syndication and venture capital finance: evidence from the u.s. market

SYNDICATION AND VENTURECAPITAL FINANCE: EVIDENCEFROM THE US MARKET

By G. Klinger, P. Otero and G. Pratobevera

MSc in Finance, 29/06/2010

PRESENTATION OUTLINE

1. Introduction

2. Related Literature

3. Description of dataset

5. Conclusion

4. Statistical Analysis

Introduction

Syndication is a widespread phenomenon among theVenture Capital Industry

Different hypothesises have been developed by research

The aim of our research is to evaluate which hypothesisis the most important one to explain our results

PRESENTATION OUTLINE

1. Introduction

3. Description of dataset

5. Conclusion

4. Statistical Analysis

2. Related Literature

Related Literature

Venture Capital

Investment in private companies

“Money of invention”

Supply value-added resources

Investor takes active role in development

Maximize Capital gain by exiting through a sale or IPO

Related Literature

Syndication Joint investment by at least two VC firms Most commonly soon after first investment Repeated inside the same VC network Structure can solve free-riding problem

Existing literature identifies three main reasons,but differs on their ranking:

Project Selection and Screening Value added (management skills) Risk Sharing

Project Selection and Screening Joint expertise facilitates the spotting of profitable projects Second opinion improves evaluation Several separate screenings are more efficient Evaluation costly: loss of monopoly (competitor)

Value-added VC brings additional value VC have different resources, knowledge, skills Syndication reduces risk via superior management of investments

Risk Sharing intuitive, although not necessarily most important reason syndication to reduce total capital in investment diversification by syndication is need to share risk liquidity constrains

Reasons for Syndication

Determinants of syndication

Difficult to evaluate the prevalent reason for syndication in high uncertain projects, selection and screening is more difficult second opinion of other VC more valuable

high agency costs: monitoring difficult and asymmetric information problems benefits of risk sharing increase more frequent and intense in uncertain

environment

Different relationship under the hypothesises (Brander 2002) Selection hypothesis

higher syndication in unsuccessful projects (project quality relative low) Value-added hypothesis

high syndication in successful projects(value and expertise added by each member)

PRESENTATION OUTLINE

2. Related Literature

3. Description of dataset

5. Conclusion

4. Statistical Analysis

1. Introduction

2692 US firms that received venture capitalfinancing (2001-2005)

This dataset includes firms that are no longerVC backed

The data was downloaded from the ThomsonOne Banker database

Description of the Dataset

Description of the Dataset

Name of the company

Founding date of the venture firm

First and the last investment date (by VC)

Total amount of funding to date

Industry in which the venture firm operates

Exit type of the investors (acquisition, IPO,…)

The number of investors in each venture firm

Description of the Variables

n_synd: is the number of investors

d_synd: indicating syndication (1) or not (0)

types of exit:o M&Ao IPOo Defuncto Private

Description of the Variables

age: difference between the first investment date andthe founding date

fund: total amount of funding to date in millionpounds

d_round: indicating one round (0) or more than oneround (1)

industry dummies: 9 main industries

year dummies

Summary Statistics

Investments decreasedfrom 925 to 382

Syndicated investmentsremained relativelyconstant

Liquidity constraints Control for year

Summary Statistics

Missing values for age and fund No logarithmic transformation of the variable age High skewness in funding (apply logarithm to

funding) The average number of investors among the

syndicated ones is 3.99

Summary Statistics

Syndicated investments are more present when the exit isan M&A or an IPO

Standalone investments are more present in case ofdefunct and private firms

IPOs yield the highest return (59.5%) for venture investorsAcquisitions offer average returns of only 15.4%Liquidations lose 80 percent of their value (Gompers, 1995)

Summary Statistics

VC specialize in industries in which monitoring andinformation evaluation are important

Syndication is a way to evaluate projects better,especially in uncertain environments

Control for industry fixed effects

PRESENTATION OUTLINE

2. Related Literature

3. Description of dataset

5. Conclusion

4. Statistical Analysis

1. Introduction

Empirical Strategy

Does syndication varies across firms accordinglywith the three motivations discussed before?Determinants of syndication

Which one of the three motivations is the mostsuitable for explaining US data?Relation between syndication and the success of the

firm:o if positive => Value-added hypothesis;o if negative => Selection and/or risk-sharing hypothesis.

Determinants of Syndication

Poisson regression for the number of syndicate members; probitregression for the syndication dummy (with marginal effects)

Robust standard errors

Determinants of Syndication

The two models give the same qualitativeresults. The measures for syndication:

decrease with the age of the firm at the firstinvestment (0.12 points): more informationavailable and lower uncertainty for older firms

increase with the total amount of funding (0.71points): opinion and expertise more valuable

increase with the number of rounds (2.35points): syndication after the first investment

This evidence does not reject any of themotivations for syndication (value-added,selection, risk sharing)

Determinants of Success

Probit regressions reporting marginal effects Robust standard errors

Determinants of Success

Statistical significance partially different in thetwo models:

model2: probability of success higher when there is morethen one investment round => acquisition of new info

both models: probability of success higher when the totalfunding increases => favourable prospects

both models: no relation between success and age model1: probability of success higher when the number

of syndicate members increase => value-added hypothesis

The last result does not hold anymore in model2.Hence, it is the addition of a member that isrelated to the success of the firm more than thedecision to syndicate itself

Robustness Checks

These results are robust to (and in some casesenhanced by) several robustness checks:

missing valuesclassification of “active” firmsdefinition of successother regression models

We also discuss some concerns regardingendogeneity problems

omitted variables:- experience of the VC and- control rights of the VC

reverse causality?

PRESENTATION OUTLINE

2. Related Literature

3. Description of dataset

5. Conclusion

4. Statistical Analysis

1. Introduction

Conclusions

Syndication is more common in indutries that face agreater uncertainty, in investments about which littleinformation is available and the required amount offunding is relatively high

These results are consistent with the three mainhypothesis explaining syndication

However, we find that the probability of success is higherwhen the number of syndicate members increase

This result prefer the value-added hypothesis over theother two: venture capitalists syndicate in order to exploitcomplementary skills and knowledge, thus enhancing theproject's probability of success

Thank you!Vielen Dank!

Muchas gracias!Grazie mille!

APPENDIX: RobustnessChecks

Missing Values

Classification of Private Firms

Definition of Success

Other Regression Models (1)

Other Regression Models (2)