the syndication of venture capital investments

Omega 29 (2001) 375–390www.elsevier.com/locate/dsw

The syndication of venture capital investments

Andy Lockett ∗, Mike WrightNottingham University Business School, Jubilee Campus, Wollaton Road, Nottingham NG8 1BB, UK

Received 1 May 2000; accepted 21 February 2001

Abstract

This paper examines competing .nance, resource-based and deal 0ow explanations for the syndication of venture capitalinvestments. Evidence from 60 .rms (a 58.8% response rate) is analysed. Overall the .nance perspective provides a strongexplanation of motives for syndication, but the resource-based view is found to be much more important for those .rmsinvolved in at least some early stage transactions. The implications for researchers are that venture capital .rms should not betreated as a homogeneous group and that the investment stages in which they operate may strongly in0uence attitudes towardssyndication. In addition, there are implications for practitioners as venture capital .rms may not be attributing su6cientattention to the need to augment their own resource base in order to enable them to make superior decisions when selectingdeals and managing investments. ? 2001 Elsevier Science Ltd. All rights reserved.

Keywords: Venture capital; Finance; Syndication; Resource-based theory

1. Introduction

This paper examines the question of why venture capital.rms syndicate their investments. We de.ne the activitiesof venture capital .rms to cover the range of investmentbehaviours engaged in by members of the British VentureCapital Association (BVCA). As such, we include earlystage investment, usually regarded as classic venture cap-ital, through to management buy-out=buy-in (MBO=MBI)investments, sometimes referred to as private equity.Similarly, Ruhnka and Young [1] di?erentiate between theventure capital investment decision and the decision to pur-chase established companies while Bygrave and Timmons[2] use the terms venture and merchant capital, respec-tively. In a venture capital syndication, two or more venturecapital .rms come together to take an equity stake in an

∗ Corresponding author. Tel.: +44-115-951-5268=5493; fax:+44-115-951-5204.E-mail address: [email protected] (A. Lockett).

investment. The operation of the syndicate involves the mak-ing of common decisions under conditions of uncertaintythat will result in joint pay-o?s for the investors [3].

Venture capital .rms are characterised as providing com-panies that have high potential growth and entrepreneurialtalent with .nance and business skills to exploit market op-portunities. The relatively high risks that venture capitalistsaccept are compensated by the possibility of high return,usually through substantial capital gains in the medium (tolong) term [4,5]. In order to accommodate these high levelsof uncertainty venture capital .rms have developed variousstrategies for dealing with risk, deal selection and monitor-ing [see: 6, for a review], one of which is the syndicationof investments. However, although syndication by venturecapital .rms is empirically signi.cant, it has received rela-tively little attention. This paper is an initial exploratory at-tempt to begin to redress this imbalance. The originality ofthe research stems from the use of survey data that makesthe study unique in this area.

The objective of this exploratory study is to examinethe two dominant competing views as to why venture

0305-0483/01/$ - see front matter ? 2001 Elsevier Science Ltd. All rights reserved.PII: S0305 -0483(01)00024 -X

376 A. Lockett, M. Wright /Omega 29 (2001) 375–390

capital .rms syndicate equity investments. 1 The traditionalapproach, developed from .nance theory, has been to viewsyndication as a means of risk sharing via portfolio diver-si.cation. In contrast, the resource-based perspective viewssyndication as a response to the need to share=access infor-mation in the selection and management of investments. Inaddition, the paper will also examine the importance of ac-cess to deal 0ow as a motivation for syndicating out a deal.US research indicates that syndication is both a function ofthe desire to spread .nancial risks as well as the need toshare information, with uncertainty and syndication beingpositively related [8,9]. The analysis conducted in the pa-per addresses these issues by posing two di?erent sets ofquestions to venture capitalists. First, what are the motivesfor syndication-out of deals? Second, what are the motivesfor not syndicating-out deals? It was anticipated that inves-tigating the syndication decision, from both a positive andnegative perspective, would lead to a more thorough under-standing of the salient issues.

The motives for syndicating a deal may vary accordingto the investment stage of the deal. Evidence indicates thatthe degree of syndication has generally been falling overtime. The available evidence permits a comparative analysisof the degree of syndication in MBO=MBI investments andfor all venture capital investments. This evidence indicatesthat the degree of syndication for MBO=MBI investments isbelow that for all venture capital investment stages taken to-gether, although this di?erence has been reducing (Table 1).Hence, in this study we also examine the di?erent motivesof MBO=MBI investors compared to investors participatingin at least some early stage investments for syndicating ornot syndicating out a deal.

The paper is structured as follows. The .rst section out-lines the theoretical perspectives on syndication and devel-ops propositions. The methodological approach is outlinedin the second section whilst the third section presents theresults from the study. The .nal section discusses the issuesarising from the study and identi.es managerial and practi-tioner implications as well as directions for further research.

1 There are clear analogies between syndication and the reinsur-ance literature which generally predicts di?erences between .rmsin their reinsurance practices. For example, Borch [7] using ex-pected utility with risk aversion shows that optimal risk sharingoccurs when insurers participate in a reinsurance pool in proportionto their respective degrees of risk tolerance. Garven and LoubergLe[10] develop a model under risk neutrality where the optimal shar-ing rule is related to the endowed .nancial capacity of each insurerrather than risk aversion. Re-insurance models tend to be basedon the existence of a reinsurance pool and that each insurer hasa homogeneous portfolio of claims. There is no clear evidence ofsyndication pools in the venture capital market and syndication isconducted on a deal by deal basis. Thus, the re-insurance modelswould require signi.cant modi.cation to be directly applicable tothe venture capital market. This is beyond the scope of this paper.We take the view that syndication should be viewed as a methodof reinsurance, rather than as a direct competitor to reinsurance.

2. The syndication of venture capital investments

Syndication by venture capital .rms may be based on adesire both to share and to reduce risks. Venture capital.rms attempt to share the risk associated with a particularinvestment by involving another venture capital .rm in the.nancing. Venture capital .rms also try to reduce the risksassociated with investing by sharing information with otherventure capital .rms in order to bene.t from a superior se-lection and management of investments [8,9,11,12]. In do-ing so, it is expected that venture capitalists will raise themean expected return on their investments but not the vari-ance of the underlying distribution of returns. US researchby Bygrave [8,9] indicates that syndication is both a func-tion of the desire to spread .nancial risks as well as theneed to share information (reduce risks) with uncertaintyand syndication being positively related. In addition, Chiplinet al. [13] in their study of syndication in the UK marketfor MBO=MBIs found a relationship between risk reductionand syndication although it was not particularly strong.

The traditional perspective on why venture capitalists syn-dicate equity investments, developed from .nance theory,views syndication as a means of risk sharing via portfoliodiversi.cation. However, although the venture capital .rmhas traditionally been viewed as a .nancial intermediary, itmay also be thought of as a “collection of productive re-sources” [14]. A resource is considered to be anything thatcould be thought of as a strength or a weakness of a given.rm [15], with syndication being a method of accessing spe-ci.c resources from other .rms in order to reduce the riskof investment. The following section develops propositionsbased on these di?erent perspectives on syndication.

