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Coordination Frictions in Venture Capital Syndicates

Ramana Nanda () and Matthew Rhodes-Kropf ()
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Matthew Rhodes-Kropf: Massachusetts Institute of Technology

No 17-089, Harvard Business School Working Papers from Harvard Business School

Abstract: An extensive literature on venture capital has studied asymmetric information and agency problems between investors and entrepreneurs, examining how separating entrepreneurs from the investor can create frictions that might inhibit the funding of good projects. It has largely abstracted away from the fact that a startup typically does not have just one investor, but several VCs that come together in a syndicate to finance a venture. In this chapter, we therefore argue for an expansion of the standard perspective to also include frictions within VC syndicates. Put differently, what are the frictions that arise from the fact that there is not just one investor for each venture, but several investors with different incentives, objectives and cash flow rights, who nevertheless need to collaborate to help make the venture a success? We outline the ways in which these coordination frictions manifest themselves, describe the underlying drivers and document several contractual solutions used by VCs to mitigate their effects. We believe that this broader perspective provides several promising avenues for future research.

Keywords: venture capital; syndication; networks; entrepreneurship (search for similar items in EconPapers)
JEL-codes: G24 K22 L14 M52 O32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-cta, nep-ent and nep-pay
Date: 2017-04
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