Breaking Up: the Effect on Venture Capital Syndicates


The venture capital (VC) industry plays an important role in supporting entrepreneurship and innovations in a range of industries. It functions as a gatekeeper, selecting promising new ventures for continued investment and support. It also serves as an intermediary, linking capital providers—large institutions such as endowments, foundations, and pension funds—with young, nonpublic companies that need funds. These young companies potentially can return the investment many times over in the case of an initial public offering or an acquisition by an established industry actor. VCs can also provide significant nonfinancial support for their portfolio companies, including strategic guidance and direction, connections with prospective customers, suppliers, alliance partners, or acquirers, as well as signaling the value of the portfolio company in the larger marketplace.

VC firms commonly form syndicates and invest in the same portfolio company; this allows them to share the financial risk and diversify their portfolio more effectively. Co-investors are also expected to contribute non-financial resources, such as participating in the due diligence process, sitting on the company’s board, providing management advice and coaching, and promoting the company within their own networks. Pooling resources and capabilities increases the probability of success for the syndicate, but requires the trust and commitment that all participants will meet their obligations. As a result, VCs are highly selective in choosing their syndication partners, and they present a compelling setting within which to study the formation of inter-organizational relationships.

Although scholars have conducted extensive work on what drives syndication, there has been little attention to withdrawals from syndication relationships. To redress this imbalance, Pavel I. Zhelyazkov and Ranjay Gulati initiated a study that focused on how the withdrawal of firms from VC syndicates is associated with their subsequent syndication. They used data from Thomson Reuter’s VentureXpert database from the period from 1985-2008, focusing on US VC companies, and defined a withdrawal as the permanent disappearance of a VC firm from the ranks of co-investors.

In exploring the relational and reputational impact on firms that are exiting business ties, the researchers unpacked a commonly held assumption that all business tie-ups between firms cast a positive halo on their future interactions. They first proposed that terminations of collaborations have relational consequences, which disrupt the relationships with the abandoned collaborators and reduce the likelihood of future relationships. Consistent with that view, they demonstrated that VC firms are less likely to form ties with former collaborators that have previously abandoned them or their other syndication partners. Second, they examine the global reputational consequences of withdrawals: since withdrawals are observable to other VCs if they look for such information hard enough, it is plausible that firms that withdraw a lot will develop a reputation for being an unreliable – and thus less desirable – partner. To support this argument, the authors demonstrated that the overall proportion of withdrawals in a VC firm’s track record reduces the likelihood that any VC firm will select it as a syndication partner. Third, although the act of terminating ties is observable globally, they argued that there can also be local reputational consequences, driven by negative private information that abandoned co-investors spread to their immediate network contacts. In particular, they find evidence that a VC firm is less likely to be able to syndicate with firms that have had prior relationships with its abandoned coinvestors, even after controlling for the global hit to its reputation.

The findings have some interesting implications for our understanding of interorganizational collaborations in general and venture capital syndication in particular. For example, prior research has noted the willingness of venture capitalists to “throw good money after bad” and persist in underperforming deals; this paper suggests that rather than being a sign of irrational commitment, such behavior may reflect a calculated trade-off to preserve relational and reputational capital at the expense of financial capital.


Assistant Professor