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Informational Holdup by Venture Capital Syndicates

Published online by Cambridge University Press:  18 August 2023

Suting Hong  and
Pierre Mella-Barral Open the ORCID record for Pierre Mella-Barral [Opens in a new window]
Suting Hong
Affiliation:
ShanghaiTech University School of Entrepreneurship and Management [email protected]
Pierre Mella-Barral*
Affiliation:
TBS Business School
*
[email protected] (corresponding author)
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Abstract

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We argue that syndicates associate venture capitalists (VCs) with uneven skill levels in order to lower their expected gains from threatening to stop financing: Non-continued participation would send a milder negative signal to alternative financiers. This can explain the empirical observations that i) early-round syndicates regularly associate VCs with different levels of experience and ii) follow-on syndicates often involve none of the early-round VCs. Consistent with the theory, we find empirically that the heterogeneity of VC experience levels in a syndicate is i) negatively related to the extent to which the founders of the VC-backed firm are professionally well connected and ii) positively related to the likelihood of syndicate switching in a later round.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 3 , May 2024 , pp. 1362 - 1400
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We acknowledge very helpful insights from an anonymous referee, Xiangwei Wan (discussant), Chengsi Wang, and seminar participants at Monash University, Nanjing University, East China Normal University, TBS, and ShanghaiTech University. We also thank Xingsheng Yang and Yixuan Zhao for excellent research assistance. Suting Hong acknowledges supports from the ShanghaiTech University Start-Up Fund. Any errors are entirely our own.

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