Syndication of Venture Capital Investments - Theory and Practice in Germany

Diploma Thesis, 2003

244 Pages, Grade: 1


Schloß Reichartshausen am Rhein
Diploma Thesis
for obtaining the academic title
Syndication of Venture Capital Investments ­
Theory and Practice in Germany
Finn Rieder
Due Date:
February 21, 2003

Table of Contents
List of Addenda ...V
List of Tables... VI
List of Figures...X
List of Abbreviations ... XI
Introduction... 1
1.1. Problem set and course of investigation... 1
1.2. Definition of venture capital ... 2
1.3. Definition of venture capital syndication... 2
1.4. Syndication practice of venture capitalists in Europe ... 3
Exploration of the data set... 5
2.1. Methodology ... 5
2.2. Description of the sample... 6
Number of investors... 6
Syndication Ratio of the investors ... 8
Number of portfolio companies ... 9
Geographical characteristics of the sample ... 10
Distribution of the venture capital investors in Germany ...10
Distribution of the portfolio companies in Germany ...11
Rationales for venture capital syndication... 13
3.1. The finance-based motive ... 13
3.2. The resource-based motive ... 14
The Superior Investment Selection Hypothesis ... 15
The Value Added Hypothesis ... 16
Evaluation of the Value Added Hypothesis and the Selection Hypothesis .. 17
3.3. The deal flow motive ... 18
3.4. Other motives ... 19
Window dressing... 19
Collusion ... 20
3.5. Empirical relevance of the major motives... 20

Facto rs influencing the propensity to syndicate... 24
4.1. Degree of uncertainty... 25
4.2. Industry of the investee company... 26
4.3. Type of the venture capital investor ... 30
4.4. Characteristics of the venture capital organisation... 32
Size ... 32
Maturity... 35
Specialisation... 36
Investment amount ... 37
Workload of the investment manager ... 37
4.5. Location of the venture capital firm and the portfolio company... 37
4.6. Investment stage ... 40
4.7. Competition in the venture capital market ... 41
Syndicate formation and networking of venture capital organisations ... 42
5.1. Partner selection in syndicates ... 42
5.2. The structure of venture capital syndicates... 44
The role of the lead investor... 45
5.3. Syndication under a networking perspective ... 47
Networking activities of venture capitalists... 47
Implications on venture capitalists ... 48
Implications on entrepreneurs ... 48
Syndication and firm value of the portfolio company ... 49
6.1. Syndicates of independent venture capitalists ... 49
6.2. Syndicates of corporate venture capitalists ... 51
Potential problems with syndication ... 54
7.1. Informational asymmetry ... 55
7.2. Coordination problems ... 55
Conclusion... 57
8.1. Prospects... 57
8.2. Avenues for further research... 58
8.3. Closing remarks... 59

Appendix ... 61
... 61
... 120
... 216
References... 222
Endnotes... 227

List of Addenda
Addenda 1: Variables listed in the primary Excel file ...61
Addenda 2: Data processing and consolidation of the original Excel file ...63
Addenda 3: Consolidation of the industries of the portfolio companies...71
Addenda 4: Data aggregation of the venture capital investors and portfolio companies...80
Addenda 5: Creation of the Syndication Ratio of the venture capital investors ...86
Addenda 6: Frequency distribution of the variable "IC Industry" ...91
Addenda 7: Aggregation of the Syndication Index and the variable "IC Industry" ...91
Addenda 8: Handling of Chi-squared tests with under-represented cell counts ...97
Addenda 9: Description and geographical distribution of the types of venture capital
investors ...102
Addenda 10: Aggregation of the variable "VC Type" and the Syndication Ratio ...104
Addenda 11: Aggregation of the variable "VC Size ­ Categorised" and the Syndication
Ratio ...106
Addenda 12: Calculation of the co- investment ratios of the most frequented clusters...107
Addenda 13: Calculation of the Syndication Index of the foundation types of the
portfolio companies...113
Addenda 14: Aggregation of the variable "IC Failure" and the Syndication Index ...115
Addenda 15: Frequency Distribution of the variable "IC Failure" ...118

List of Tables
Table 1: Total investment amount and number of venture capital investments syndicated in
Europe in 2001 ...120
Table 2: Syndication rates of German venture capitalists 2001 (all stages) ...120
Table 3: Syndication rates of German venture capitalists 2001 (early stage) ...121
Table 4: Syndication rates of German venture capitalists 2001 (later stage)...121
Table 5: Average number of investments per investor (total sample)...121
Table 6: Average number of investments per investor (single-time investors excluded) ...122
Table 7: Frequency distribution of the number of investments per investor ...122
Table 8: Names of the in vestors with at least five investments ...123
Table 9: Frequency distribution of the categorised number of investments per investor ...128
Table 10: Statistics on the particular size classes of the investors ...128
Table 11: Frequency distribution of the particular size classes of the investors...130
Table 12: Frequency distribution of the Syndication Ratio of the investors...131
Table 13: Mean of the Syndication Ratio (total sample) ...133
Table 14: Mean of the Syndication Ratio (single-time investors excluded)...133
Table 15: Average number of investors per portfolio company ...134
Table 16: Frequency distribution of the number of investors per company ...134
Table 17: Name of the portfolio companies with at least three investors...135
Table 18: Average Number of investors per portfolio company (companies with less
than two investors excluded) ...143
Table 19: Portfolio companies categorised according to their number of investors ...143
Table 20: Statistics on the particular syndication classes of the portfolio companies ...143
Table 21: Frequency distribution of the particular syndication classes of the portfolio
companies ...145
Table 22: Frequency distribution of the cities of the investor s ...145
Table 23: Frequency distribution of the clusters of the investors ...148
Table 24: Frequency distribution of the states of the in vestors...150
Table 25: Frequency distribution of the cities of the portfolio companies (Cities with
less than two portfolio companies excluded) ...151

Table 26: Frequency distribution of the clusters of the portfolio companies ...156
Table 27: Frequency distribution of the states of the portfolio companies ...158
Table 28: Frequency distribution of the distance between the investor and its portfolio
company ...160
Table 29: Frequency distribution of the industries of the portfolio companies ...160
Table 30: Syndication Index of the factor "IC Industry" (all portfolio companies) ...161
Table 31: Significance of the factor "IC Industry" on the Syndiction Index (all portfolio
Table 32: Comparison of the categories of the factor "IC Industry" (all portfolio
Table 33: Syndication Index of the factor "IC Industry" (only co-invested portfolio
Table 34: Significance of the factor "IC Industry" on the Syndiction Index (only co-
invested portfolio companies) ...170
Table 35: Comparison of the categories of the factor "IC Industry" (only co-invested
portfolio companies)...171
Table 36: Chi-squared test for the variables "VC Type" and "IC Industry" (all company
industries and investor types) ...178
Table 37: Chi-squared test for the variables "VC Type" and "IC Industry" (company
industries and investor types with a too low cell count excluded) ...178
Table 38: Contingency table for the variables "VC Type" and "IC Industry" (portfolio
company industries and investor types with a too low cell count excluded) ...179
Table 39: Frequency distribution of the investor types...180
Table 40: Chi-squared test for the variables "VC Type" and " VC Cluster"...181
Table 41: Contingency table for the variables "VC Type" and " VC Cluster"...182
Table 42: Syndication Ratio of the investor types ...183
Table 43: Significance of the factor "VC Type" on the Syndiction Ratio ...183
Table 44: Comparison of the categories of the factor "VC Type" (on the Syndication
Ratio) ...184
Table 45: Significance of the factor "VC Type" on the Syndication Index...190
Table 46: Average number of co-investors of the investor types ...191

