Birds of a Feather or Celebrating the Difference? Syndicate Formation in the Venture Capital Industry

Qianqian Du

University of British Columbia

Qianqian.du@sauder.ubc.ca

This paper contributes to the venture capital literature by endogenizing the way venture capitalists select partners to form a syndicate and its impact on the performance of the syndicate. Specifically, this paper tries to answer three questions: Do venture capital firms syndicate with partners who are similar to or different from them? Are investee attributes important to investor's syndication decision?       Will the way venture capital firms select partners affect their performance?

Using SDC Platinum's comprehensive dataset of first round syndicated venture capital investments to U.S. companies from 1995 to 2005, this paper develops innovative matching method to construct hypothetical syndicates and predicts the formation of syndicates among a group of investors. Based on Conditional Logit model which controls for investee fixed effects and Heckprob model, this paper shows VCs have a strong preference towards partners who are similar to themselves in both prior success and experience. VCs' preference of similarity is stronger when success and experience are measured in the same industry and state as the investees. Preference for homogeneity does not always lead to superior performance. While syndicates composed of VCs homogeneous in prior success outperform heterogeneous groups, syndicates composed of VCs heterogeneous in experience outperform homogeneous groups. Motivated by management literature, this paper further includes status similarity and prior relationships as explanatory variables. Both variables have positive impacts on syndicate formation but do not show significant impacts on performance.