How Does Uncertainty Resolution Affect VC Syndication?

59 Pages Posted: 26 Jul 2011 Last revised: 28 Jul 2013

See all articles by Ayca Altintig

Ayca Altintig

Claremont Colleges - Peter F. Drucker Graduate School of Management

Hsin-Hui Chiu

California State University, Northridge

M. Sinan Goktan

California State University, East Bay

Date Written: May 3, 2012

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.

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

JEL Classification: G24, G32

Suggested Citation

Altintig, Z. Ayca and Chiu, Hsin-Hui and Goktan, Sinan, How Does Uncertainty Resolution Affect VC Syndication? (May 3, 2012). Available at SSRN: https://ssrn.com/abstract=1894885 or http://dx.doi.org/10.2139/ssrn.1894885

Z. Ayca Altintig (Contact Author)

Claremont Colleges - Peter F. Drucker Graduate School of Management ( email )

The Drucker School of Management
1021 North Dartmouth Avenue
Claremont, CA 91711
United States

Hsin-Hui Chiu

California State University, Northridge ( email )

18111 Nordoff Street
Northridge, CA 91330
United States

Sinan Goktan

California State University, East Bay ( email )

25800 Carlos Bee Blvd
Hayward, CA 94542
United States
510-885-3797 (Phone)
510-885-7175 (Fax)

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