2.1. The traditional 6nance=risk sharing perspective

The risk associated with any investment can, in general,be sub-divided into two groups: unique (non-systematic orcompany) risk and market (systematic) risk. Unique risk isthe risk associated with a particular investment whereas mar-ket risk is associated with market wide variations. Uniquerisks relate to internal company factors associated with theskills of the entrepreneur, the growth and pro.tability pro.leof the .rm, its technology, etc. [1] Investors, via diversi.ca-tion, can eliminate unique risk by holding a well-balancedportfolio of investments in companies whose returns do notco-vary. This view implicitly assumes that investors are un-able to take actions to a?ect the risk in any particular com-pany. Whilst this may be the case for investors in listedcompanies, venture capital .rms with their speci.c skillsand powers may be able to intervene to manage and re-duce unique, company speci.c risks. We examine the linkbetween these actions and syndication in the next section.Here we consider the role of syndication in sharing the riskassociated with a particular investment by facilitating thespreading of their capital across a greater number of invest-ments and hence reducing overall portfolio risk [3].

A. Lockett, M. Wright /Omega 29 (2001) 375–390 377

Table 1Syndicated all venture capital and venture-backed MBOs=MBI deals

Year Syndicated Venture Capital Syndicated Venture-backedinvestmentsa MBOs=MBIsb

% of venture No. % of venture No.capital backedinvestments MBOs=MBIs

1989 48.4 1.107 27.0 901990 45.9 917 29.6 871991 59.2 1.373 26.9 701992 61.9 1.281 33.7 921993 46.3 800 40.4 761994 46.6 910 31.4 951995 41.8 716 31.8 1111996 34.4 589 24.3 931997 21.1 355 14.4 601998 17.1 345 12.9 501999 17.0 63

aEVCA yearbook (various issues), data on all venture capital-backed companies only available for 1997 and1998 and in per cent.

bCMBOR database.

In general, venture capital .rms .nd it more di6cult toobtain a fully diversi.ed investment portfolio than institu-tional investors in listed stocks. 2 This arises partly becauseof the presence of ex-ante asymmetric information in ven-ture capital investment decisions [16,12], which is less of aproblem in listed companies, and partly because of fund size.Evidence suggests that small venture capital funds in par-ticular, i.e. those more likely to invest in early stage deals,.nd it di6cult to achieve optimal diversi.cation [17,18]. Inorder to achieve portfolio diversi.cation it may thus be nec-essary to syndicate investments. When investments are largein comparison to the total size of the venture capital .rm’sportfolio syndication may be appropriate. Chiplin et al. [13]found evidence of this size e?ect in the UK MBO=MBI mar-ket where 66% of deals over £10 million were syndicatedcompared to 23% of deals valued at less than £10 million.More recent larger MBO=MBI funds may, however, enablediversi.cation without syndication, see below.

2 There are a number of factors prohibiting the organization ofinvestment on the basis of diversi.cation through taking sole equitystakes in a large number of individual companies. For example,if there were a large number of .rms owning small proportionsof equity then no .rm would have any form of control. The issueof control is one that is very important to the venture capital .rmin the management of an investment, and therefore it is di6cultto conceive of a situation with such a fragmented equity holding.Second, the bilateral contracting between the investee and a rangeof investors would create excessive transaction costs. Finally, thedetailed nature of the investment agreement between the investorand the investee would create huge problems for future investeesto agree to all the terms and conditions. The contractual problemsfaced in this instance, rather than just creating excessive transactioncosts, would be likely to be insurmountable.

The information asymmetry argument for syndication isbolstered by a second reason that relates to the problemsarising from the illiquidity of venture capital investmentsvis-Sa-vis stock market investments. The actual risk associ-ated with an investment may only become clear after the in-vestment is made and the venture capital .rm obtains accessto less biased information. As a result of illiquidity, it is moredi6cult in the short term to adjust a venture capital .rm’sportfolio by divesting ‘lemons’ if the risk of an investmentturns out to be greater than initially thought. Hence, syndica-tion provides a means of sharing risk on a deal-by-deal basisthat may help to reduce overall portfolio risk. The scope forboth syndicating out deals as well as syndicating into dealsalso gives access to a wider diversity of investments.

A third .nance-related explanation for syndicationemerges from the requirement to raise funds in future peri-ods. In order to be able to raise funds in the future, venturecapital .rms may diversify their holdings in the currentperiod so that they do not conspicuously under-performtheir peers; one method of achieving this is syndication [5].However, the venture capital .rm incurs substantial costs asa result of the hands-on nature of its investments. The costsassociated with the ex-post management of investments andtransacting may reduce the extent of diversi.cation, as therewill be a trade-o? between risk reductions and transactioncosts associated with any additions to the portfolio.

Fourth, the nature of the risk-return trade-o? may be asso-ciated with syndication. There is little direct evidence relat-ing to this point. However, Lerner [5] .nds that establishedventure capital .rms syndicate through investing for the .rsttime in later investment round investments when the valua-tion of investees, a proxy for their performance, increasessharply but that changes in valuation are insigni.cantly


related to investment by less-established venture capi-tal .rms. This discussion leads to the following researchproposition (P1).

P1. Syndication is a response by venture capital 6rms tothe need to share risk via portfolio diversi6cation

2.2. The resource based=risk reduction perspective

The resource base of the .rm is comprised of .rm-speci.cassets, or the assets over which the .rm has control. The re-source base of the venture capital .rm can be sub-dividedinto .nancial and non-.nancial resources, the latter beinglargely intangible in nature such as market information. Asa result, the exchange of resources between the venture cap-ital .rm and the investee is more than a purely .nancialtransaction. Resources are required for reducing the vari-ous dimensions of company speci.c risk at both ex-ante andex-post decision making stages in the venture capital pro-cess. Ex-ante decision making relates to the selection of in-vestments, whereas ex-post decision making relates to thesubsequent management of investments.

At the deal selection stage, syndication has implicationsfor adverse selection in two main ways. First, syndicationcan reduce the potential for adverse selection if it changesthe means by which an investment is made because it pro-duces a greater range of analytical skills among investors.Sah and Stiglitz [19], for example, contrast decision mak-ing in hierarchies and polyarchies: that is settings in whichprojects are undertaken only if one of the parties thinks itworthwhile, and where it is necessary for both parties toapprove. They show that it may be more e6cient to under-take those projects that are only approved by both parties.Here it is envisaged that the reputation of parties will be im-portant. The better-established .rms with a track record ofsuccess (i.e. better selection=management of investments)will have a more valuable reputation and thus will becomea more desirable syndicate partner for others. This is sup-ported by Lerner’s [5] study of the biotechnology industrywhich found evidence that in .rst round investments estab-lished venture capital .rms syndicate with one another. Inlater rounds, established venture capital .rms are found tosyndicate with less-established venture capital .rms. This.nding is consistent with the view that syndication allowsestablished venture capitalists to obtain information whenevaluating risky investment decisions. This superior selec-tion of investments theory of syndication does not hold incases where the lead investor underwrites the whole deal andthen subsequently syndicates down the investment to other.rms. Of course, as seen in the previous section, syndicationmay reduce the impact of adverse selection on the partiesinvolved in an investment where it leads to risk sharing.