Table 47: Comparison of the categories of the factor "VC Type" (on the Syndication
Table 48: Syndication Ratio of the investors according to their size...198
Table 49: Significance of the factor "VC Size" on the Syndiction Ratio ...198
Table 50: Comparison of the categories of the factor "VC Size" (on the Syndication
Ratio) ...199
Table 51: Frequency distribution of the single-time investors according to their type...201
Table 52: Average number of co-investors of the investors according to their size ...202
Table 53: Significance of the factor "VC Size" on the Syndiction Index...202
Table 54: Comparison of the categories of the factor "VC Size" (on the Syndication
Table 55: t-test on the Syndication Ratio of Young- and Established Specialist...205
Table 56: t-test on the Syndication Ratio of Specialised- and Non-Specialised investors .205
Table 57: Significance of the factor "VC Cluster" on the Syndication Ratio ...206
Table 58: Significance of the factor "Distance" on the Syndication Index...207
Table 59: Average number of investors of the portfolio companies according to their
mean distance to their investors ...207
Table 60: Comparison of the characteristics of the factor "Distance"...208
Table 61: Syndication Index of the portfolio companies according to their foundation
type ...209
Table 62: Significance of the factor "IC Foundation Type" on the Syndiction Index...209
Table 63: Comparison of the categories of the factor "IC Type"...210
Table 64: Chi-squared test for the variables "VC Type" and " VC Lead yes/no"...211
Table 65: Contingency table for the variables "VC Type" and " VC Lead yes/no"...211
Table 66: Significance of the factor "IC Failure" on the Syndication Index ...212
Table 67: Comparison of the categories of the factor "IC Failure"...212
Table 68: Syndication Index of the portfolio companies according to their failure-
characteristics ...213
Table 69: Chi-squared test for the variables "VC Type CVC yes/no" and "IC Failure"...213
Table 70: Contingency table for the variables "VC Type CVC yes/no" and "IC Failure".214
Table 71: Chi-squared test for the variables "VC Type" and "IC Failure"...214

Table 72: Contingency table for the variables "VC Type" and "IC Failure" ...215

List of Figures
Figure 1: Number of investments distributed according to the name of the investors...216
Figure 2: Frequency distribution of the number of investments per investor ...216
Figure 3: Number of investments per investor according to their size class...217
Figure 4: Frequency distribution of the portfolio companies according to their total
number of investors ...217
Figure 5: Histogram of the number of investors per portfolio company ...218
Figure 6: Frequency distribution of the size classes of the portfolio companies ...218
Figure 7: Frequency distribution of the clusters of the investors...219
Figure 8: Frequency distribution of the clusters of the portfolio companies ...219
Figure 9: Frequency distribution of the distance between the investor and its portfolio
Figure 10: Frequency distribution of the industries of the portfolio companies ...220
Figure 11: Frequency distribution of the investor types ...221

List of Abbreviations
Bundesverband Deutscher Kapitalbeteiligungs-
Corporate venture capital
Business to Business
Business to Consumer
British Venture Capital Association
For example
European Venture Capital Association
Global Fortune 500 InfoCom Corporations
High Innovative Technology Companies
Investee company
Initial Public Offering
Low Innovative Technology Companies
Venture Capital

Problem set and course of investigation
Cooperation among financial institutions is a persistent feature of the equity issu-
ance process. Also, the syndication of venture capital investments is common practice
among vent ure capitalists. Despite the importance of syndication, surprisingly little is
known on the motives and structure of syndication (Manigart et al. (2002)). Further-
more, there is hardly any empirical evidence for Europe or particularly Germany on the
syndication behavior of VC organisations and the factors influencing their overall pro-
pensity to co- invest.
On the one hand, the purpose of this paper is to compile and summarise all aspects
of the existing theory on VC syndication. Therefore, the evidence from the few empir i-
cal studies that were so far carried out on this topic is discussed. Thus, the general the-
ory on syndication, which is thought to be independent from peculiar VC industries,
serves as the framework throughout this paper which is complemented by the results of
the empirical analyses done so far by different authors. On the other hand, this text has
also an explorative component where it is analysed if and to what degree findings of the
existing studies also hold for the German VC market. This analysis is done by the use of
a data base listing a total of 3,230 VC investments in German portfolio companies. The
nature of the data base at hand is not designed to allow for conclusions on all relevant
aspects of syndication. But the claim of this paper is to use and analyse it whenever it is
possible and the data base can be linked to aspects on syndication discussed throughout
the different chapters.
Firstly, this paper gives a theoretical overview on general motives behind VC syn-
dication which leads to a discussion which rational is more important in explaining VC
syndicates and if there are differences between the North American and European VC
market with regards to this. Then, as the principal part of this paper, various factors in-
fluencing the propensity of VC investors to syndicate are analysed and ­ whenever pos-
sible and appropriate ­ also reviewed based on the data base. The next part exa mines the
process of forming and managing a syndicate, after the decision to co- invest a deal was
made built upon the motives and factors of influence, and to what extent networking
activities play a role in it. After this, it is discussed if syndicates enhance the firm value

of the portfolio company and whether there is a difference between the value added of
syndicates formed by independent VC organisations and corporate venture capital
(CVC) firms. Then, the major potential drawbacks of syndicates are reviewed to the ex-
tent they were researched so far. Finally, the paper concludes with a short prospect on
the development of the importance of VC syndication and names some avenues for fur-
ther research.
Definition of venture capital
The VC industry, unlike most other parts of the financial sector, lacks a precise le-
gal or regulatory definition. Looking at the broad variety of common definitions of VC,
they usually focus on four characteristics. The first characteristic sees VC as a source of
financing for privately held companies. Secondly, this sort of financing happens usually
in form of either equity or long term convertible debt. Thirdly, the venture capitalist is
seen as an intermediary between investor and entrepreneur (Schilit (1991)). Lastly, the
combination of equity investments and active involvement in the development of the
company is a unique characteristic of the VC industry (Kunze (1990)).
The principle of venture capital is to provide high potential growth companies with
the required funds and market expertise they need to make their business model a suc-
cess. Venture capitalists strive for substantia l capital gains and returns in the medium or
sometimes long term, compensating them for the high uncertainty and risk they accept
with their investments (Sahlmann (1990)). The ability to select investment opportunities
from a wide range of expected returns is vital to any venture capital organisation. Dif-
ferent to other institutional investors, venture capitalists face an informational disadva n-
tage as they do not invest in public quoted companies (Fama (1991)).
With regard to deal selection and monitoring, venture capital firms have developed
different strategies to reduce uncertainty in their high risk environment. One of these
strategies is to syndicate investments with other venture capitalists (Manigart et al.
(2002), Wright and Robbie (1998)).
Definiti on of venture capital syndication
Syndication is one form of collaboration among venture capitalists. As Lerner
(1994) points out, cooperation among financial institutions is an enduring feature of the

equity issuance process. The first syndicated underwriting to be recorded dates back to
1870 and was an offering by Pennsylvania Railroad (Lerner (1994)).
An equity syndicate involves several venture capitalists taking an equity stake in an
investment (Lockett and Wright (1991)). It involves "[...] a group of individuals who
must make a common decision under uncertainty that will result in a payoff to be shared
jointly among them" (Wilson (1968), p. 119).
Thereby it is possible to make a distinction between a narrow and broad definition
of VC syndication. The narrow definition takes only venture capitalists that make the
investment decision simultaneously in the first financing round into consideration,
whereas the broader definition allows for investments to be syndicated, none important
whether the investment decision was made at the same or different time (Brander
(2002)). The analysis of the data set throughout this paper is always based on the
broader definition of syndication considering an investment as syndicated when the
portfolio company is funded by mo re than one VC investor.
Syndication practice of venture capitalists in Europe
The concept of syndicating investment deals is very common among US- and
European venture capitalists. In August 2002, Tornado Insider, a European trade journal
focusing on start-ups, identified 100 promising European based technology companies.
The study showed that more than 90% of these start-ups were given venture capital,
with at least 85% of them being funded by a syndicate of venture capital firms (Tornado
Insider (2002)).
According to the European Venture Capital Association (EVCA) almost 30% of the
amount invested by European venture capitalists and number of VC deals were synd i-
cated in 2001 (see table 1). This appears relatively low compared to the fact that over
60% of VC investments in the US were syndicated in 2000. However, a 30% share
equaling a total amount syndicated of 7 billion still emphasizes the importance synd i-
cation plays in the European VC market and that it is well worthwhile to analyse the
backgrounds of syndication practice (EVCA (2002)).
As Chiplin et al. (1997) point out, the UK has the most established and mature VC
industry in Europe and syndication has been common practice in its VC market for
many years. Thus, with a total investment volume of almost 7 billion, the UK is the

biggest VC market in Europe and ranks world-wide second behind the US. Germany
(4.4 billion investment volume) and France (3.3 billion) are the next biggest Euro-
pean VC markets (see table 1).
Although being the largest European VC market, Germany (1.5 billion) and
France (1.4 billion) are ahead of the UK (1.3 billion) in terms of investment amount
syndicated by venture capitalists. Additionally, the UK shows the lowest number of in-
vestments syndicated (13.7%) and syndicated invested amount (19.3%) in Europe.
disagrees with Ooghe et al. (1991) who find that increasing maturity of markets is often
associated with increased syndication. (see table 1)
According to the EVCA (2002), among the six countries Belgium, France, Ger-
many, The Netherlands, Sweden and the UK, syndication in terms of amounts invested
is most common in Belgium: In 2001, 53.9% of the total VC investment amount was
invested through syndicates (while only 24% of all VC deals were syndicated). Contrary
to this, in Sweden only 9% of the total investment amount is syndicated, whereas the
number of deals syndicated (40%) is significantly higher (see table 1).
For the German VC industry, the "Bundesverband Deutscher Kapitalbeteiligungs-
gesellschaften" (BVK (2002)) reports that 32.9% of the total investment amount was
syndicated in 2001. This represents an amount syndicated of 1.5 billion in Germany.
Moreover, 37.5% of all German VC investments were syndicated (see table 1). Of the
total amount syndicated by German venture capitalists 66.9% were invested on a na-
tional, 28.7% on a European and only 4.4% on a trans- European level (see table 2).
Nearly 65% of the total amount syndicated by the German VC industry was spent
on the funding of late stage ventures and 35% on early stage ventures respectively
(EVCA (2002)). There is a distinct difference between the pattern of syndication of
early- and late stage investments: In Germany 92.1% of the amount syndicated in early
stage ventures is invested by German venture capitalists (see table 3). The amount syn-
dicated for late stage ventures, however, is partly financed by German syndicates
(52.1%), European syndicates (43.5%) and even trans-European syndicates (4.4%) (see
table 4).

