Venture-Capital Syndication: Improved Venture Selection vs. The Value-Added Hypothesis
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syndication
entrepreneurship
Business Administration, Management, and Operations
Business and Corporate Communications
Corporate Finance
Finance and Financial Management
Management Information Systems
Management Sciences and Quantitative Methods
Organizational Behavior and Theory
Portfolio and Security Analysis
Strategic Management Policy
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Abstract
Syndication arises when venture capitalists jointly invest in projects. We model and test two possible reasons for syndication: project selection, as an additional venture capitalist provides an informative second opinion; and complementary management skills of additional venture capitalists. The central question is whether venture capitalists are engaged primarily in selection or in managerial value added. These alternatives imply contrasting predictions about comparative returns to syndicated and standalone investments. Our empirical analysis, using Canadian data, finds that syndicated investments have higher returns, favoring the value‐added interpretation. We also discuss risk sharing and project scale as possible reasons for syndication.