How Does Uncertainty Resolution Affect VC Syndication?

Abstract:     
All medical device companies require FDA 510(k) clearance before they can market their products to the public. Using this external certification as a natural experiment, this paper analyzes the dynamics of the syndicate formation process of venture capital firms under different circumstances of uncertainty. Our results suggest that FDA 510(k) clearance does serve as an outside certification reducing uncertainty that leads to a larger amount of capital flow into the company from a greater number of investors. Our results also suggest that VC firms are able to identify promising projects without the need for external 510(k) certification. Pre-approval syndicate formation is primarily driven by a search for second-opinion with greater likelihood of successful exit, while post-approval syndicate formation is primarily driven by the need for capital diversification. We test several non-mutually exclusive hypotheses on project selection, second opinion, collusion and diversification and find support for our hypotheses.

Number of Pages in PDF File: 59

Keywords: 510(k), venture capital, syndication, certification, IPO

JEL Classification: G24, G32

working papers series