Venture capital .rms may believe that they can generatesuperior returns from investing alone in risky deals. Largerventure capital .rms may be more able to achieve portfoliodiversi.cation in order to reduce risk [1]. Similarly, spe-

cialisation through increasing focus on a particular venturecapital .rm’s competencies may mean that risk is reducedthrough sole investments rather than through syndication.Indeed, evidence suggests that specialisation is associatedwith a lower required rate of return by venture capital .rms[20], in line with Gupta and Sapienza [21] who .nd thatspecialisation is more e?ective than diversi.cation by in-vestment stage in controlling risk. The exercise of specialistskills implies that a series of projects undertaken by a syndi-cate of venture capital .rms with the same specialism mayhelp to make better selections. As such investments wouldbe likely to exhibit high covariance between any pairs, therisk spreading through diversi.cation rationale for syndi-cation may be undermined. Syndication across specialismsmay be bene.cial but carries the risk of exploitation of in-formational asymmetries between venture capital .rms. Inthese circumstances, there is a need for the development ofreputational capital, or trust, if syndication is to take place[22–24].

Resources may be required for the ex-post management ofinvestments. This need is expected to be greater in the caseof earlier stage as opposed to MBO=MBI stage investments.More established investee companies already have manage-ment structures in place, are an established market presenceand have existing suppliers and customers [25]. However,later stage investments will require other speci.c resources,especially .nancial if the investee .rm requires successivestages of .nancing. This need for specialist expertise in themanagement of investee companies may be met by the re-source base of the company or by industry experts from out-side the .rm. If this is not possible, or for other reasons, theventure capital .rm may wish to enlist the help of a syndi-cate partner to assist in the management of the investment.It needs to be appreciated, though, that syndication may notnecessarily reduce risk, it may increase it. To the extent thatsyndication increases co-ordination costs and the time scalesinvolved in decision making, risk may be increased if thenecessary critical decisions are delayed during times of dif-.culty. Syndication may therefore be viewed as a responseto the need to access additional resources in the selectionand management of investment opportunities. This discus-sion leads to the following research proposition (P2).

P2. Syndication is a response by venture capital 6rms tothe need to reduce risk via the superior selection and man-agement of investments.

2.3. Deal 9ow

Another important intangible resource that is highly val-ued by venture capitalists is deal 0ow. It is important forventure capitalists to be in a position to compete for asmany deals as possible so that they can make their invest-ment selections from a wide supply of deals. There are alsoimplications that will result from the quality of such deals.Deal 0ow becomes increasingly important in times when the


competition for deals is great and the availability of moneyto invest is high. The reciprocation of syndicated deals be-tween venture capital .rms may mean that deal 0ow canbe maintained even when an individual venture capital .rmmay not be the originator of the deal [4].

Irrespective of whether syndication facilitates the reduc-tion of risk via portfolio diversi.cation or specialisation,deal 0ow is vital to a venture capital .rm. It is anticipatedthat by syndicating out deals, .rms are intending to create anexpectation to reciprocate the gesture in the future. If so, the.rm may be invited to join other syndicates as a non-lead inthe future, and deal 0ow is increased. The above discussionleads to the research proposition below (P3).

P3. Syndication is a response by venture capital 6rms tothe need to access=reciprocate deal 9ow.

2.4. Syndication and stage of investment

The previous section considered general motives for syn-dicating private equity investments. However, sub-groupsof venture capital .rms may hold di?erent views on syndi-cation according to the stages of investment in which theyare involved. Elango et al. [23] argue that venture capital.rms should be divided into two sub-groups, those that onlyinvest at a later stage and those who invest at all stages.Firms investing in all stages may fund several rounds of in-vestment in a venture from early stage to expansion stage.Firms that only invest in later stage investments will placemuch greater emphasis on accounting information becauseof its availability [24]. This is compared with those .rmswho invest across the board who place greater emphasis onnon-accounting information [6].

The investment stages in which a venture capital .rm isprepared to invest may in0uence its attitude towards syn-dication. The risk sharing (portfolio diversi.cation) mo-tive for syndicating deals may di?er between venture cap-ital .rms. MBO=MBI investments tend to be larger thanearly and expansion stage investments (Table 2). BVCA

Table 2Average amount invested by .nancing stagea

Finance stage 1998 1997 1996(£ 000s) (£ 000s) (£ 000s)

Start-up 964 515 490Other early stage 1404 949 895Total early stage 1194 725 710Expansion 1422 1505 890Secondary purchase 1828 2511 2294Re.nancing bank debt 533 844 2809Total expansion 1466 1656 1138MBO 9767 6053 6341MBI 5254 4916 4747Total MBO=MBI 8328 5731 5853Total 3365 2747 2647

aSource: BVCA report on investment activity (1998).

evidence shows that the mean investment in venture backedMBOs=MBIs in 1997, the year immediately prior to thesurvey reported here, was £5:7 million, compared with£0:7 million for early stage and £1:7 million for expansionstage investments. MBOs=MBIs are generally less risky asthey are established businesses in established markets. Thisis re0ected in the signi.cantly lower target returns soughtby venture capital .rms in later stage investments such asMBOs=MBIs as compared to early stage investments [24].In addition, the larger equity funds raised in the late 1990sonwards for investment in MBOs=MBIs may enable riskspreading to be achieved through portfolio diversi.cationwithin a single fund [26], which was problematical in moretraditional venture capital funds. As noted already in Ta-ble 1, MBO=MBI investments are also less likely to besyndicated. As a consequence of the much higher risk pro-.les of early stage investments, it is therefore more likelythat venture capital .rms whose portfolios of investmentsinclude early stage deals will engage in syndication in or-der to spread the risk associated with speci.c deals. Thisdiscussion leads to research proposition P4.

P4. The risk sharing (portfolio diversi6cation) motive forsyndication will be signi6cantly more important for thoseventure capital 6rms whose portfolios include early stageinvestments compared to those venture capital 6rms invest-ing in MBOs=MBIs only.

Venture capitalists can add value, especially at the earlystages of ventures, in the form of information such as re-lationships with suppliers, distributors, etc. [27]. However,the resources required by the investee may vary with thestage of investment. Early stage investments often requirea much greater involvement by the venture capitalist inthe day-to-day operation of the business. In the case ofMBOs=MBIs, the .rm has a management structure in placeand is much more experienced; so that the exchange of .-nancial resources is likely to be more important.

It is anticipated, therefore, that the resource-based (riskreduction) motive for syndicating deals will be more impor-tant for those venture capitalists that include at least someearly stage investments in their portfolios because they willhave a greater need for informational resources, both beforeand after the closing of the deal. The need for such resourceswill be greater because they will be investing in more riskyearlier stage .rms that usually require a higher degree ofspecialisation. Those .rms that invest in MBO=MBI stageinvestments will be investing in established .rms in whichthe asymmetry of information problem is typically lowerand requirement for specialised informational resources less.This leads us to research proposition P5.

P5. The risk reduction (resource-based) motive forsyndicating deals will be signi6cantly more important toventure capital 6rms whose portfolios include early stageinvestments compared to those venture capital 6rmsinvesting in MBOs=MBIs only.