Exploration of the data set
The empirical analys es in this paper are carried out on a data base from the Chair of
Entrepreneurship lead by Prof. Dr. Klandt at the European Business School in Oestrich-
Winkel, Germany. In an Excel file, this data base lists a total of 3,272 valid transactions
where a VC investor (German or non-German) funds a German investee company.
Originally, the database was built upon approx. 1,500 VC transactions from the
year 1998 on that were researched for the project ""
. In early 2002, Prof.
Dr. Klandt's chair adopted these 1,500 transactions and extended them through continu-
ous research to a total of 3,272 until December 2002. The information on these VC
transactions in Germany are exclusively based on secondary sources, such as the inter-
net, bus iness reports of VC firms, print media, Genios-, MARKUS- and other data
For the purpose of this analysis, 42 transactions were excluded in which a one-time
investor (all companies from various industries which did a single occasional VC in-
vestment) took an equity stake in a company which has no investors else wise. These
investments were of no interest in terms of VC syndication as they involved a non-VC
orientated single-time investing company and a portfolio company that was solely
funded by this one investor and not through a syndicate.
The 3,230 remaining transactions were originally described by 86 variables, giving
further information on different aspects of each transaction (see Addenda 1). Most of
these variables in the original Excel file were either of little interest with regards to the
study on syndication or could not be used for proper statistical analysis due to data qua l-
ity reasons. Thus, the analyses in this paper are mostly based on twelve of the original
variables which will be described later in the text and also serve to derive a whole set of
new variables from them.
The sample was described and analysed by importing the original Excel file into the
statistic software program SPSS. Due to the heterogeneous nature of the secondary
sources and the way the information on the different variables of each transaction were
entered in the original Excel data base, it was necessary to edit, modify and complete
the whole data set in SPSS before it was used for statistical purposes. The major meas-

ures and steps undertaken to improve the overall quality of the sample are described in
addenda 2 and 3
The data base with its entries on all the transactions as well as the SPSS-edition at
hand are in German. The names of the variables as well as the newly created variables
with their entries are translated into English, but it would have been to elaborate to
change all original data entries of the sample and the automated SPSS outputs to Eng-
Description of the sample
The sample consists of a total number of 3,230 transactions where a VC investor
takes in some way an equity stake in a portfolio company. For each of these 3,230
transactions, there exist no missing values on the names of the VC investor and investee
company, thus the bottom line information of each transaction is that the participating
investor and portfolio company are known. The 3,230 transactions are distributed on
812 different VC investors and 1,962 portfolio companies. 1,377 transactions (42.6%)
are investments in companies that have only one VC provider and the other 1,853 trans-
actions (57.4%) involve co-invested companies with more than one investor. In the fo l-
lowing, the distribution of the VC investors and portfolio companies is described (see
addenda 4).
Number of investors
All transactions in the sample are completed by N=812 different VC investors. The
number of investments per single VC provider ranges from 1-120 recorded transactions
(range=119). As can be seen from table 5, the 812 investors of the sample have on aver-
age an equity stake in four different portfolio companies, whereat VC investors with
only one investment form the most represented group (mode=1). If only considered
those investors with two or more investments (N=301), the mean number of investments
per VC provider significantly increases to nine (see table 6), with two being the most
frequent value (mode).
A high standard deviation of almost 9.36, thus nearly 2.5 times the arithmetic mean,
indicates a strong dispersion of the distribution of the 812 investors. As demonstrated
by the extreme sinistral asymmetry ("Linksschiefe") of seven, the sample does not show
a symmetric distribution around the mean of number of transactions. The asymmetric

distribution form becomes apparent in figure 1. Obviously, the graph is rather complex
due to the high number of different VC firm names but reflects well the trend of the ac-
cumulation of FC investors in Germany: Firstly, some very few VC firms are involved
in remarkably many investments. Secondly, the number of different VC investors dis-
tinctly grows with decreasing number of investments. Thus, the sample of 812 VC pro-
viders consists of very few large investors (with tbg being the biggest one with 120
transactions) and a strong majority of small ones (see figure 2).
511 investors (62.9%) were only invested in a single company. Moreover, the num-
ber of VC providers with less than ten investments accounts for over 90% of the total
sample (see table 7).
Table 8 lists all investors with more than five investments with their particular
number of investments. This table points up that the 31 VC firms with 20 or more in-
vestments only make up 3.8% of the total number of VC investors, but made almost
40% of all 3,230 transactions of the sample. The four largest VC firms (0.5% of all in-
vestors) tbg Technologie-Beteiligungsgesellschaft (N=120 investments), TFG Venture
(N=100), 3i Deutschland (N=94), Knorr Capital Partners (N=86) combine 400 transac-
tions, 12.4% of the whole sample. In contrast to this, the 511 investors with only a sin-
gle transaction account for 62.9% of all investors in the data set, but cover only 15.8%
of the transactions in the sample. This emphasises again on the one hand the high con-
centration of VC investments on a few very large VC companies in Germany and on the
other hand the vast majority of small VC investors having a portfolio of only one or
very few VC investments.
On the basis of table 7 and 8 it seems appropriate to classify the investors according
to their number of transactions in groups of "one time investor" (1 investment), "very
small VC" (2-3 inv.), "small VC" (4-6 inv.), "lower middle fie ld VC" (7-10 inv.), "up-
per middle field VC" (11-20 inv.), "large VC" (21-50 inv.) and "very large VC" (>50
inv.) (see table 9). This classification concisely displays the character of the distribu-
Almost 2/3 (N=511) of all investors in the sample take only once a VC equity stake
in a company, 14.7% (N=119) are very small VC investors with 2-3 transactions, and
9.6% (N=78) are small with still less than seven companies. 41 VC firms (5%) in the
lower middle field have up to ten investments and 32 venture capitalists (3.9%) form the
upper middle field with in-between 11-20 investments. There are 25 large VC firms

with up to 50 investments (3.1%) and only six organisations (0.7%) completed more
than 50 transactions each and thereby constitute the top flight of the 812 VC investors.
The allocation of the investors in size classes is visualised in figure 3. Table 10
contains detailed statistics on each particular size class and table 11 lists their individual
frequency distribution.
Syndication Ratio of the investors
It is interesting to describe the propensity to syndicate of the VC investors in the
sample. The propensity of an investor to co-invest is expressed in this paper by its ratio
of syndicated investments to those that he did on his own. The Syndication Ratio di-
vides the number of co- invested deals by the total number of deals the investor com-
pleted in the sample (see addenda 5). The higher the Syndication Ratio of an investor,
the more he tends to invest in portfolio companies that are funded through a co-
Table 12 shows the frequency distribution of the Syndication Ratio of the investors.
The value "0" in the table indicates that the specific investor invested exclusively on his
own and was not involved in any co- investment. This is the case for 126 investors,
equaling a share of 15.5%. All other 686 investors of the sample (84.5%) did at least
participate in one syndicate during their investment activities. Only 185 investors
(22.8%) have a syndication ratio other than "0" or "1". By far the most VC providers
(N=501; 61.7%) have a syndication ratio of "1", meaning that they invested solely in
companies that were funded through a co- investment.
Based on all 812 VC investors of the sample the mean Syndication Ratio is striking
73.5%, saying that the investors of the sample tend by far more to invest in portfolio
companies that have more than one investor than to invest in companies that have no
other investors (see table 13).
However, it is important to note that this number is biased in a way. In the sample,
there are 511 investors who did only one single VC investment. If this particular com-
pany was funded through a syndicate, the single time investor gets the maximum synd i-
cation ratio value of 100% (1.0). Still it would be misleading to reason that this single
time investor has a higher propensity to syndicate than for example 3i Deutschland
which invested in 94 companies and has a Syndication Ratio of 70%.
Therefore, these
511 one-time investors which can only have a syndication ratio of either "1.0" or "0.0"

