The Design of Syndicates in Venture Capital



The formation of venture capital syndicates is a process characterized by two-sided asymmetric information, as the profitability signals acquired by different VCs are nonverifiable and manipulable. We analyze how appropriate design of the syndicating VCs’ cash-flow rights can induce them to reveal their signals to each other truthfully, and how the incentive costs of syndication vary with the VCs’ expertise in evaluating entrepreneurial projects. We then address the question of how lead venture capitalists should choose their syndication partners. Our findings suggest that lead VCs should not syndicate with partners much more experienced than themselves even if such partners are available: more experienced venture capitalists should select more experienced partners. This is consistent with the empirical evidence.
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Ingolf Dittmann