The .nal motive for syndication was that of deal 0ow.However, the importance of this motive for syndicationis not thought to di?er according to investment stagepreferences.

3. Methodology

This study involved an examination of syndication inthe UK venture capital market, The UK was selected as itis a developed market where syndication has been exten-sive and where there are venture capitalists with distinct fo-cuses on late stage (including MBO=MBI) and other stageinvestments.

The .rst stage in the process was the developmentof a questionnaire based on available literature. Aquestionnaire-based methodology was employed becausethe di?erent theoretical perspectives on syndication were an-ticipated to be multidimensional. Therefore, it was deemednecessary to ask respondents a number of di?erent ques-tions relating to each of the perspectives. The questionnairewas piloted in six interviews with a range of executives inventure capital .rms involved in di?erent stages of venturecapital investment. The interviews generally lasted a mini-mum of one hour. The venture capital .rms ranged from a.rm that only invested in early stage investments through tothose that invested across the board and those that investedin late stage investments only. The individuals interviewedin each company were at the level of investment executiveupwards, including assistant directors and directors. In thepilot interviews it was suggested that venture capital .rmswere likely to have corporate policies with regard to theissue of syndication. In order to check whether syndica-tion was a corporate level policy the questionnaire wassent to both the national o6ces of venture capital .rms aswell as their regional o6ces for those .rms with regionalnetworks. However, of the 23 .rms contacted, only tworeturned multiple copies of the questionnaire. Follow-uptelephone interviews conducted by the researchers with thenon-respondents established that one person from each or-ganisation had been selected to give the company view ofsyndication. In the two cases providing multiple responses,the responses were consistently similar. This strongly sug-gests that it was appropriate to send the questionnaire onlyto a representative at venture capital .rms’ head o6ces.

Following the pilot study, the questionnaire was admin-istered by post to the head o6ces of all 102 venture capital.rms in the UK, identi.ed using the British Venture CapitalAssociation (BVCA) handbook and Centre for ManagementBuy-out Research (CMBOR) records, during the early sum-mer of 1998. In order to increase the response rate, a secondround of the questionnaire was mailed after one month.

The questionnaire was mailed to the representatives of theventure capital .rms listed in the BVCA handbook. Theseindividuals’ presence in the handbook suggests that theyheld signi.cant decision making roles within their .rms.

Table 3Job functions of respondents

Count(%)

Managing director=CEO 10(16.7)

Director 23(38.3)

Assistant director 2(3.3)

Investment executive 13(21.7)

No response 12(20.0)

Total 60

From the responses, 20% did not report a job title, see Table3. However, over half of all respondents were at managingdirector=CEO or director level (55%) with the remainderof the sample being either assistant director or investmentexecutive (25%). This pattern of respondents is in line withthat of other recent studies of UK venture capitalists [28]and suggests that we have successfully targeted individualswho possessed the appropriate knowledge of their .rm andthe issue of syndication. Selective recall bias is unlikely tobe a problem given that respondents were senior executivesin their .rms, were involved in deal structuring issues on adaily basis and were asked questions that relate to their .rms’policies rather than to information speci.c to a particularinvestment or event.

Of the 102 companies targeted, 63 responses were ob-tained relating to one response per venture capital .rm. Ofthese, three were deemed unusable as the respondents hadnot completed any of the questions relating to syndication.The reason given for not completing the questionnaire fullywas that the survey was not applicable to their organisa-tion as they did not syndicate deals, or because they viewedsyndication as a well rehearsed topic. The analysis that fol-lows is, therefore, based on the remaining 60 cases, giv-ing a usable response rate of 58.8%. The .rm level char-acteristics of the sample are highlighted in Table 4. The.rst step in the analysis of the results was to check therepresentativeness of the sample of responding .rms andwhether any non-response bias existed. This was achieved asfollows.

The representativeness of the sample was tested usingthe .rm speci.c characteristics available for the populationas published in the BVCA Directory: source of funding,number of investment executives, and the .rms’ minimumand maximum investment preferences. Any potential di?er-ences between the respondents and non-respondents with re-spect to these variables were analysed using Mann–Whitneynon-parametric tests. These tests were preferred as they haveless rigorous assumptions than parametric tests [29]. For


Table 4The characteristics of the sample

Firm characteristics N Mean Median SD Min Max

Number of investment executives 60 11.80 8.00 18.48 1.00 130.00Number of investments in current portfolio 59 2.86 27.00 5.56 0.01 30.00Number of years .rm has been in operation 56 26.74 13.50 48.33 0.04 200.00Minimum investment preference (£ m) 52 50.82 0.50 88.66 0.25 450.00Maximum investment preference (£ m) 59 90.88 5.00 387.76 3.00 3000.00Maximum investment .rm could underwrite (£ m) 60 15.13 13.20 11.92 1.00 64.00How specialised is your .rm’s investment preferencesin terms of (please rate from 1 to 5, 1 = highly specialised ...5 = highly unspecialised)Industry sectorsa 60 3.10 3.00 1.32 1.00 5.00Finance stagesa 59 2.44 2.00 1.12 1.00 5.00Geographical regionsa 58 3.26 3.50 1.72 1.00 5.00

aScored on range 1 = highly specialised to 5 = highly unspecialised.

Table 5Tests for the representativeness of the sample

n Mean SD Mann–Whitney z-statistic

Source of funds Respondent 60 0.77 0.43 −1:07Non-respondent 42 0.85 0.36

Number of investment executives Respondent 60 11.27 18.11 −0:57Non-respondent 42 7.76 6.11

Minimum investment preference Respondent 60 2.82 5.56 −1:13Non-respondent 41 1.68 4.20

Maximum investment preference Respondent 56 26.91 48.25 −1:90a

Non-respondent 33 6.05 11.36

aSigni.cant at the 10% level.

ease of interpretation, we report z-statistics derived from theprocedure in SPSS which transforms the Mann–Whitney Ustatistic into a standard normal deviate z-statistic in order tocompute signi.cance levels [30, p. 379].

The results presented in Table 5 indicate that therewere no signi.cant di?erences between respondents andnon-respondents at the 5% level of signi.cance or better.However, there was weak evidence that the non-respondentshave signi.cantly lower minimum and maximum invest-ment preferences. Here and throughout the paper, the con-vention is adopted that a 10% level of signi.cance indicatesweak evidence of di?erences between groups; we suggestthat this is an appropriate cut-o? point given the exploratorynature of the research in this paper.

In addition to testing for representativeness, the poten-tial for non-response bias was also investigated using vari-ables in the questionnaire. The potential for non-responsebias was tested by dividing respondents into those that hadinitially returned the questionnaire (group 1), and those thatreturned the questionnaire after the follow-up second mailround (group 2). The latter group is taken as a proxy fornon-respondents that can then be compared against initial re-

spondents. Two levels of analysis were conducted here: .rst,the responses of the two groups in terms of their attitudestowards syndication were compared using Mann–WhitneyU tests. This analysis found that there were no signi.cantdi?erences in terms of the groups’ responses at the 10%level of signi.cance or better. Second, the .rm level char-acteristics of the two groups were compared using Mann–Whitney U tests, the results of which are presented in Table6. The results showed signi.cant di?erences between thetwo groups in terms of only three out of 11 criteria: the max-imum size of investment that a .rm could underwrite (group1 being signi.cantly larger than group 2 at the 5% level ofsigni.cance); the number of years a .rm had been in oper-ation (group 2 being signi.cantly older than group 1 at the10% level); and the extent to which a .rm is specialised interms of the industry sectors in which it will invest (group1 being signi.cantly more specialised than group 2 at the5% level).

