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