that although relational embeddedness is a key driver of future partnering, structural embeddedness and trust generating institutions such as high quality legal frameworks and industry associations facilitate cross-border partnering and diminish the need to rely on relationally embedded ties in cross-border partner selection.

Birds of a feather or celebrating differences? The formation and impacts of venture capital syndication

Abstract This paper examines the preferences of venture capital firms for syndication partners and the impacts of syndication partners on venture capital firms. Co-investing with similar partners may reduce transaction costs, but it may also limit opportunities for learning. Based on U.S. data on venture capital investments, I find that, on average, venture capital firms are more likely to syndicate with partners that are similar to them, consistent with prior theoretical predictions. In the long term, however, venture capital firms may benefit more from co-investing with partners that are different from them.

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

Venture capital (VC) syndicates involve repeated transactions among partners and therefore possess network‐like characteristics. Although networks provide access to important externalities, extant literature has not studied the effects of the focal firm's resource needs on performance benefits arising from different network structures. We investigate the impact of two proxies for firm‐level resources, namely maturity and status, on the relationship between network cohesion and VC performance. We find that mature and high status VCs benefit less from network cohesion. We also show that maturity and status simultaneously determine the performance effects of network cohesion.

After the Break-Up: The Relational and Reputational Consequences of Withdrawals from Venture Capital Syndicates

Organizational theorists are increasingly interested in the antecedents of terminating interorganizational relationships, but have paid little attention to the disruptive consequences of such termi...

Extra-and Intra-Alliance Behavioral Moderators of Success in Alliances with Competitors

This study examines the relationship between the degree of competition among alliance members and alliance success. Adopting the competitive tension perspective on alliances we examine how several extra- and intra-alliance behavioral factors moderate this relationship in the context of US venture capital syndicates. We find that competitive similarity of partners decreases chances of alliance success, but performance below historical and social aspiration levels, higher relative “weight” of alliance, and social proximity of alliance members to other firms in the industry attenuate this effect and can act as switches of collaborative success. We also find that relational embeddedness of competitors and presence of distinct alliance leadership positively affect success of alliances with competitors.

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...

Status Not Alone: Revisiting the Relationship Between Status and Uncertainty

This study explores the possibility that status, as a signal of quality, receives less attention in the presence of alternatives that indicate underlying quality. We argue that such alternative cues that include relevant resources, common third-party actors, and relational embeddedness provide more direct and pertinent quality information than status does, which, as a result, alleviates the dependency on status. Distinguished from the points suggested by prior studies, this study proposes that status-heterophilous relations may be the effect of those alternative cues on status concerns in that the less attention actors pay to status, the more likely they are to be affiliated with partners of different status by lowered status anxiety. We empirically test our hypotheses using data on venture capital (VC) syndication from 1995 to 2005. Our results show that the effect of status differences on tie formulation is moderated by the availability of alternative cues to infer quality.

Do I Have a Say in It? The Founders’ Role in Venture Capital Syndicate Formation

Despite being the ones who solicit venture capital (VC) funding, the founders’ influence on VC syndicate formation has been neglected in the current literature. This paper fills this gap by comparing serial and novice entrepreneurs. We argue that a syndicate with lower prior tie density is more likely to be formed by serial entrepreneurs. However, this effect only holds when collaboration challenges are less of an issue. In the case of multi-VC syndicates, serial entrepreneurs are more likely to form a syndicate with lower tie strength dispersion to ensure a supportive syndicate. Empirical analyses of 183 startup companies support our arguments.

Venture Capital Syndication Withdrawal and Collective Sanctions

The literature on strategic alliances has put significant attention on the formation, duration and stability of the alliances. We add to the alliance discourse by studying post-termination outcomes. To our knowledge, there is no research on the consequences of alliance break-ups. Building on arguments from the social capital theory, we posit that unexpected termination of alliance ties triggers collective punishment by community actors. We explore the effect of firm reputation on the severity of such collective sanctions. We test our hypotheses by investigating the impact of VC firms’ withdrawal from syndications and their inclusion in future deals. Our findings indicate that withdrawal from VC syndications reduces the chance of inclusion in future deals and this effect is stronger for reputable firm, which are more visible in the network.

Cultural differences and cross-border venture capital syndication

We examine cross-border syndication in investments led by foreign venture capitalists (VCs) focusing on the potential correlation between cultural differences and the formation of VC syndicates. Contrary to the risk-sharing motive, we find that a greater cultural disparity between the countries of investors and their companies is actually associated with smaller VC syndicates. This is driven largely by lesser local investor representation in foreign VC-led syndicates. However, certain cultural disparity-related syndication strategies, such as the involvement of locally experienced foreign VCs or syndicate members from culturally similar countries, are associated with greater presence of local VCs who provide valuable monitoring services. We further show that these culture-linked syndication approaches are significantly correlated with VC financing and monitoring strategies in cross-border investments and their eventual success.

Network effects on organizational decision-making: Blended social mechanisms and IPO withdrawal

This paper develops a new approach to the study of network effects in organizations and markets by proposing that structural influences on social and economic action result from contingent blends of well-understood social mechanisms. We emphasize the interplay of three different network processes: resource and information transfer, status signaling and certification, and social influence. Different mixes of these mechanisms characterize disparate networks because the obligations imposed by ties and the capacities of partners result in situations where mechanisms amplify or diminish one another. We test hypotheses about mechanism interactions using four years (1997–2000) of data on high-technology IPOs that situate organizational decisions about whether to withdraw an offering in two distinct networks. We find that network mechanisms exert multiple moderating effects on one another and that those effects vary systematically across venture capital syndicate and director interlock networks. These findings help to explain why different networks exert disparate effects, why the effects of some structures change as their larger contexts shift, and why even very successful organizations can sometimes find themselves hamstrung by their connections.