Dissertation/Thesis Abstract

An analysis of relationship networks in venture capital syndication decisions
by Lauf, Richard I., Ph.D., Union Institute and University, 2008, 163; 3334118
Abstract (Summary)

The venture capital industry affects America's economy, particularly new businesses and the jobs they create. Previous studies have explored the decision process by which a venture investor decides to invest in a specific business proposal, the number of venture fund investors, and the geographical clustering of the venture industry. Despite the common use of investment syndicates of venture funds, the literature contains relatively few studies on how these syndicates are created and the network structure of the venture industry.

This study used grounded theory based on an ethnographic analysis of practitioner interviews to describe their decision-making in the context of network structures around them, their objectives and the interests of other participants. Participants were selected using a modified snow-ball sampling method. Several indicators of theoretical saturation were used to assess data adequacy.

The study found that among venture capitalists, networks are created and nurtured more by professional contact than social contacts among participants. A key criterion for selecting deal partners is the geographic and industry networks of ventures capitalists. Partner reputation was found to precede firm reputation in choosing syndicate partners, while firm reputation grows only over time with multiple interactions. The reputation of an individual venture capitalist rests on boardroom behavior. Comparable size among participating firms and mutual dependence reinforces "staying power," that is, the willingness to continue investing in subsequent financing rounds. Reciprocity of deal flows being offered to previous syndicate participants with a firm is weighed loosely, not tightly.

Two forces dominate the syndication decision: the need for capital determines the number of partners, and the need for help in building the start-up's success leads to choosing syndicate partners with complementary expertise and networks. Creating the syndicate is a shared responsibility of the start-up CEO and the venture capitalist leading the deal. The process generally begins with one venture firm approaching other venture capitalists with which it has had good experience in past deals. The process continues to move out in a network fashion to others recommended by trusted firms and partners.

Indexing (document details)
Advisor: Kohun, Fred
School: Union Institute and University
School Location: United States -- Ohio
Source: DAI-A 69/10, Dissertation Abstracts International
Subjects: Finance
Keywords: Corporate board, Ethnography, Grounded theory, Relationship networks, Social network analysis, Syndication, Venture capital
Publication Number: 3334118
ISBN: 978-0-549-87006-7
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