In order to examine P4 and P5 it was necessary to splitthe venture capital .rms in the sample according to their in-vestment stage preferences. Investment stage can be directlyproxied by the investment stage focus of the venture capital


Table 6Tests for non-response bias

N Mean SE of Mann–Whitneymean z statistic

Invest o? own balance sheet only Round 1 47 0.74 0.06 −0:76Round 2 13 0.85 0.10

Number of investment executives Round 1 47 12.53 3.09 −0:99Round 2 13 9.15 2.93

Co-investment rights Round 1 44 0.39 0.07 −0:33Round 2 12 0.33 0.14

Minimum investment preference Round 1 46 3.47 0.91 −1:84a

Round 2 13 0.69 0.58Maximum investment preference Round 1 45 32.70 7.80 −2:07b

Round 2 11 2.34 0.58Maximum size of investment .rm could underwrite Round 1 40 51.71 11.85 −1:56

Round 2 12 47.84 37.09Total funds managed=advised Round 1 35 385.62 121.11 −1:72a

Round 2 13 106.38 64.97Number of investments in current portfolio Round 1 46 107.80 64.65 −0:69

Round 2 13 31.00 7.71Number of years in operation Round 1 47 14.91 1.96 −1:88a

Round 2 13 15.92 0.84Extent to which specialised in industry sectors Round 1 47 3.30 0.18 −2:06b

.rm will invest inc Round 2 13 2.38 0.40Extent to which specialised in stages of .nancing Round 1 47 2.51 0.16 −1:08.rm will invest inc Round 2 12 2.17 0.35Extent to which specialised in geographical regions (UK) Round 1 47 3.43 0.25 −1:54.rm will invest inc Round 2 11 2.55 0.47

aSigni.cant at the 10% level.bSigni.cant at the 5% level.cScored on range 1 = highly specialised to 5 = highly unspecialised.

.rm or indirectly by the size of investment, the two beinghighly correlated ([18] and Table 2 above). First, venturecapital .rms’ investment stage preferences were obtainedfrom the BVCA handbook but these tend to be broad, withit being di6cult to separate out expansion and MBO=MBIinvestments. Second, based on evidence in Table 2 that theactual mean size of MBO=MBI investments is much largerthan for all other investment stages, the sample of venturecapital .rms was divided into two groups according to theirminimum investment preferences as stated on our question-naire; those that prefer to invest £5 million plus and thosethat invest less than £5 million. This size cut-o? was deter-mined by the mean size of MBO=MBI investments in 1997as shown in Table 2, the latest year available at the time ofthe survey.

The two groups of .rms, those that invest in MBO=MBIstage deals and those venture capital .rms whose portfo-lios include at least some early stage investments, werethen compared in terms of their characteristics using Mann–Whitney U tests. In Table 7 and subsequent tables compar-ing investment stage .ndings, we use the results based onthe size proxy. The .ndings using size as a proxy for focus

on MBO=MBI investments were in the same direction butstronger than those based on the broader stage preferencesreported in the BVCA handbook. 3

The results from Table 7 indicate that there are substantialdi?erences between those .rms that invest in MBOs=MBIsonly and those .rms that include early stage investments intheir portfolio. The .rms that invest in late stage deals onlyare less likely to be investing o? their own balance sheet only(signi.cant at 5% level); employ more investment execu-tives (signi.cant at 1% level); provide more co-investmentrights (signi.cant at 1% level); have larger maximum in-vestment preferences and are able to underwrite larger deals(both signi.cant at 1% level); manage=advise a greater totalof funds (signi.cant at 1% level); and are less specialised interms of the industry sectors (signi.cant at 10% level) andgeographical regions (signi.cant at the 1% level) in whichthey will invest.

3 The .ndings based on the broader stage preference de.nitionare available from the authors.


Table 7Firm level di?erences between late stage only investors and others

N Mean SE of Mann–Whitneymean z statistic

Invest o? own balance sheet only Other 49 0.71 0.07 −2:01a

Late stage 11 1.00 0.00Number of investment executives Other 49 10.82 2.86 −3:40b

Late stage 11 16.18 2.39Co-investment rights Other 46 0.30 0.07 −2:32a

Late stage 10 0.70 0.15Maximum investment preference Other 46 8.36 2.18 −4:82b

Late stage 10 111.25 18.72Maximum size of investment .rm could underwrite Other 42 26.31 11.12 −4:40b

Late stage 10 153.75 25.14Total funds managed=advised Other 39 237.94 105.48 −3:50b

Late stage 9 622.22 133.56Number of investments in current portfolio Other 48 100.23 62.01 −1:19

Late stage 11 50.09 14.86Number of years in operation Other 49 13.52 1.15 −0:77

Late stage 11 22.32 6.45Extent to which specialised in industry sectors Other 49 2.94 0.19 −1:94c

.rm will invest in Late stage 11 3.82 0.30Extent to which specialised in stages of .nancing Other 48 2.46 0.15 −0:53.rm will invest in Late stage 11 2.36 0.43Extent to which specialised in geographical regions Other 47 2.87 0.25 −3:59b

(UK) .rm will invest in Late stage 11 4.91 0.09

aSigni.cant at the 5% level.bSigni.cant at the 1% level.cSigni.cant at the 10% level.

4. Results of testing of propositions

The analysis presented below relates to the tests carriedout concerning the propositions identi.ed above. Pairwisetests relating to di?erences between the importance of the.nance=risk sharing versus resource based=risk reductionversus deal 0ow rationales for syndication as expressed byeach venture capital .rm were conducted using the WilcoxonMatched Pairs test as the two samples are not independentand this test does not require the underlying distributionof the data to be normal [29]. These tests relate to P1, P2and P3. Tests relating to di?erences between venture cap-ital .rms investing in MBOs=MBIs and those investing inat least some early stage investments, P4 and P5, were con-ducted using Mann–Whitney U tests, for reasons outlinedearlier.

4.1. Motives for syndication

This section presents the results from the survey relatingto venture capitalists’ decisions to syndicate out a deal. Ta-ble 8 shows the results for the sample of .rms as a whole.Panel A of Table 8 outlines the importance of the di?er-ence between resource-based, .nance and deal 0ow factorsas motives for syndication. This analysis is then presented

in aggregated form in Panel B, in which the means for eachof the three di?erent factors are computed from the scalecomponents. The scales were considered to be highly reli-able in the light of the exploratory nature of the researchwith the Cronbach’s � for the scales being: resource basedview = 0:87; .nance = 0:72; and deal 0ow = 0:86.

