Venture syndicates

I’ve been thinking a fair amount lately about venture capital syndication. For those not in the know, that is the method by which venture capitalists “share the wealth” by letting other venture capitalists in on deals. For example, I might be investing $10mm in Whangdoodle, Inc., and I might ask three other VCs to join in, each investing $5mm.
Why do VCs do it? It is a lightly researched topic, and so far research has only touched on a subset of the following possible reasons:

  1. Because they need the extra money. This presumes that funds are small, and that is not generally the case.

  2. Because they see it as value-added. This is sometimes the case, although few VCs will concede that they’re not able to do it all.
  3. Because diversification is a species of active risk reduction. This is certainly a compelling answer, and one that is probably the closest non-cynical explanation for syndication.
  4. Because it is a bad transaction. In other words, this thing stands a serious chance of failing, so I want other people ready to pitch in. While this may sometimes be the case, if it were generally true any reasonably intelligent VC would self-select out of syndicates.
  5. Because it is a great transaction. In other words, VCs want to share the wealth to make sure that they have co-investors on future deals. While this is possible, it is highly unlikely given how self-interested most VCs are.

I’ll plump for 3) as the best answer, but syndication is a bit of a puzzle, perhaps explaining why it goes in and out of fashion so regularly. I actually have another explanation altogether in mind, and rather than disclosing it and tipping my hat to some of my own research, I’ll just say that it turns things around entirely.

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Comments

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  2. Great!!!