Raising Capital from Investor Syndicates with Strategic Communication

Abstract

An entrepreneur makes offers to multiple investors to fund a project. The project is implemented only if the investment committed exceeds a threshold. Concerned about the project quality and others' decisions, investors share information through strategic communication. When having conflicts of interest, those with contractually stronger incentives to invest persuade others, which induces a cascade causing more investors to invest and persuade. The entrepreneur's choice of contracts affects whether investors have conflicts of interest and thus how they communicate strategically. When the project has high ex ante profitability, the entrepreneur is concerned about investors' information rent and employs a hierarchical structure to differentiate investors, create conflicts of interest, and impede information sharing. When the project has low ex ante profitability, the entrepreneur is concerned about investors' miscommunication and employs a flat structure to homogenize investors, align their interests, and facilitate information sharing. The two structures and their underlying logic are consistent with empirical observations regarding investor syndicates.

Keywords: contracting with externalities, strategic communication, informational cascades, syndication

JEL Classification: D71, D83, D86, G32, L24