were excluded from the calculation of the next mean. In doing so, the new mean of the
overall Syndication Ratio of the sample is 0.6 and applies to the remaining 301 VC in-
vestors of the sample which have at least two investments (see table 14).
Number of portfolio companies
The 3,230 transactions are distributed on a total of 1,962 different capital seeking
companies. The range with regards to the number of investors involved in the funding
of a single company is between 1-17, with one being the mode (see table 15). More than
70% (N=1,377) of all investee companies in the sample have only one investor and 92%
of them are funded by not more than three different VC investors (see table 16). Com-
panies with more than five investors on board account for 3% of the sample. Finally,
there are only nine portfolio companies being funded by ten or more VC providers. A
list with the names of the portfolio companies and their number of investors is given in
table 17.
The distribution of the companies according to their total number of investors
is shown in figure 4.
Throughout this paper, each portfolio company is allocated a Syndication Index
which is created as an important input factor for the statistical analysis throughout the
text. The Synd ication Index simply calculates how many different investors a company
has. A Syndication Index of four means that the company is funded by a co-investment
of four different VC providers, for example.
From all transactions results an average of
1.65 investors per portfolio company (Syndication Index=1.65). However, if only calcu-
lated on the basis of the companies that have at least two funding investors (N=585) the
mean almost doubles to 3.17 (see table 18). Thus, if it comes to a co- investment of a
portfo lio company in the sample, the average number of investors is 3.2.
The standard deviation of the number of investors (1.45) for the sample of the
1,962 companies is lower than the one of the number of transactions of the VC investors
(9.36), however also here, the distribution shows a sinistral asymmetry of four, indicat-
ing that it is non-symmetric distributed around the arithmetic mean (see figure 4).
With regards to further statistical analyses, the histogram for the portfolio compa-
nies suggests rather awry values as borders for a classification according to their num-
ber of investors (see figure 5). When looking at the frequency distribution in table 16, it
appears to be more reasonable to classify each of the 1,962 companies in groups of be-
ing funded by a "one single investor", "small syndicate" (2-3 investors); "middle synd i-

cate" (4-5 investors), "large syndicate" (6-9 investors), and "very large syndicate" (>9
investors). The overall frequency distribution of this classification is summarised in ta-
ble 19.
As already stated, only 30% of the portfolio companies have more than one inves-
tor. The aggregated 30% share of those companies with at least two investors (N=585)
is portioned out on 435 investee firms funded by a small syndicate (22.2%), 94 funded
by middle syndicates (4.8%), 47 funded by large syndicates (2.4%) and nine portfolio
companies funded by very large syndicates (0.5%) (see table 19). The overall distribu-
tion of the size classes is pictured in figure 6.
Further detailed statistics on the classification of the portfolio companies with re-
gards to by what kind of syndicate they are funded is given in table 20. Finally, table 21
contains the detailed frequency distribution within each syndication class.
Geographical characteristics of the sample
In the following, the distribution characteristics and statistics of the variables de-
scribing geographical aspect of the 3,230 transactions are analysed. In doing so, the base
entity always is the transaction and not, as the names of the variables used to describe
the transactions might suggest, the VC investors or portfolio companies themselves.
Distribution of the venture capital investors in Germany
The city of the VC investor (variable "VC City") is known for 2,679 of the 3,230
transactions of the sample. These 2,679 transactions are distributed on 90 cities of the
VC investors in Germany and 20 cities abroad (see table 22). As can be seen from this
table, Munich is the explicit leading VC city of Germany with more than ¼ of all trans-
actions. The metropolis Munich, Berlin and Frankfurt combine a share of 50.6%
(N=1,355) of all transactions emphasising their dominant role in the German VC indus-
try. The strong position of Bonn (5
place with 5.4% of all transactions) is due to one
dominant VC firm, tbg. The geographical concentration of VC investors in few large
cities is also emphasised by the fact that 68.2% (N=75 cities) of the 110 cities are less
than ten times the basis for transactions of VC investors.
On a next level, smaller cities in the catchment area of a metropolis are allocated to
clusters. Based on the variable "VC Cluster", 2,535 transactions of VC investors are
spread on 47 clusters in Germany and show for the large cities a highly similar distribu-

tion as the variable "VC City" (see table 23 and figure 7). Also here, the cluster Munich
clearly is at the top with 711 transactions (28%). It is followed by Berlin (N=409,
16.1%) and Frankfurt (N=336, 13.3%). The three most frequent clusters Munich, Berlin,
and Frankfurt combine a share of 57.7% (N=1,465) of the 2,535 transactions, which is
7% more than for the variable "VC City". This is explained by the fact, that these clus-
ters include transactions from smaller cities nearby. Surely, the high concentration of
the clusters is even higher than that of the VC firm cities: ¾ of all 2,535 recorded trans-
actions are allocated to VC investors coming from one of the six largest out of 47 total
The state the VC investor comes from (variable "VC State") is known for 2,644 of
all 3,230 transactions in the sample. As expected from the distribution of the cities and
clusters, by far the greatest share of these transactions (29%; N=767) are allocated to
VC firms from Bavaria (see table 24). The next top three states Nordrhein-Westfalen
(N=451; 17.1%), Berlin (N=409; 15.5%) and Hessen (N=371; 14.1%) all have a similar
share of the transactions. Combined with Bavaria, they bundle more than ¾ of all trans-
actions in German portfolio companies. Hessen clearly ranks before Hamburg (N=184;
7%) as there are a number of large VC firms based in Frankfurt. VC investors from for-
eign countries account for 3.1% of the transactions which still places them before
Thüringen (1.9%), Brandenburg (1.5%), Niedersachsen (1%), and Rheinland-Pfalz,
Saarland, Schleswig-Hostein, Mecklenburg-Vorpommern and Bremen, the latter ones
being home to VC investors which did less than 1% of the 2,644 transactions.
Distribution of the portfolio companies in Germany
The city of the portfolio company (variable "Investee Company (IC) City") is
known for 2,980 of all 3,230 transactions of the sample (see table 25). These transac-
tions are distributed on 478 different cities, which meets the expectation that the inves-
tee companies are much stronger spread across Germany than the VC firms. Similar to
the VC firms, Munich (N=473) and Berlin (N=366) are the most dominant cities in the
sample and account for 28.2% of the 2,980 transactions. Frankfurt (3.1%), the 3
popular VC city (9.6% on the variable "VC City"), is home to less capital seeking firms
than Hamburg (7.3%), Cologne (5.2%) and Martinsried (3.7%). Generally, the distribu-
tion of the transactions across the group of the most frequent investee company cities is
more balanced than the one for the VC firm cities. But the degree of concentration of

the distribution still is very high with the top eight of the 478 portfolio company cities
combining 50.6% (N=1,509) of all 2,980 transactions.
The information from which of the 47 clusters the portfolio company comes (vari-
able "IC Cluster") from is given for 2,517 of the 3,230 transactions (see table 26). The
dominant position of Munich (N=679; 27%) is at least partly explained by the allocation
of Martinsried (N=111 for the variable "IC City") to this cluster. As for the variable "IC
City", Berlin forms the second largest cluster (14.8%) followed by Hamburg (9.1%),
Cologne (7.7%) and Frankfurt (5.8%). The five largest clusters make up 64.4% of all
2,517 transactions. The distribution in form of a bar chart is shown in figure 8.
The variable "IC State" provides on 2,740 transactions the information in which
state the investee company is based. Bavaria with almost 1/3 of all transactions (N=805)
is by far the most represented state of the portfolio companies of the sample (see table
27). The second most frequent state is Nordrhein-Westfalen (N=430; 15.7%) followed
by Berlin where the companies in 370 transactions came from (13.5%). These three
states already make up 58.6% of the 2,740 transactions. If complemented by Hamburg
(N=222; 8.1%), Hessen (N=210; 7.7%), and Baden-Württemberg this number increases
to 81.6%. The remaining 504 transactions (18.4%) are distributed on ten German states
and 21 foreign countries.
Overall the distribution shows that the VC investors, as well as the portfolio com-
panies, are highly concentrated on few regions in Germany. Clearly the cluster Munich,
where by far the largest number of VC firms and investee companies are located, is the
most popular German metropolitan area for VC. The clusters Munich, Berlin, Frankfurt,
Cologne and Hamburg play the absolute prominent role in the German VC industry.
Other cities and regions are only of secondary importance. The distribution also clearly
reflects that there are by far more portfolio companies in West - than in East Germany
and that those VC investors based in East Germany mostly operate from Leipzig, Jena
and Dresden.
The variable "Distance" measures for 1,390 transactions the number of kilometres
(km) between the VC firm and its portfolio company. In most cases (N=604; 43.5%),
the VC investor and the investee company are located in the same city (see table 28).
There is also a considerable number of transactions (N=125; 9%) where both parties are
very close to each other (up to 50km). In contrast to this, 500 transactions (36%) show a
distance of more than 200km between the two parties. Within this group, 212 transac-

