The effects of prior co‐investments on the performance of venture capitalist syndicates: A relational agency perspective

• Published date: 01 June 2020
• Author: Igor Filatotchev,Joost Rietveld,Cristiano Bellavitis
• Date: 01 June 2020
• DOI: http://doi.org/10.1002/sej.1320

RESEARCH ARTICLE

The effects of prior co-investments on the

performance of venture capitalist syndicates:

A relational agency perspective

Cristiano Bellavitis

1

| Joost Rietveld

2

| Igor Filatotchev

3,4

1

Auckland Business School, University of

Auckland, Auckland, New Zealand

2

UCL School of Management, University

College London, London, UK

3

King's Business School, King's College

London, London, UK

4

Institute for International Business, Vienna

University of Economics and Business,

Vienna, Austria

Correspondence

Cristiano Bellavitis, Auckland Business School,

University of Auckland, Owen G Glenn

Building, 12 Grafton Road, Auckland 1142,

New Zealand.

Email: c.bellavitis@auckland.ac.nz

Funding information

Auckland University FDRF, Grant/Award

Number: 3713248

Abstract

Research Summary:This study provides a reconciliation of

previous findings regarding the effects of prior co-

investments among venture capitalists (VCs) and the perfor-

mance of VC syndicates. We propose a relational agency

framework outlining cost–benefit trade-offs associated with

prior co-investments between VCs. A longitudinal study of

4,550 U.S. ventures receiving syndicated investments from

1980 to 2017 shows that there exists an inverted U-shaped

relationship between the number of prior co-investments

and a venture's likelihood of a successful exit through initial

public offering or merger and acquisition. We further find

that the relationship between prior co-investments and syn-

dicate performance is moderated by venture- and partner-

specific risks.

Managerial Summary:We study the effects of prior co-

investments among venture capital (VC) firms on the perfor-

mance of VC syndicates. We propose a framework outlining

cost–benefit trade-offs associated with prior co-investments

between VCs. A study of 4,550 U.S. ventures receiving

syndicated investments shows that there exists an inverted

U-shaped relationship between the number of prior co-

investments and a venture's likelihood of a successful exit

through initial public offering or merger and acquisition. Our

findings hold implications for managers considering whom to

partner with for future co-investments and the conditions

under which prior co-investments are more or less likely to

be beneficial.

Received: 13 October 2017 Revised: 9 April 2019 Accepted: 23 April 2019 Published on: 3 June 2019

DOI: 10.1002/sej.1320

© 2019 Strategic Management Society

240 wileyonlinelibrary.com/journal/sej Strategic Entrepreneurship Journal. 2020;14:240–264.

KEYWORDS

entrepreneurial finance, performance, prior co-investments,

syndication, venture capital

1|INTRODUCTION

Venture capital (VC) firms frequently partner together by investing in the same entrepreneurial ventures. Syndication

of VC investments, where two or more investors co-invest in a venture and share any resulting proceeds, offers dis-

tinct advantages over solo investments, including greater access to resources, sharing of risks and better informed

decisions regarding which projects to invest in (Brander, Amit, & Antweiler, 2002; Lerner, 1994; Lockett & Wright,

2001). Given the risks associated with VC investments in general, and the selection of partners for syndicated invest-

ments specifically, investors often rely on their pre-existing networks and syndicate with the same partners over

time (Bygrave, 1988; Li & Rowley, 2002; Sorenson & Stuart, 2001, 2008; Wright & Lockett, 2003). While the effects

of prior co-investments on the performance of VC syndicates have received some attention, conclusions have been

mixed, with some authors arguing for positive effects of prior co-investments (Hochberg, Ljungqvist, & Lu, 2010),

some arguing for diminishing returns (De Clercq & Dimov, 2008), while others finding negative effects arising from

repeated co-investments between VCs (Guler, 2007). There thus exists theoretical and empirical ambiguity regarding

the impact of prior co-investments on syndicate performance. This raises the following questions: How do prior

co-investments affect the performance of VC syndicates? And Which contingency factors affect this relationship?

Past research has explored various theoretical mechanisms linking prior collaborations with a focal partnership's

performance. Studies in the entrepreneurial finance, networks, and strategic alliance literatures have argued that

prior collaborations between partners improve current partnership performance by fostering relationship continuity,

mutual learning, facilitating trust, and triggering the development of collaborative capabilities, norms, and routines

(Coleman, 1988; Gulati, 1995a; Lioukas & Reuer, 2015). Other studies, however, have suggested that there are limits

to the benefits conferred by prior collaborations, which can lead to increasing resource redundancy, overconfidence,

and inertia (Li & Rowley, 2002; Uzzi, 1997). These negative aspects of repeated collaborations have been found to

diminish and even negatively affect various performance-related outcomes of repeated partnerships, such as knowl-

edge creation (McFadyen & Cannella Jr., 2004; Molina-Morales, Martínez-Fernández, & Torlò, 2011) and various

financial outcomes (Goerzen, 2007; Holloway & Parmigiani, 2016).

This paper builds on Uzzi's (1997) arguments that recognize potential tensions associated with repeated collabo-

rations. Our aim is to provide additional evidence on the benefits and costs of prior co-investments and to identify

important partner and venture-specific risks that moderate the relationship between prior co-investments and per-

formance in the context of VC syndicates. To this end, we propose a relational agency framework focusing on the

cost–benefit trade-offs associated with prior co-investments in syndicated VC investments. The relational agency

framework represents a theoretical extension of the classical principal-agency theory that is focused on information

asymmetries and goal incongruence between the venture and its investors by recognizing potential agency conflicts

among multipleinvestors themselves. PriorVC research has already identifieda scope for potential “principal–principal”

conflicts within VC syndicates (e.g., Bruton, Filatotchev, Chahine, & Wright, 2010; Chahine, Arthurs, Filatotchev, &

Hoskisson, 2012). The relational agency framework integratesboth venture- and partner-specific agency problems and

associatedrisks, and explores how these conflictsemerge and evolve as an outcomeof continuous relationshipsamong

VCs based on repeatedco-investments.

More specifically, our theoretical framework suggests that prior co-investments can reduce some of the partner-

specific risks associated with syndicated VC investments, including free-riding, relational conflict, and self-serving

behavior (Coleman, 1988; De Clercq & Dimov, 2008; Heidl, Steensma, & Phelps, 2014; Uzzi, 1997; Zhelyazkov &

BELLAVITIS ET AL.241