Informational Hold-up by Venture Capital Syndicates

Abstract

We develop a theory of informational hold-up by incumbent VC syndicates, in the spirit of Sharpe (1990) and Rajan (1992). The theory can explain and relate the empirical observations that (a) early round syndicates regularly associate VCs with different levels of experience and (b) follow-on syndicates often involve none of the early round VCs. Consistent with the theory, we find empirically that the heterogeneity of VC experience levels in a syndicate is (i) negatively related to the extent to which outside VCs trust the entrepreneur and (ii) positively related to the likelihood of syndicate switching in a later round.

Keywords: Venture Capital, Syndication, Staged Investment, Heterogeneity, Switching, Network Centrality

JEL Classification: G24, L26, D85