Syndication strategy and type of venture capital firms

Abstract

Syndication is one of the strategies to deal with high risks in venture capital (VC) investment. We argue that VC syndication strategies are heterogeneous among different types of VC firms. Three differentiating factors are analyzed in this study: background of VCs, investment stage preferences, and syndicating roles. According to firm background, VC firms are divided into strategic VCs, financial VCs, and independent VCs. By investment stage preferences, VC firms are grouped into early stage investors and late stage investors. The factor a??syndicating rolesa?? categorizes VC firms into lead investors and non-lead investors. Each type of VCs distinguishes itself from the others as far as the syndication strategy is concerned. This empirical study examines the syndication strategy of VC firms from two perspectives: motives to syndicate and propensity of syndication. Motives to syndicate between each VC group are firstly discussed in this study. Financial motives and recourse-based motives are applied and hypotheses are developed. Next, the linkage between motives to syndicate and propensity of syndication is introduced. Propensity of syndication among each VC group is compared in the end, and hypotheses are developed accordingly. We conduct a survey among VCs in Singapore to test hypotheses because Singapore is an active player in VC activities and its VC industry is relatively mature among emerging markets. 46 VC firms, representing a response rate of 39.32%, give us positive replies. Non-parametric Mann-Whitney U Test is used to detect the differences of motives to syndicate. We do a multivariate regression analysis to compare the propensity of syndication among different types of VC firms.Our findings indicate that resource-based motives are more important for strategic VCs while financial motives are more important for financial VCs. In addition, financial motives are more critical for early stage VCs than for late stage VCs. The syndication propensity of early stage VCs is more positively related to the importance of financial motives than late stage VCs. In addition, lead and non-lead VCs indicate significant differences of syndication strategy. Financial motives are weighted more by non-lead VCs, while resource-based motives are more important for lead VCs. The findings in this study have practical implications for both VC managers and government policy makers.