Syndication in Venture Capital

OF DOCTORAL DISSERTATION HELSINKI UNIVERSITY OF TECHNOLOGY P.O. BOX 1000, FI-02015 TKK http://www.tkk.fi Author Mikko Samuel Jääskeläinen Name of the dissertation Syndication in venture capital Manuscript submitted 27.2.2009 Manuscript revised 13.5.2009 Date of the defence 9.6.2009 Monograph Article dissertation (summary + original articles) Faculty Information and Natural Sciences Department Industrial Engineering and Management Field of research Venture capital, entrepreneurial growth, renewal of technology-based firms Opponent(s) Professor Mike Wright, Nottingham University Supervisor Professor Markku Maula Instructor Professor Markku Maula Abstract The syndication of investments is a prevalent and distinctive feature of the venture capital (VC) industry. Motivated by its benefits for the performance of both VC firms and their portfolio companies, active co-operation within and across syndicates creates a multi-layered phenomenon. While prior research has devoted a considerable amount of attention to the topic, significant gaps and areas for contributions remain. This dissertation addresses syndication in venture capital using two complementary approaches. On the one hand, the first paper of the dissertation reviews the extant research to generate an understanding of the state of the existing knowledge and its limits. On the other hand, the dissertation addresses three specific research questions targeting each of the three main levels of syndication. On the deal level, it examines the structuring of profit distribution when the syndicated investment is a venture capital fund. On the VC firm level, it addresses the effects of syndication by examining the optimal portfolio size of VCs and how it is affected by the use of syndication. Finally, on the network level, the dissertation investigates how networks of VC firms, formed through syndicated investments, distribute information on the investment targets and facilitate exits to nondomestic markets. The results of the articles contribute to the research on venture capital and provide insights for policies regarding new venture financing. The conclusions of the literature review demonstrate a lack of understanding of the strategic dimensions of syndication. Accordingly, the results concerning the firmand network-level effects suggest that the strategic use of syndication and positioning within co-operation networks enhance the performance of VCs and increase opportunities for successful exits. From the policy perspective, the results demonstrate that while the opportunities to attract private sector actors to markets with severe performance gaps using profit distribution are limited, the facilitation of cross-border investments improves the functioning of domestic markets.The syndication of investments is a prevalent and distinctive feature of the venture capital (VC) industry. Motivated by its benefits for the performance of both VC firms and their portfolio companies, active co-operation within and across syndicates creates a multi-layered phenomenon. While prior research has devoted a considerable amount of attention to the topic, significant gaps and areas for contributions remain. This dissertation addresses syndication in venture capital using two complementary approaches. On the one hand, the first paper of the dissertation reviews the extant research to generate an understanding of the state of the existing knowledge and its limits. On the other hand, the dissertation addresses three specific research questions targeting each of the three main levels of syndication. On the deal level, it examines the structuring of profit distribution when the syndicated investment is a venture capital fund. On the VC firm level, it addresses the effects of syndication by examining the optimal portfolio size of VCs and how it is affected by the use of syndication. Finally, on the network level, the dissertation investigates how networks of VC firms, formed through syndicated investments, distribute information on the investment targets and facilitate exits to nondomestic markets. The results of the articles contribute to the research on venture capital and provide insights for policies regarding new venture financing. The conclusions of the literature review demonstrate a lack of understanding of the strategic dimensions of syndication. Accordingly, the results concerning the firmand network-level effects suggest that the strategic use of syndication and positioning within co-operation networks enhance the performance of VCs and increase opportunities for successful exits. From the policy perspective, the results demonstrate that while the opportunities to attract private sector actors to markets with severe performance gaps using profit distribution are limited, the facilitation of cross-border investments improves the functioning of domestic markets.