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Syndication in Venture Capital Financing

Previous researchers consider the benefits associated with alternative organizational arrangements. Syndication is an organizational arrangement common to the venture capital industry. In a syndicated investment multiple venture capital (VC) firms make investments in a firm simultaneously. Syndication has been the subject of relatively little empirical examination.

We find that surprising given that VC investments have risen from $740 million in 1980 to a high of $118 billion in 2000 (constant 2005 dollars) and that while syndication is common, it is not universal. In our sample, 63% of investments by VC firms are syndicated. What explains cross-sectional variation in the syndication of venture capital investments?

It is possible that syndication arises randomly, and if so, we would expect little systematic cross sectional variation in the types of investments that are syndicated. We suspect, however, that syndicates represent a purposeful organizational (contractual) arrangement designed to facilitate the venture capital process.

We make two simple arguments to motivate our predictions on cross-sectional variation in syndication—syndicates can help overcome resource constraints within VC firms (with respect to both human and financial capital) and, syndicates can help resolve uncertainty with respect to firm value (Lerner, 1994a). We test the predictions that flow from those arguments by linking resource demands and uncertainty to the characteristics of the firm seeking financing and the amount of financing demanded.

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Syndication in Venture Capital Financing