Coordination Frictions in Venture Capital Syndicates

21 Pages Posted: 14 Apr 2017 Last revised: 3 Jan 2019

See all articles by Ramana Nanda

Ramana Nanda

Harvard University - Entrepreneurial Management Unit

Matthew Rhodes-Kropf

Harvard Business School - Entrepreneurial Management Unit; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2018

Abstract

An extensive literature on venture capital has studied asymmetric information and agency problems between investors and entrepreneurs, examining how separating entrepreneurs from the investor can create frictions that might inhibit the funding of good projects. It has largely abstracted away from the fact that a startup typically does not have just one investor, but several VCs that come together in a syndicate to finance a venture. In this chapter, we therefore argue for an expansion of the standard perspective to also include frictions within VC syndicates. Put differently, what are the frictions that arise from the fact that there is not just one investor for each venture, but several investors with different incentives, objectives and cash flow rights, who nevertheless need to collaborate to help make the venture a success? We outline the ways in which these coordination frictions manifest themselves, describe the underlying drivers and document several contractual solutions used by VCs to mitigate their effects. We believe that this broader perspective provides several promising avenues for future research.

Keywords: Venture Capital, Syndication, Networks, Entrepreneurship

JEL Classification: G24, K22, L14, M52, 032

Suggested Citation

Nanda, Ramana and Rhodes-Kropf, Matthew, Coordination Frictions in Venture Capital Syndicates (October 2018). Harvard Business School Entrepreneurial Management Working Paper No. 17-089. Available at SSRN: https://ssrn.com/abstract=2951945

Ramana Nanda (Contact Author)

Harvard University - Entrepreneurial Management Unit ( email )

Boston, MA 02163
United States

HOME PAGE: http://www.people.hbs.edu/rnanda

Matthew Rhodes-Kropf

Harvard Business School - Entrepreneurial Management Unit ( email )

Soldiers Field Road
Rock Center 312
Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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