The Effect of Syndication on Performance Manipulation in the Venture Capital Industry

Abstract

Venture capital fund performance measures are manipulable. This paper examines the effect of syndication among venture capital (VC) funds on the funds' incentives to manipulate their performance measures. I show that the presence of new syndicate partners reduces misreporting by VC funds: (i) by reducing the opacity regarding funds' portfolio-company valuations and (ii) through common limited partners (LPs) who can observe discrepancies in portfolio-company valuations reported by syndicate partners. The effect is especially important during the follow-on fundraising period. To identify that syndicate partners reduce performance misreporting I use availability-of-syndicate-partners as an instrument for the number of new syndicate partners. The implications of my findings are that LPs should better monitor VC funds with fewer new syndicate partners and regulators should consider the presence of peer-monitoring among VC funds before imposing disclosure requirements.

Keywords: Venture capital, performance reporting, syndication, monitoring

JEL Classification: G23, G24