The Design of Syndicates in Venture Capital

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Abstract
We argue that the process whereby a venture capital syndicate is formed is characterized by two-sided asymmetric information, as the profitability signals held by different VCs are non-verifiable and manipulable. We analyze how an appropriate design of the syndicating VCs' cash-flow rights can induce them to truthfully reveal their signals to each other, and analyze how the incentive costs of syndication vary with the VCs' expertise in evaluating entrepreneurial projects. We then address the question of how lead venture capitalists should choose their syndication partners. Our findings suggest that lead VCs should not syndicate with very experienced partners, and that more experienced venture capitalists should select more experienced partners.