tions (15.3%) involve a company and an investor which are more than 500km afar and
in 288 cases (20.7%) 200-500km lie in-between the two. The classes "up to 200km"
(N=97; 7%) and "up to 100km" (N=64; 4.6%) are less frequent with the latter being the
scarcest one. Thus, one can conclude that the investors and their portfolio companies
either tend to be very close together with a distance of not more than 50km (N=729;
52.5%), or rather far away from each other with a distance of more than 200km or even
500km (N=500; 36%). This distribution is visualised in figure 9.
Rationales for venture capital syndication
There exist two dominant competing views as to why venture capitalist syndicate,
which are the traditional finance-related perspective and the resource-based perspective.
A third perspective acknowledges the impact of reciprocated deal flow which some-
times is also related to the resource-based perspective. In the following, these three per-
spectives will be primarily investigated. Other rationales behind syndication, such as
window dressing and the collusion of VC firms, are also presented. Then, the empirical
relevance of the finance-related rational and the resource-based rational in Europe and
the US are analysed.
All rationales as follows are described from a perspective to syndicate out an in-
vestment. Locket and Wright (1999) find that the motivation to join a syndicate is ex-
plained by the same factors to syndicate out an investment: the traditional finance per-
spective, the resource-based perspective or deal flow.
The finance-based motive
The finance-related rational for syndication originates from finance theory and is
therefore also seen as the traditional approach. The finance perspective is to see synd i-
cation as a mean for venture capitalists to build up a well-diversified portfolio and re-
duce risk without reducing return. The relevant risk-consideration for a VC investor is
the contribution of an investment to the overall risk of his portfolio. This depends on the
covariance of the portfolio and the investment opportunity. There are two subdivisions
of risk involved in an equity investment. While the market component is systematic and
cannot be eliminated, the firm specific risk component is non-systematic and can there-
fore be reduced by holding a well-diversified portfolio. In a well-balanced VC portfolio

there exists a minimum level of co-variance between the different investments (Mani-
gart at al. (2002), Lo cket and Wright (2001), Markowitz (1959)).
Syndication allows a venture capitalist to participate in more deals and to spread his
financial risk on a larger number of investments. Therefore, syndication can serve as a
mean to considerably reduce the variation of returns without lowering the overall ex-
pected return of the portfolio (Manigart et al. (2002)). The constraints on investment
activities are based on the Modern Portfolio Theory. Its main principle is the efficient
diversification of investments (Elton and Gruber (1995)).
Firstly, venture capitalists encounter the difficulty to obtain a well-diversified port-
folio, since they do not invest in listed stocks as institutional investors. The difficulty
arises on the one hand from ex-ante asymmetric information and also from the size of
the fund required (capital restraints).
This demonstrates that through syndication smaller venture capitalist can actually
invest in deals with a high amount of required funds. Thus, syndication enables venture
capitalists to invest in more companies and thereby increases the balance of their portfo-
lio. The result is a reduction of the overall risk of the fund (Manigart et al. (2002)).
Another characteristic of the VC industry promoting syndication is the illiquidity of
investments. This means that venture capitalists have their capital bound to the investee
company for a longer period. The minimum investment period makes equity illiquid in
the short- to medium-term and therefore equity cannot be continuously traded. Further-
more, due to ex-ante information asymmetry, the actual risk of a project may turn out to
be higher than expected. Under these circumstances it may be difficult to adjust the
portfolio by divesting because the capital is bound to the investee company. As a result,
venture capitalists should strive to access a diversity of projects at the initial investment
stage because these require a lower investment amount (Lockett and Wright (1999)).
To summarise, syndication enables the sharing of risk on a deal-by-deal basis that
could lead to a reduction of the overall portfolio risk without giving up return (Manigart
et al. (2002)).
The resource-based motive
Frequently syndication occurs in the VC industry even though the amount of fund-
ing required for the investment opportunity is relatively modest compared the financial

resources of the venture capitalists. The resource-based perspective raises the question
why venture capitalists still syndicate in such situations. (Brander (2002)). The re-
source-based approach sees the VC market as a pool of productive resources in which a
VC organisation can access resources of another venture capitalist through syndication
(Manigart et al. (2002), Bygrave (1987).
The Superior Investment Selection Hypothesis
At the pre-investment stage, Lerner (1994) suggests the Selection Hypothesis as a
rational for VC syndication. Under this hypothesis the evaluation process before the se-
lection of an investment opportunity is undertaken by more than one venture capitalist.
The evaluation of the same venture proposal by different VC companies operating in a
syndicate reduces therefore the potential danger of adverse selection (Lerner (1994,
Houben (2002)). The combined effort to assess the quality of a venture helps VC inves-
tors to overcome informational asymmetries as the entrepreneurs typically know more
about the investment opportunity they seek funding for and might overstate the attrac-
tiveness of his business proposal (Sorenson and Stuart (1999)).
Sah and Stiglitz (1986) compare the decisio n- making process under different sce-
narios: In the first scenario the project is already accepted when a single party thinks
that it is worth undertaking. In the second scenario, however, two or more separate par-
ties must be convinced by the investment opportunity before the project is undertaken.
Sah and Stiglitz (1986) conclude that the decision making process is more efficient and
leads to better results if the project is only undertaken when approved by two or more
Transferred to the situation of a VC syndicate this means that the involvement of
two or more venture capitalists leads to better decisions whether to invest in a venture
not. The same investment opportunity is screened and evaluated by different VC firms
under different aspects. If all potential syndicate members believe that it is worthwhile
to invest in the venture this is a good indication for the success of the investment.
The Superior Selection model expects syndicated deals to be of higher quality than
deals selected and completed by a single VC investor. However, Brander (2002) takes a
different view on the common assessment of an investment opportunity. He points out
that the reputation of the investing parties plays an important role since the more estab-
lished and renowned VC firms will firstly receive projects for evaluation. Therefore, at

first they can assess and decide solely over the project. If they find the project not to be
of sufficient quality and potential they will reject it without further consideration. On
the other extreme, if the project is very promising and offers a high expected return they
will accept the project without the consultation of a second party. The more established
VC firms then also have mostly the financial resources to fund the project without the
help of a syndicate and try as a single investor to get all the financial benefits from the
lucrative project.
These two extreme scenarios of a very bad and a very promising project lead to the
conclusion that syndication occurs in the intermediate range of the assessed project
quality. If the evaluating venture capitalist is not able to clearly identify a project as
profitable it will pass it on to other VC firms for their review and evaluation. In case
different other VC providers evaluate the venture and believe that it is profitable enough
then an investment syndicate may be formed for the project of intermediate quality
(Brander (2002).
This results in the conclusion that stand-alone investment projects should promise
higher average returns than syndicated investments. Therefore, by assuming that the
Superior Selection Hypothesis is a central motive for syndication, it has to be acknowl-
edged that syndicated investments possibly lead to lower average returns than stand-
alone projects (Brander (2002)).
Finally, it has to be stated that the Superior Selection Hypothesis does not hold in
the case of a lead investor undertaking the whole deal at first and then syndicating down
the investment to other investors. In this case the risk-sharing perspective is more ap-
propriate as the decision to invest has already been made (Lockett and Wright (1999)).
The Value Added Hypothesis
The Superior Selection Hypothesis applies to the pre- investment stage whereas the
Value Added Hypothesis in terms of managerial activities is a resource-based motive
for syndication which holds for the post- investment stage.
Under the Value Added Hypothesis venture capitalists are considered to add value
to the performance of the venture after they invested in it. This contrasts with the selec-
tion hypothesis, where syndication helps investors to select the best projects, but does
not influence the performance of the investee company (Brander (2002)).

