Venture-Capital Syndication: Improved Venture Selection vs. the Value-Added Hypothesis

Abstract

Syndication arises when venture capitalists jointly invest in projects. We model and test two possible reasons for syndication: project selection, as an additional venture capitalist provides an informative second opinion; and complementary management skills of additional venture capitalists. The central question is whether venture capitalists are engaged primarily in selection or in managerial value added. These alternatives imply contrasting predictions about comparative returns to syndicated and standalone investments. Our empirical analysis, using Canadian data, finds that syndicated investments have higher returns, favoring the value-added interpretation. We also discuss risk sharing and project scale as possible reasons for syndication.

Assessing the impact of public venture capital programmes in the United Kingdom: Do regional characteristics matter?

“…A second approach focuses on the level of the VC fund, trying to assess the financial performance of publicly supported VC funds relative to private VC funds (Cumming and Macintosh, 2003;Brander et al, 2002). For instance, the study of Murray (1998) on the European Seed Capital Fund Scheme highlights that the target Internal Rate of Return (IRR) for the managers of the publiclysupported VC funds were significantly lower than the target IRR for commercial VC funds" managers.…”

IPOs, trade sales and liquidations: Modelling venture capital exits using survival analysis

“…Many rationales have been suggested to explain the co-investment of such deals (Admati and Pfleiderer, 1994, Barry, Muscarella, Perry, and Vetsuypens, 1990, Megginson and Weiss, 1991, Brander, Amit, and Antweiler, 2002, Lerner, 1994and Hellmann, 2001. Some of these studies suggest that larger syndicates should make exit easier for successful start-ups as far as it increases the pool of contacts required to make a trade sale possible.…”

Syndication of Venture Capital Investment: The Art of Resource Pooling

“…The lead investor develops social ties with the entrepreneur prior to investment. After closing the funding, he or she becomes strongly involved in the management of the start-up (Brander, Amit, & Antweiler, 2002;Hellman & Puri, 2002;Hsu, 2004;Lerner, 1995;Sapienza, 1992). Generally, he or she is on the board of directors of the invested company.…”

“…Different hypotheses have been explored. Syndications have been understood as a means to diversify risk (Bygrave, 1987;Bygrave & Timmons, 1992;Lerner, 1994;Manigart et al, 2006), to improve projects selection (Brander et al, 2002;De Clercq & Dimov, 2004;Manigart et al), to mobilize competencies (Brander et al;De Clercq & Dimov;Hochberg, Ljungqvist, & Lu, 2007;Manigart et al), and to gain access to deal flow (Manigart et al).…”