A Signaling Perspective on Partner Selection in Venture Capital Syndicates

Abstract

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.

Alliance‐building Process as Inhibiting Factor for SME International Alliances

“…Based on the spirit of Hopp and Lukas (2014), Li (2013), Lu and Beamish (2006), Manigart et al (2006), Reuer and Ariño (2007) and Swoboda et al (2011), we developed a multi-item scale. Based on the spirit of Hopp and Lukas (2014), Li (2013), Lu and Beamish (2006), Manigart et al (2006), Reuer and Ariño (2007) and Swoboda et al (2011), we developed a multi-item scale.…”

“…But searching for and deciding who to cooperate with can be difficult for the manager, who may have limited information and financial resources with which to gather critical information in the search for potential collaborators (Julien and Ramangalahy, 2003;Raymond and St-Pierre, 2013). To solve this shortcoming, occasionally and in order to simplify this task, mangers tend to choose partners with whom they have already collaborated (Gulati, Nohria and Zaheer, 2000;Hatfield and Pearce, 1994;Hopp and Lukas, 2014); this makes the process of international alliance easier, but as Gulati, Nohria and Zaheer (2000) indicate, it can decrease the efficiency of the agreement's results. Also, there are certain initiatives, in the case of the EU, which provide support to managers in finding partners and in the launching of joint ventures (e.g.…”

“…These cooperative relationships search for synergies that aim to reduce risk and to obtain economies of scale and scope (Coviello and McAuley, 1999;Beamish, 2001, 2006;. (2008), Hopp and Lukas (2014) and Lu and Beamish (2001) point out that the use of international alliances entails several obstacles and barriers derived from factors such as the coordination of two or more partners, the search for the right partner, the emergence of goal conflicts, the lack of trust and understanding, and cultural differences (Audretsch, 2009;Beamish, 2001, 2006;Oviatt, 1999, 2000). Thus, for example in the EU case, one-fifth of European SMEs develop international activities, and only 5% have subsidiaries and joint ventures abroad (Observatory of European SMEs, 2010).…”

“…Fink, Harms and Kraus. (2008), Hopp and Lukas (2014) and Lu and Beamish (2001) point out that the use of international alliances entails several obstacles and barriers derived from factors such as the coordination of two or more partners, the search for the right partner, the emergence of goal conflicts, the lack of trust and understanding, and cultural differences (Audretsch, 2009;Beamish, 2001, 2006;Oviatt, 1999, 2000). These obstacles reveal that the alliance cooperation itself is not a guarantee of successful entry in international markets.…”

Impact of Venture Capital Investment Syndication on Enterprise Lifecycle and Success

“…Certainly, the selection of a suitable syndication partner could minimise any potential agency problems; hence the issue of syndication partner selection has received significant attention (Tykvová, 2007;Hochberg et al, 2007;Hopp & Lukas, 2014;Gu & Lu, 2014). The literature however does not necessarily explain what factors influence the success of ventures receiving investments from a single or syndicate of VC firms.…”