A lead investor acts according to the Value Added Hypothesis when he believes
that the involvement of other venture capitalists would add some value to the venture.
The benefit of involving co- investors is derived from heterogeneous skills and informa-
tion different venture capitalists can contribute to the management of the venture com-
pany. The need for such additional resources is anticipated to be greater in earlier stages
of an investment, than in later-stage investments. This is mainly due to the fact that
more mature investee-companies already have an established management structure and
market position and have already built relationships with suppliers and customers
(Locket and Wright (1999), Brander (2002)).
Evaluation of the Value Added Hypothesis and the Selection Hypothesis
When evaluating the Value Added Hypothesis it is important to compare the ob-
served financial returns of investments that were syndicated to those that were funded
by a single investor. The Value Added Hypothesis predicts that the financial returns on
syndicated investments should exceed the return of a stand-alone investment due to the
sharing of resources in a syndicate. Also the Superior Selection Hypothesis expects
syndicated investments to be of higher quality as they were reviewed and approved by
different VC investors.
Contrary to this, Brander (2002) also sees The Value Added Hypothesis as a rele-
vant motive to syndicate leading to higher returns of co- invested deals but expects the
Selection Hypothesis to lead to lower returns of syndicated investments. Thereby, he
finds the two hypotheses to be mutually exclusive. In order to test if syndicated VC in-
vestments have higher or lower returns he uses the Macdonald & Associates database
for returns on Canadian VC investments. He finds that syndicated investment projects
have significantly higher returns than investments of a stand-alone status. Thus, accord-
ing to Brander (2002) the Value Added Hypothesis should be favoured over the Selec-
tion Hypothesis in order to explain the resource-based rational for syndicating VC in-
Brander (2002) does not deny the value of a second opinion for the investment se-
lection process, but emphasizes that venture capitalists do much more than merely se-
lecting profitable projects. He sees the post- management and development of the ve n-

ture as the core competency of venture capitalist activities rather than the investment
Considering the possibility that both motives and hypothesis could operate at the
same time it could be assumed that "Syndication is a response to the need to share in-
formational resources in the ex ante selection and ex post management of invest-
ments."(Lockett and Wright (1999), p. 307).
The deal flow motive
Due to syndication, venture capitalists can expand their geographical and industrial
reach. This is mainly based on two factors ­ trust and reciprocity. Prior co- investing ex-
perience can create a relationship based on trust and competence and can be a strong
influence in the selection of future potential partners. Trust is an important factor since
VC firms do not only invest in local ventures. Therefore, they often rely on the evalua-
tions of another investor since it could be closer to the venture in a physical or industry-
related way. Reciprocity is reflected in the fact that different investments are often made
by the same group of investors which already shared a number of investments before.
This demonstrates that venture capitalists build up ties with one another and then invite
each other to participate in new deals (Sorenson and Stuart (1999)).
A lead investor hopes that in the future he will be invited by his co-investors who
then put together a syndicate under their lead. By syndicating deals to others, venture
capitalists anticipate to receive the same gesture in the future, thereby increasing deal
flow (Lockett and Wright (1999)).
As a result, deal flow can be seen as an important intangible resource. VC organisa-
tions compete for as many investment opportunities as possible because it is favourable
to be able to select from a wide range of ventures. Thus, new VC firms have to establish
themselves in the local market before being invited by geographically distant venture
capitalists. These networks are important to venture capitalists in order to establish deal
flow, especially in times of high competition where reciprocation can be a mean to
maintain deal flow. In this context it is not important any more whether the firm was
originator of the deal or not. A steady deal flow is vital for venture capitalists, especially
for those in highly competitive markets with only few good deals (Boviard (1990),
Sorenson and Stuart (1999)).

Although investors strive to expand their radii of investments, this expansion oc-
curs mainly by joining syndicates with geographically distant lead venture capitalists. In
this sense, syndication can serve as a mechanism to enter trans-national networks in or-
der to expand spatial reach for potential investments. Syndication can thereby reduce
effective spatial limitations on the information flow and thus increases the possibility of
getting access to co- investments and local expertise beyond market boundaries
(Sorenson and Stuart (1999)). Therefore, it is possible to venture capitalists who have
already built up a good syndication network to "[...] transcend the natural boundaries
on the dissemination of information and expand the radius of their investment activity."
(Sorenson and Stuart (1999), p.5)
Other motives
Window dressing
In this case, venture capitalists use the same strategy as money managers who ad-
just their portfolios through investing in successful ventures in order to receive good
publicity. In the VC industry, such kinds of investments are usually made shortly before
the target company goes public with its lead investor. Investments in already successful
projects at a later stage offer to the VC investor to "window dress" his investment per-
formance. For publicity reasons, the venture capitalist can demonstrate his investment
know-how by emphasising his participation in successful ventures. He will not mention
that he joined the syndicate in the last financing round and was not really involved in
the development of the venture. The expected return under these circumstances is only a
secondary factor. Also early-stage investors receive the opportunity to invest in projects
at later stages thus receiving the same benefits (Gompers and Lerner (1999)).
The window dressing hypothesis suggests that the lead investor also benefits from
offering to other venture capitalists to co- invest in his successful deals. The lead inves-
tor should identify those co- investors that are well-established. These are the most inter-
esting since they are the most capable to reciprocate. The idea behind reciprocation is
that the invited venture capitalist will himself offer to join in its successful later stage
investments. The concept of window dressing can thereby create deal flow and increase
spatial reach (Lerner (1994)).

Brander (2002) used his research to evaluate the relevance of window dressing in
the VC industry. Since it involves two investments at two different points in time, he
uses the broader definition of syndication (see chapter 1.3). Yet, as he compared the av-
erage returns for narrow and broader defined syndicated investments, he found little dif-
ference. He also states that most syndicates in his sample were of narrow definition and
therefore it seems that only few venture capitalists are joining late. Overall, (Brander
(2002) sees little if no evidence for window dressing as a motive for syndication.
One further potential explanation for syndication is collusion. Hereby, venture capi-
talists would strive to syndicate in order to band together rather than competing against
each other. Under this scenario the main aim of the VC investors would be the attempt
to improve their own bargaining position with entrepreneurs.
Syndication of the deal could also have an important impact on control rights
within the venture. Especially in VC financing control of a venture plays a key role
(Brander (2002).
Empirical relevance of the major motives
Different empirical studies over the last years come to varying conclusions as to
whether the desire to share risk and increase portfolio diversification is a more impor-
tant rationale for syndication than the desire to access additional informational resources
or deal flow. As this is the prevailing controversy and issue in the literature on VC syn-
dication, it is appropriate to draw a comparison to what conclusions the existing empir i-
cal studies come.
Bygrave (1987) found that there is more co- investing when there is a higher level
of uncertainty. His comparison of the more conservative consumer and the more risky
computer industry in the USA showed a clear tendency of co-investing in the high in-
novative computer sector.
There was also more syndication in early-stage investments
than later-stage investments, even though the investment amount required was on aver-
age 40% lower for early-stage investments. These findings seem to question the fi-
nance-based rational as it assumes higher syndication for deals requiring a la rger
amount of funding. Thus, Bygrave (1987) concluded that the main motive for syndica-
tion was rather the sharing of experience and other intangible resources than capital re-

straints and the spreading of financial risk. In his findings he also refers to Pfeffer and
Salancik (1978) who found similar evidence in their studies on joint ventures. In an-
other publication, Bygrave and Timmons (1992) again emphasise the great role uncer-
tainty plays in the decision to syndicate which can be reduced by the sharing of infor-
mation and the access to resources from the syndicate members.
In 1997, Chiplin et al. (1997) also drew conclusions in favour of the resource-based
motive in their study. They found the greater support for syndication as a mean to im-
prove deal selection through joint decision making. Chiplin et al. (1997) acknowledge
the importance of costs in the VC market, but can only find weak support for the risk
sharing perspective as a motive to syndicate.
Contrary to this, Lockett and Wright (1999) are with their findings on the UK mar-
ket clearly in favour of the financial-based rational as primary explanation for syndica-
They find that the large size of a deal compared to the funds that are available to
a single venture capitalist is significantly more important than all other factors. The
need for additional information before making a decision turned out to be the least rele-
vant explaining factor. This leads to the conclusion that that the ex-ante Superior Selec-
tion Hypothesis is less important than the ex-post Value Added Hypothesis both being
allocated to the resource-based perspective. According to Locket and Wright (1999), the
best explanation for syndication, however, is based on the traditional finance perspec-
Lockett and Wright (1999) split the UK venture capitalists into two groups. On the
one hand those with a maximum investment preference of £5 million and on the other
hand those with a minimum investment preference of £5 million. The reasoning behind
this is to separate those VC firms that exclusively invest in MBO/MBI later stage in-
vestments from the rest of the sample being characterised by a higher degree of uncer-
tainty and variability in outcomes. Locket and Wright (1999) find that the two groups
with their different minimum investment preference ha ve different attitudes towards
syndication in a way that they have different financing requirements. The level of risk
associated with smaller early stage investments is considerably higher than for late stage
investments. Thus, venture capitalists that have a preference or limitation to smaller
minimum investment amounts need to diversify away the greater risk through the crea-
tion of a portfolio of syndicated investments. Moreover, the findings suggest that the
exchange of informational resources in the ex-ante selection and ex-post management of

