When Venture Capital Syndication Gets Crowded
When two venture capital firms get together and collaborate, they can accomplish much more than either going solo — investing in a larger number of ventures, pooling each other’s judgment, and leveraging both firms’ networks. But when you throw more partners into the mix, something else also happens.
Rather than simply amplifying the efforts of the two partners, a multi-party collaboration fundamentally changes the dynamics. In recent research, the Smith School’s Anil K. Gupta and his co-authors highlight how group-level venture capital syndicate formation introduces new constructs and logics, and explores how status dynamics might differ between dyadic partnerships and group collaborations. Gupta is the Michael D. Dingman Chair in Strategy and Entrepreneurship.
In addition to their fieldwork, the researchers examined data on U.S.-based ventures spanning from 1985 to 2008. They found that, while offering benefits, syndicates involving three or more venture capital firms are also subject to greater coordination challenges resulting from risks of subgroup conflicts and power dynamics within the syndicate.
The researchers’ empirical findings show that the single biggest factor that can help minimize coordination challenges in multiparty syndicates is a history of prior co-investment ties. Prior ties result in greater familiarity and trust, which in turn help the co-investors overcome the potential challenges in a syndicate involving multiple partners.
Their findings add to a growing body of research on venture capital partnerships at a time when multiparty collaborations are becoming increasingly common. By some estimates, as many as 50 percent of all strategic alliances now involve three or more partners.
There’s growing appetite for multiparty collaborations, which allow for a wider set of resources, experiences, expertise and connections, while also distributing risk across a broader plane than is common in two-party collaborations. However, with more members involved in the collaboration, it seems that more can go wrong. Any one partner can delay the entire group, for example. A partner who has a change of heart, meanwhile, can exit the collaboration, leaving the rest of the group in flux.
Read more: The Conditional Importance of Prior Ties: A Group-Level Analysis of Venture-Capital Syndication is featured in the Academy of Management Journal.