Syndication in private equity industry: comparing the strategies of independent and captive venture capitalists

This paper aims to connect two strands of the venture capital literature: the inter-relationships among venture capitalists (VCs) on the one hand, and between VCs and their funds providers on the other hand. It examines the existence of a relationship between type of fund provider and skill characteristics of the VCs partners in a syndication deal. In other words, it examines whether captive/independent VCs privilege partnerships with firms with specific skills? We develop a theoretical analysis to compare the syndication behaviors of independent and captive VCs. Based on a game-theoretical approach, we model whether the type of lead VC has an influence on the optimal (related to skill levels) partnerships established with syndicate members. Our paper highlights that the source of finance matters for the syndication choice. Its influence takes two forms. The first is related to the heterogeneity between a captive and an independent VC in relation to the returns from the funded project: independent VCs (IVCs) tend to participate in higher profitability syndicated funding projects than captive VCs (CVCs). The second is related to heterogeneity among captive and independent VCs in the ability to syndicate. This is related strongly to the types of financial incentives funds providers employ to align the VC's interests with their own goals. Our analysis suggests that these incentives play a decisive role in the bargaining power of the lead VC and generally make IVCs more attractive syndication partners for other venture capitalists.