investments is greater for VC firms with a focus on earlier stage investments. The
asymmetry of information is generally higher for these deals and a higher degree of spe-
cialisation is required.
To summarise, Locket and Wright (1999) come to the conclusion that both the fi-
nance-based rationale and the resource-based rational are more important to VC firms
with a lower minimum investment preference with the finance motive being generally
significantly more relevant. The deal flow rational does not differ across the two groups
with their differing investment stage preferences.
In 2000, Hoje Jo (2000) again focuses on the resource-based rational to conduct his
research. However, he emphasises that it is unclear to him to what extent risk sharing
aspects influence venture capitalists to syndicate. Maula and Murray (2000) support this
view in their study. They identify the need for complementary resources, including in-
tangible assets like industry experience or tangible assets like warehousing. They offer
no explicit findings regarding to what extent the financial perspective is involved as a
motive for syndication.
In 2002, Brander (2002) concentrates like Maula and Murray (2000) on the re-
source-based rational. In his conclusion, he clearly favours the Value Added Hypothe-
sis. This is underlined by his findings that syndicated investments have higher rates of
return than stand-alone investments. He acknowledges the value of a second opinion in
the investment selection process, but states that his empirical analysis identifies the
value added effect as the driving force behind VC syndication. He concludes that risk-
sharing might play a role, but emphasises at the same time that he sees capital con-
straints only as an issue in come cases and rather not for large VC firms which do most
of VC investing.
The most up to date research on this discussion was just recently finished by Mani-
gart et al. (2002) who pick up the study by Locket and Wright (1999) on the UK and
extend it to a European context.
In their study of six European countries, Manigart et al. (2002) come to the conclu-
sion that the traditional finance perspective is significantly more important than all other
perspectives and motives.
It is remarkably that this finding is consistent across all
countries of the study. For the UK and France, they even find significant evidence for
the deal flow motive being more important than the resource-based perspective. The

same is found for Germany, however only at slightly more significant level. The impor-
tance of the deal flow and resource-based perspective is equal in Sweden, Belgium and
The Netherlands. Overall, the results of this comprehensive study suggest that the fi-
nancial motive is the only important motive European VC firms consider when synd i-
A new aspect discussed in this study is the differentiation between the syndication
motives of lead- and non lead investors. Lead investors usually are the driving force in
the constitution of a deal while non- lead investors more passively react to the invitation
to join a syndicate. Thus, they are expected to have a different decision- making process
with regards to syndication. A lead investor is more likely to syndicate a forthcoming
investment if it is a high risk project or if the required funds exceed his financial limits.
This suggests that the financial motive is more important to a lead venture capitalist
than to a non- lead venture capitalist because it allows him to balance its portfolio at a
given investment strategy. However, this expectation could not be verified by the results
of the study. The finance-based rational for syndication seems to be equally important
to lead investors than to non- lead investors. The same holds for the deal flow motive
(Manigart et al. 2002).
Manigart et al. (2002) find strong support for the hypothesis that the resource-based
motive is more important to non- lead investors than to lead investors. Being invited by a
respected lead investor to join a syndicate enables a non- lead investor to increase his
resource base in terms of legitimacy and reputation. It is a signal of its quality to the VC
community and moreover allows the co- investor to learn from other syndicate members.
To summarize, both studies on the European VC industry lend strong credibility to
the traditional finance rational which is also found to be the dominant motive for Ger-
man VC firms. Opposing to this, the findings of studies on North American syndicates
come to the conclusion that the motive for VC syndication is derived from additional
resources and added value that are brought in by syndicate partners although they also
acknowledge the relevance of financial considerations.
There is a potential explanation for the different findings on the rationales behind
syndication in the US and Europe. Manigart et al. (2002) and Locket and Wright (1999)
use perceptual data originating from a survey. The North American studies use outcome
data and thereby derive their findings on syndication patterns from actual investment
decisions. From this, Manigart et al. (2002) conjecture: ,,Maybe European VC managers

unconsciously underestimate the importance of access to resources and deal flow, but
their actions might nevertheless reflect the fact that these are important. Ho wever, if this
is true, then European VCs should be made more conscious of the potential benefits
syndication may yield, beyond risk reduction considerations. In this way, they might
more consciously develop a strategy relating to this important dimension of ma naging a
VC firm." (Manigart et al. (2002), p. 18).
And Locket and Wright (1999) write in this context with regards to the UK market:
,,The lack of support for the skills accessing and deal flow rationales for syndication
casts some doubt on the efficacy of attempts to add value in new types of investments
such as investor-led buy-outs and leveraged build-ups. VC firms may be giving inade-
quate emphasis to the need to access other skills to enable them to make superior deal
selection decisions and more importantly in the light of the present findings, in terms of
the subsequent management of investments"(Locket and Wright (1999), p. 322).
Thus, as opposed to North American VC firms, European VC managers may not
sufficiently appreciate resource-based benefits such as getting access to additional re-
sources, establishing strong and trustworthy networks and increasing deal flow (Mani-
gart et al. (2002)).
Factors influencing the propensity to syndicate
The herein before discussed motives play an important role in the propensity to
syndicate. This is due to the finding as postulated by Manigart "[...] that a firm's pro-
pensity to syndicate will be positively associated with finance-based, resource-based,
and deal flow motives for syndication, controlling for firm- level characteristics." (Ma-
nigart et al. (2002), p. 8). The stronger VC firms believe that financial, resource-based
and deal flow rationales are important the higher their propensity to syndicate their
In the following, factors that influence a venture capitalist's propensity to syndicate
are further investigated.

Degree of uncertainty
Syndication can be seen as a powerful mean to reduce the overall high degree of
uncertainty in which VC organizations operate. Therein, Bygrave (1988) found that the
degree of uncertainty a firm faces determines its amount of co-investing. Generally, a
higher level of uncertainty implies a higher amount of syndication.
This relation is theoretically based on the Resource Exchange Model by Pfeffer and
Salincik (1978) postulating that the interconnectedness of firms increases with the
amount of uncertainty in their environment. As pointed out by Bygrave (1988), there
also exist competing models, such as the Population Ecology Model by Wholey and
Brittain (1986), but the Resource Exchange Model turns out to be most suitable to ex-
plain the networks formed by VC syndicates. The model consists of the three structural
variables "concentration", "munificence and "uncertainty" which determine the inter-
connectedness of a firm. Interconnectedness describes the stability of linkages between
firms within an industry. Among others (e.g. interlocking directorates), joint ventures
are one common form of interconnectedness. The model is based on the assumption that
the interconnectedness of companies increases with the degree of uncertainty in the en-
Concentration as the first variable is the number of competing firms in an indus-
Back in 1987, Bygrave (1987) classified the VC industry as having intermediate
concentration at most. It is expected that in times of prosperity the number of invest-
ment opportunities increases and concentration is low and vice versa in times of hard-
ship. Locket and Wright (1999) come to similar conclusions.
Under the variable munificence, Pfeffer and Salincik (1978) understand the scarcity
or abundance of the main resources a firm derives from its environment. Transferred to
the VC industry these would be resources such as capital, deal flow and people to ma n-
age the investments. The manipulation of these factors influences the behaviour of a VC
organization towards syndication. According to Bygrave (1987), low amounts of spend
able cash or few investment opportunities tend to lead to more syndication.
The third and most important variable is uncertainty measuring the degree to which
the outcome of an event cannot be predicted (Knight (1921)). Each industry has a cer-
tain degree of uncertainty and especially the VC industry with its focus on high risk ­
high return investments has a high degree of uncertainty. Apparently, the level of uncer-