The results from Table 8 Panel A indicate that, for thesample as a whole, the traditional .nance motive for syndi-cation appears to be more important than any other motive.All the means for the individual variables relating to the .-nance perspective are scored more highly than those relatingto both the resource based and deal 0ow perspectives. Themost highly scored variable is the “the large size of the dealin proportion to the size of funds available. These appar-ent di?erences are con.rmed by the statistical tests shownin Panel B. The results presented in Panel B are based onthe combined mean scores for the variables relating to the.nance, resource based and deal 0ow perspectives in turn.As noted above, the di?erences between the importance ofthe di?erent factors were tested using the Wilcoxon-matchedpairs tests. The results indicate strong support for the portfo-lio diversi.cation (risk sharing) motive for syndication (P1)over the resource based (risk reduction) perspective (P2) orreciprocation of deal 0ow (P3) in a .rm’s decision to syn-dicate out a deal. The pairwise analysis indicates that the


Table 8Motives for syndicating-out a deal

How important are the following factors in in0uencing your decision to N Mean Median Mode SDsyndicate deals? (Please rate from 1 to 5, 1 = very important ... 5 = very (Rank)unimportant)

Panel A: individual variables

Traditional .nance perspectiveThe large size of the deal in proportion to the size of funds available 59 1.53 1 1 1.61

(1)The requirement for additional rounds of .nancing 60 2.08 2 1 1.17

(2)The large size of the deal in proportion to the .rm’s average deal size 59 2.29 2 1 1.33

(3)The large size of the deal in proportion to the largest deal previously 58 2.88 3 2 1.35undertaken by your .rm as a sole investment (4)A high degree of speci.c risk associated with the deal 59 3.05 3 2 1.46

(5)Resource-based perspectiveThe need to access speci.c skills in order to manage the investment 59 3.36 3 5 1.39

(8)Di6culty in bringing in industry experts from outside 59 3.66 4 5 1.45

(9)The deal is outside the investment stage(s) in which you usually invest 54 3.67 (10) 5 5 1.50The deal is outside the industries in which you usually invest 57 3.74 (11) 4 5 1.38The deal is located outside of the geographical region(s) in which you 55 3.93 (13) 5 5 1.43usually investThe need to seek the advice of other venture capital .rms before investing 58 4.22 (15) 5 5 0.96Deal 0owThe possibility of the future reciprocation of deals (deal 0ow) 60 3.20 3 3 1.31

(6)The reciprocation of past deal 0ow 60 3.23 3 3 1.29

(7)

Motive N Mean SD Wilcoxon-matched pairs z statistic

Panel B: comparison tests of motives for syndicating deals

Resource-based perspective 50 3.82 1.06 −5:61a

Traditional .nance perspective 3.24 0.87

Traditional .nance perspective 57 2.34 0.88 −4:56a

Deal 0ow 3.23 1.21


Deal 0ow 3.24 1.21aSigni.cant at the 1% level.

.nance portfolio diversi.cation (risk sharing) motive is themost important one for .rms syndicating deals. The .nancefactor was found to be signi.cantly more important thanthe resource based (risk reduction) and deal 0ow motivesat greater than the 1% level of signi.cance, thus supportingproposition P1. In addition, the deal 0ow perspective (P3)was found to be more important than the resource base (P2)perspective as a motive for syndication; this result was sig-ni.cant at greater than the 1% level of signi.cance.

The analysis presented above was then repeated for theissue of what motivates a .rm not to syndicate out a deal.The analysis presented in Table 9 indicates that the .-nance perspective (P1) is a more important motive than theresource-based perspective (P2) for venture capital .rmsnot syndicating out deals. The results are in accordance withthose presented above for the motives for venture capital.rms to syndicate out deals. In particular, Table 9 Panel Ahighlights that the traditional .nance (risk sharing) factors


Table 9Motives for not syndicating a deal

How important are the following factors in your decision NOT TO N Mean (Rank) Median Mode SDSYNDICATE a deal? (Please rate from 1 to 5, 1 = very important ...5 = very unimportant)

Panel A: individual variables

Traditional .nance perspectiveThe small size of the deal 59 1.56 (1) 1.00 1 1.02The desire to keep attractive deals for oneself 58 1.98 (2) 2.00 1 1.16The low risk associated with the deal 58 2.86 (3) 2.5 1 1.66Resource-based perspectiveThe investment is in a geographic region in which you have 57 3.19 (5) 3.00 5 1.48experienceThe investment is in an industry sector in which you perceive 58 3.14 (4) 3.00 5 1.50yourself to have a specialismThe investment is at an investment stage in which you perceive 58 3.26 (6) 3.00 5 1.38yourself to have a specialism

Motive N Mean SD Wilcoxon-matched pairs z statistic

Panel B: comparison tests of motives for not syndicating deals


Traditional .nance perspective 2.13 0.99

aSigni.cant at the 1% level.

are all scored as more important than the resource-based(risk reduction) factors determining whether or not a dealwill be syndicated.

This perception is reinforced by the analysis presented inaggregated form in Table 9 Panel B, in which the meansfor each of the two di?erent factors are computed fromthe scale components. The scales for the resource-basedview were considered to be highly reliable in the light ofthe exploratory nature of the research with a Cronbach’s�=0:84. The scale for .nance, with a Cronbach’s �=0:62,is however, less reliable and needs to be treated as ex-ploratory only. Wilcoxon-matched pairs tests of di?erencebetween the two factors indicate that the .nance (risk shar-ing) motive is more important than the resource-based (riskreduction) perspective at greater than the 0.01% level ofanalysis.

The analysis presented above in Tables 8 and 9 high-lights that the most important motive in the syndica-tion of deals is the .nance perspective (risk sharing)and thus supports P1. The resource-based (risk reduc-tion) perspective of syndication was found to be theleast important motive and therefore there is little evi-dence to support proposition P2. The deal 0ow perspec-tive (P3) was found to be of intermediate signi.cance,being less important than the .nance (risk sharing) andmore important than the resource-based perspective (riskreduction).

4.2. Syndication and investment stage

The sample was split into two sub-groups according to in-vestment stage preferences, as discussed above: those .rmsthat invest in MBO=MBI only and those .rms that invest inat least some early stage investments. The results relatingto the Mann–Whitney U tests between the di?erent groups’motives for syndicating out deals are presented in Tables 10–12; the results for the groups’ motives for not syndicatingdeals are presented in Tables 13 and 14.

4.2.1. Finance=risk sharing motiveTable 10 presents the analysis of the di?erences between

the rankings for the elements of the .nance motive forsyndicating out deals as an overall mean (i.e. the itemswere summed and then averaged) and as individual com-ponents of the scale. The results indicate signi.cant di?er-ences between those venture capital .rms focusing only onMBO=MBI investments. The overall mean of the scales in-dicates that those .rms investing in at least some early stageinvestments perceive the .nance (risk sharing) motive to bemore important than those who invest in MBO=MBI dealsonly (signi.cant at the 5% level), which provides supportfor proposition P4. In addition, when the individual compo-nents of the scale are analysed, two factors are signi.cantlydi?erent between the two groups. These factors are the re-quirement for additional rounds of .nancing (signi.cant at


Table 10Finance motives for syndicating-out dealsa

How important are the following factors in Minimum N Mean SE of Mann–Whitneyin0uencing your decision to syndicate deals? investment mean z-statistic(Please rate from 1 to 5, 1 = very important ... 5 = very unimportant) preference

The large size of the deal in proportion to the size of funds available Other 48 1.42 0.13 −1:13Late stage only 11 2.00 0.49

The requirement for additional rounds of .nancing Other 49 1.88 0.14 −2:21b

Late stage only 11 3.00 0.49

The large size of the deal in proportion to the .rm’s average deal size Other 49 2.10 0.18 −2:21b


The large size of the deal in proportion to the largest deal previously Other 48 2.77 0.19 −1:27undertaken by your .rm as a sole investment Late stage only 11 3.36 0.45

A high degree of speci.c risk associated with the deal Other 48 2.90 0.21 −1:68Late stage only 11 3.73 0.43

Sum of the scale Other 47 2.21 0.11 −1:99b


aNote: The sum of scale variable was calculated as the simple mean of the other .ve variables in the table.bSigni.cant at the 5% level.

Table 11Resource base motives for syndicating-out dealsa

How important are the following factors in Minimum N Mean SE of Mann–Whitneyin0uencing your decision to syndicate deals? investment mean z-statistic(Please rate from 1 to 5, 1 = very important ... 5 = very unimportant) preference

The need to access speci.c skills in order to manage the investment Other 48 3.23 0.19 −1:46Late stage only 11 3.91 0.46

Di6culty in bringing in industry experts from outside Other 48 3.52 0.21 −1:57Late stage only 11 4.27 0.36

The deal is outside the investment stage(s) in which you Other 44 3.50 0.23 −1:93b

usually invest Late stage only 10 4.40 0.40

The deal is outside the industries in which you usually invest Other 46 3.63 0.20 −1:38Late stage only 11 4.18 0.44

The deal is located outside of the geographical region(s) in which you Other 44 3.77 0.22 −1:78b

usually invest Late stage only 11 4.55 0.31

The need to seek the advice of other venture capital .rms before investing Other 47 4.19 0.14 −0:61Late stage only 11 4.36 0.287

Sum of the scale Other 41 3.70 0.16 −2:27c


aNote: The sum of scale variable was calculated as the simple mean of the other .ve variables in the table.bSigni.cant at the 10% level.cSigni.cant at the 5% level.

the 5% level) and the large size of the deal in proportionto the .rm’s average deal size (signi.cant at the 5% level),which are both more important to those .rms who do notinvest in MBO=MBI deals only. However, no signi.cant dif-ferences were identi.ed between the two groups of venturecapital .rms with respect to the large size of the deal in pro-portion to the size of funds available, the larger size of the

deal in proportion to the largest deal previously undertakenby the venture capital .rm as a sole investment, and a highdegree of speci.c risk associated with the deal.

4.2.2. Resource-based=risk reductionThe analysis was repeated for the resource-based factors

(risk reduction) (Table 11). With respect to resource-based


Table 12Deal 0ow motives for syndicating-out dealsa

How important are the following factors in Minimum N Mean SE of Mann–Whitneyin0uencing your decision to syndicate deals? investment mean z statistic(Please rate from 1 to 5, 1 = very unimportant ... 5 = very unimportant) preference

The possibility of the future reciprocation of deals (deal 0ow) Other 48 3.19 0.18 −0:15Late stage only 12 3.25 0.45

The reciprocation of past deal 0ow Other 48 3.19 0.18 −0:63Late stage only 12 3.42 0.43

Sum of the scale Other 48 3.19 0.17 −0:36Late stage only 11 3.33 0.44

aNote: The sum of scale variable was calculated as the simple mean of the other .ve variables in the table. No signi.cant di?erences atthe 10% level or better.

Table 13Finance motives for not syndicating-out a deala

How important are the following factors in Minimum N Mean SE of Mann–Whitneyyour decision NOT TO SYNDICATE a deal? investment mean z statistic(Please rate from 1 to 5, 1 = very unimportant ... 5 = very unimportant) preference

The small size of the deal Other 48 1.42 0.11 −1:28Late stage only 11 2.18 0.50

The desire to keep attractive deals for oneself Other 47 1.87 0.14 −0:54Late stage only 11 2.45 0.53

The low risk associated with the deal Other 47 2.77 0.24 −0:87Late stage only 11 3.27 0.54

Sum of the scale Other 47 2.02 0.12 −1:19Late stage Only 11 2.63 0.42


Table 14Resource-base motives for not syndicating-out a deala

How important are the following factors in Minimum N Mean SE of Mann–Whitneyyour decision NOT TO SYNDICATE a deal? investment mean z statistic(Please rate from 1 to 5, 1 = very important ... 5 = very unimportant) preference

The investment is in a geographic region in which Other 46 3.28 0.22 −0:93you have experience Late stage only 11 2.82 0.46

The investment is in an industry sector in which Other 47 3.19 0.21 −0:56you perceive yourself to have a specialism Late stage only 11 2.91 0.56

The investment is at an investment stage in which Other 47 3.36 0.19 −1:07you perceive yourself to have a specialism Late stage only 11 2.82 0.54

Sum of the scale Other 46 3.31 0.17 −1:08Late stage only 11 2.85 0.50



(risk reduction) motives for syndicating out deals, themean rankings computed for the scale were found to di?ersigni.cantly between the two groups, with those venturecapital .rms that invest in at least some early stage dealsrating the resource-based motive for syndication as moreimportant than their counterparts (signi.cant at the 5%level). This supports proposition P5, that the resource-based(risk reduction) motive for syndication will be more impor-tant for those .rms that invest in at least some early stagedeals. In addition, when the individual components of thescale were analysed a number of weakly signi.cant di?er-ences between the two groups were found (i.e. at the 10%level). Speci.cally, di?erences related to the deal beingoutside the stage in which the venture capital .rm usuallyinvests and the deal being located outside the geographi-cal areas in which the venture capital .rm usually investswere found to be more important factors for those .rmsthat invest in at least some early stage investments (weaklysigni.cant at the 10% level).

4.2.3. Deal 9owThe results relating to the importance of deal 0ow for the

two groups are presented in Table 12, and indicate, as anti-cipated, no di?erences with respect to the groups’ perceptionof the importance of this factor as a motive for syndicatingout deals.

4.3. Non-syndication

The .nal two tables present the results relating to the splitgroup analysis of the motives for not syndicating deals. Theresults presented in Tables 13 and 14 represent those of the.nance (risk sharing) and resource-based (risk reduction)motives, respectively. No signi.cant di?erences were iden-ti.ed between the late stage only investors and those that donot restrict themselves to late stage only.

The above results suggest that venture capital .rms thatinvest in at least some early stage investments considerboth the .nance (risk sharing) and resource-based (risk re-duction) motives to be more important in their decisionto syndicate out a deal than their counterparts investing inMBOs=MBIs; these .ndings support propositions P4 and P5.However, the low mean scores for the resource-based (riskreduction) motives suggest that these are a less-importantmotive for syndication than .nance (risk sharing) consider-ations.