tainty and risk widely depends on in what kinds of portfolio companies a venture capi-
talist primarily invests. Bygrave (1987) splits his sample in two kinds of VC firms: On
the on hand venture capitalists that mainly invest in high innovative technology compa-
nies (HIVCs) operating in very uncertain environments. The top 21 US HIVCs in his
sample comprised a tightly coupled network (connectedness: 37%)
. On the other hand
Bygrave (1987) separates the venture capital firms primarily funding low innovative
technology companies (LIVCs) which are less risky on average. The connectedness of
the top 21 US LIVCs was clearly lower with 22%. Thus, these findings demonstrate that
a greater degree of uncertainty (HIVCs) implies a greater degree of connectedness in
form of syndication, whereas the LIVCs are more loosely bound and show less syndica-
tion. This is in accordance with the predictions by the Resource Exchange Model.
To centralise, the Resource Exchange Model provides an appropriate theoretical
framework for analysing the VC industry and for explaining the relationship between
uncertainty and syndication. It predicts that the interconnectedness of firms is greater in
more uncertain and less munificent industries. The interconnectedness is supposed to be
highest in industries with intermediate levels of concentration which applies for the VC
industry (Bygrave (1987), Bygrave (1988)).
Industry of the investee company
It is examined if the industry of a portfolio company has an impact on the degree of
its co- investing. Bygrave (1987) picked the consumer and the computer industry for a
comparison because they largely differ in their market uncertainty and risk. He found
the ratio of pairs to single investments to be five times greater in computer- than in con-
sumer companies indicating that investments in the riskier computer industry have a
higher propensity to be syndicated. Keeping in mind that there was hardly any differ-
ence in the average total investment amount per company in the two industries, Bygrave
(1987) concludes that this lends support to the resource-based motive rather than the
financial motive.
To see if Bygrave's (1987) findings that there is higher connectedness and more co-
investing in riskier industries can be confirmed with the data base, a univarite linear
model is run with the Syndication Index of the investee companies as dependent vari-
able and their industry as independent factor (Stapleton (1995), Brase and Brase

For a detailed description of the frequency distribution of the variable "IC Industry"
in the data set refer to addenda 6. The processing of the data set that was needed to set
up the model is described in addenda 7. As a result of the model, table 30 calculates the
average number of investors per company for all different industries of the portfolio
companies in the data set. Internet Service Providers have on average 2.5 VC investors
followed by Biotechnology firms with a mean of 2.2 investors. Both types of E-
Commerce firms (B2C and B2B) have on average two VC investors. These four indus-
tries with the largest average number of investors are all of high market risk.
Portfolio companies from industries with a lower market uncertainty such as Indus-
try & Construction (1.2 VC investors) or Electronics (1.2) ha ve on average one investor
less than Biotechnology firms or Internet Service Providers. However, there are also
industries of relatively higher market risk such as the Internet sector (1.5) or Techno l-
ogy (1.4) having less VC investors than the more conservative Infrastructure & Logis-
tics sector (1.6), for example.
Overall, there is a high significance of the factor "IC Industry" on the Syndication
Index explaining 4.2% of the variance of the number of investors per portfolio company
(see table 31). This lo w overall impact on the variance is also reflected in table 32. It
calculates that there is not a single significant difference in the direct comparisons of the
means of the Syndication Index of the different industries. Even though portfolio com-
panies from some industries have on average one investor less than other companies,
these differences are not found to be statistically significant.
Based on this finding it is in a next step analysed if the model comes to the same
conclusions if only those portfolio companies are analysed that have at least two VC
investors. Thus, it is analysed how many investors the companies from the different in-
dustries on average have if it actually comes to a co- investment with a number of inves-
tors. Table 33 shows for the different industries the average number of investors if a
company actually is co- invested. This time, Biotechnology firms (4.2 VC investors)
rank before Internet Service Providers (3.9). If it comes to an co- investment, the number
of VC investors involved is approx. the same for companies from the Internet- (3.4),
Life Science & Pharmacy- (3.4), B2C- (3.2) and B2B industry (3.3). Portfolio compa-
nies from the Hardware & IT- (2.1), Services- (2.7) and Media & Communication (2.8)
sectors are at the other end of the distribution having on average the lowest number of

Again, there is an overall high significance of the portfolio company industry on
the variance of the number of investors accounting for 7.8% of that variance (see table
34). But also this time, the means of the Syndication Index of the different industries are
not found to be significantly different in their direct comparison (see table 35).
Overall, there is no evidence that portfolio companies from certain industries have
statistically significantly more or less investors than companies from other industries.
However, it is at least noticeable that companies in high market risk industries such as
Biotechnology, E-Commerce and Internet Service Providing have a clearly higher Syn-
dication Index than firms from less risky industries such as Finance & Banks, Industry
& Construction and Infrastructure & Logistics. The average number of investors in a
syndicate in the different industries varies by up to two investors
In a next step, it is interesting to find what types of VC firms tend to syndicate in
the different industries of the portfolio companies. This would clarify if there is a cer-
tain pattern whereupon different types of VC investors preferably syndicate investments
in certain industries. The proper statistical method to approach this question is the use of
a Chi-squared test (Greenwood and Nikulin (1996), Dowdy and Wearden (1991)).
For an N=1,689 transactions the Chi-squared test of the variables "VC Type" and
"IC Industry" yields a significance level of 0.00 (see table 36). But 172 cells (67%) of
the contingency table have an expected cell count of less than five and the minimum
expected cell count is below one (0.07) which both violates Cochran's rule (Greenwood
and Nikulin (1996)).
The high number of under-represented cells is caused by the
many different characteristics of the variables "VC Type" (16 different VC types) and
the variable "IC Industry" (17 different industries). The contingency table (which is a
16x17 matrix) must be cut on both dimensions (axes) for those variable characteristics
whose cell count is too little (see addenda 8).
The significance of the adjusted contingency table still is 0.00 and based on N=
1,229 transactions (see table 37). Only 14.3% of the cells in the matrix have an expected
cell count of less than five and there is no cell with an expected cell count of less than
one now allowing for an interpretation.
The contingency table reveals the following interesting syndication patterns (see
table 38): Foreign- (+36%)
and Public VC investors (+63%) tend significantly more to
syndicate in the Biotechnology sector than would have bee expected from their distribu-

tion in the sample. But also Established Specialists (+20%) disproportionately prefer
this high risk industry, whereas Corporate/Industry- (-95%), Non-Professional VC in-
vestors (-60%) and Young Specialists (-50%) distinctly avoid the Biotechnology sector.
The discussion earlier in the text suggested that next to Biotechnology companies
also Interne t Service Providers have on average clearly more investors than companies
from other industries. The contingency table suggests that it is mostly Foreign investors
(+133%) and Bank VC firms (+122%) who have a high propensity for co- investments
in this industry.
On the other hand, Public venture capitalists and Young- and Estab-
lished VC firms clearly refrain from co-investments in this sector.
The two industries B2C- and B2B E-Commerce cannot be as clearly attributed to
certain types of VC investors as it is the case for Biotechnology. Only Young Specia l-
ists and partly also Foreign- and Non-Professional VC investors reveal a higher propen-
sity to co-invest in these industries, while most other VC types show no noticeable
deviation from their expected frequencies.
Those industries with the lowest average Syndication Indexes and a relatively low
market risk such as Hardware & IT, Finance & Banks and Industry & Construction are
not listed in the contingency table as their expected cell counts are too little and there-
fore cannot be attributed to certain VC types.
The Service industry being of moderate risk seems to be disproportionately attrac-
tive to Non-Professional VC investors (+79%) and Young Specialists (+17%) whereas
Established Specialists are less represented (-22%). Corporate/Industry investors
(+75%) seem to prefer co-investments in the Infrastructure & Navigation sector what
this industry is surprisingly equally distributed on all other types of VC investors.
These findings also widely apply if not only co-invested portfolio companies are
included in the analysis but rather the whole sample of transactions is analysed. A de-
tailed description and report on the general investment preference (co- invested as well
as non-co- invested deals) of the VC types is therefore omitted.
The exemplary interpretations of the contingency table demonstrate that some types
of VC investors seem to have a significant preference for or against some portfolio
company industries. However, these characteristics are particularly different for each
VC type and there is no overall pattern whereupon certain groups of VC investors have
the same or distinct different investment behaviour in terms of their focal industries.
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Syndication of Venture Capital Investments - Theory and Practice in Germany
European Business School - International University Schloß Reichartshausen Oestrich-Winkel
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syndication, venture, capital, investments, theory, practice, germany
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Dipl.Kfm. Finn Rieder (Author), 2003, Syndication of Venture Capital Investments - Theory and Practice in Germany, Munich, GRIN Verlag,


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