5. Discussion and conclusions

The above analysis highlights a number of key .ndings.First, the motives for syndicating a deal appear to be drivenmuch more by .nance considerations rather than by the ex-change of .rm speci.c resources or deal 0ow. This resultmay be contrasted with research from the US venture cap-ital industry that found that syndication is both a function

of the desire to spread .nancial risks as well as the needto share information (.rm speci.c resources) [8,9]. Sec-ond, when the sample was sub-divided into two groups,those venture capital .rms that only invest in MBO=MBIsand others, a greater level of support was found for theresource-based perspective from those venture capital .rmsthat invest in at least some early stage investments. However,the split-sample analysis found that both the resource-basedand .nance motives for syndication were less important indetermining whether or not a deal will be syndicated forthose .rms investing in MBO=MBI stage investments only.

The present study has a number of implications for bothresearchers and practitioners. Previous studies have sug-gested that the behaviour of venture capital .rms is nothomogeneous with respect to the di?erent investment stagesin which they specialise. This paper extends the evidence onthese di?erences to the case of syndication. Earlier studiesof syndication have tended to focus on either early stage in-vestments [23] or later stage MBOs=MBIs [13]. The .ndingsin this paper highlight that di?erent approaches are adoptedby those venture capital .rms focusing on MBO=MBI stageinvestments compared with those investing in at least someearly stage investments. The evidence presented here re-garding syndication supports earlier work by Bygrave andTimmons [9] and Wright and Robbie [24,6] that the natureof the investment decision is di?erent when comparing laterstage with earlier stage investment.

A number of areas for further research are suggested byour exploratory results. There is a need to examine the struc-ture and operational processes of syndicates, including anal-ysis of the behaviour of deal leaders and followers. There isalso a need to consider the process by which venture capital.rms select syndicate partners and how syndicates are man-aged with respect to both early and later stage investments.Relatively little is known about the success of syndicated in-vestments compared to venture capital investments that arenot syndicated. Further analysis of this issue may be helpfulin explaining the recent fall in the rate of syndication in theUK and many other venture capital markets.

Our analysis has focused on the perspectives of venturecapital investors. As with other research on venture capitalmonitoring, there is a need to consider the impact of syndi-cated versus non-syndicated investment from the perspec-tive of the investee. This research might usefully take intoaccount the three-way relationships between the syndicatelead, non-lead members and the investee.

Analysis of the operational processes of syndicates mightalso include further consideration of the role of trust inrelationships between venture capital .rms and investors,between venture capital .rms and their funds providers andbetween venture capital members of syndicates. Issues oftrust have been examined as part of the venture screeningprocess [22], venture capital monitoring [31] and havebeen shown to include several dimensions (e.g. swift trust,competence trust, contractual trust, goodwill trust, etc. [seee.g. [22,32]]. Evidence from elsewhere [8] of the existence


of extensive networks involving repeat syndication be-tween venture capital .rms, suggests that trust may have animportant role to play. There is a further need to examinethe relative importance of trust in the relationships be-tween syndicate members as compared with contractualmechanisms governing the relationship.

There is extensive research on the information used byventure capital .rms in screening potential investments.However, as with the search processes of entrepreneurs,there is little information on the processes by which ven-ture capital .rms acquire information and the sources ofthis information. Similarly, there is little information onthe di?erent search processes involved in syndicated andnon-syndicated deals. There is a need to enhance under-standing, for example, of the extent to which syndication isundertaken as part of the search process by lead investorsto enable them to access necessary information for the in-vestment decision. By the same token, there is a need toexamine the extent to which venture capital .rms becomenon-lead members of syndicates as they do not possess theexpertise or resources to acquire information independently.In this sense, becoming a syndicate member may also bepart of a learning process prior to becoming a deal leader.

An understanding of the process of accessing informationfollowing the investment is also a potentially important areafor further research. There may be di?erences between leadand non-lead syndicate members with regard to accessinginformation from the investee. To what extent are rights ofaccess enshrined in the deal contract? To what extent doesaccess to information rely on trust between the syndicatemembers? To what extent is their di?erential access to in-vestee management by lead and non-lead syndicate mem-bers? What are the implications for the nature and timelinessof information and hence for investment monitoring?

A further area for research concerns the scope of analysis.Owing to sample size limitations, this exploratory paper hasfocused on univariate analysis of data relating to the UK.Additional research based on multi-national studies may af-ford larger sample sizes and facilitate the adoption of multi-variate approaches to data analysis. Multivariate studies arenecessary to take into account the simultaneous e?ects ofsize, experience and reputational factors relating to venturecapital .rms that may a?ect the motivation to syndicate andwhich we have not been able to address here in this ex-ploratory analysis. There are competing views about the ef-fects of these characteristics on the willingness to syndicate.Venture capital .rms with greater experience and reputationmay, on the one hand be less motivated to syndicate a trans-action because they believe that by investing in sole invest-ments they have the expertise to generate superior returns totheir competitors. Alternatively, they may still be motivatedto syndicate transactions because they place importance onreducing the variance of their returns and=or gaining accessto deal 0ow. Multinational studies might enable potentialbetween-country di?erences in the syndication process to beidenti.ed. Such analysis is important to establish whether

the results reported here in relation to the UK are generalis-able to another context. To date there is limited research oncross-country di?erences in the behaviour of venture capi-tal .rms, but the research which is available has suggestedsigni.cant di?erences between countries in respect of mon-itoring [33] and valuation approaches [34]. The absence ofmultinational studies is an important omission given the in-creasing cross-border investment by venture capital .rmsand could provide useful insights for practitioners. Acrossthe European venture capital industry as a whole, the per-centage of annual amount of non-domestic investments rosefrom 11% in 1992 to 23% in 1998 [35,36].

The .ndings of the present study raise potential concernsfor practitioners in the light of market developments. Inrecent years there has been a substantial reduction in theproportion of UK venture capital deals that are syndicated,although at the time of writing the growth in interest inInternet companies may o?set this trend as these gener-ally are signi.cantly more risky investments. The generallydownward trend in syndication suggests that venture capi-tal .rms see a reduced need to syndicate for .nancial risksharing or accessing .rm resources. The lack of support forthe resource-based and deal 0ow motives for syndicationcasts some doubt on the e6cacy of attempts to add value innew types of investments such as investor-led buy-outs andleveraged build-ups [37]. Venture capital .rms may be giv-ing inadequate emphasis to the need to access other skills toenable them to make superior deal selection decisions and,more importantly in the light of our .ndings, in terms of thesubsequent management of investments. At present, it is toosoon to provide a systematic assessment of the outcome ofthese investments. However, analysis of similar transactionsinvolving management buy-ins that indicates signi.cantlyhigher failure rates than for management buy-outs [38] sug-gests there is a need for prudence and careful attention todeal selection issues. Syndication is one means by whichventure capital .rms can access the necessary skills to addvalue to their investments. This is not to suggest, however,that it is the only way to do so. Further research is neededto examine the mechanisms by which venture capital .rmsaccess these skills.

Acknowledgements

Financial support for CMBOR from Barclays Private Eq-uity and Deloitte and Touche Corporate Finance is gratefullyacknowledged. The helpful and constructive comments ofthe editor and three anonymous referees are acknowledgedwith thanks. We also gratefully acknowledge the invalu-able input and contribution of Ken Robbie and commentson an earlier version by participants at the ESRC IndustrialEconomics Network seminar held at Southampton Univer-sity in September 1998.


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