EXPRESS: An alter-centric perspective of status disparity and newcomer additions in multiparty syndicates

Abstract

Status dynamics play a critical role in venture capital (VC) syndication. Prior research on multiparty syndicates has shown how status differences among current syndicate members affect how the syndicate searches for new investors in later investment rounds. However, it is unclear how potential newcomers evaluate whether or not to join a syndicate based on the degree of status disparity among current syndicate members. We adopt an alter-centric approach by examining how an existing syndicate’s status disparity affects a potential newcomer’s willingness to join. For potential newcomers, we contend that syndicate status disparity is a double-edged sword, both deterring newcomers due to low perceptions of syndicate trust while simultanously attracting newcomers at the prospect of accessing diverse future investment opportunities. Whether the perceived costs of syndicate status disparity outweigh the perceived benefits for newcomers depends upon the degree of risk associated with the venture deal. Across two studies—a field experiment of 193 institutional investors and an archival study of 3,644 multiparty syndicates—we found that newcomers are attracted to syndicate status disparity when deal risk is low but deterred from syndicate status disparity when deal risk is high. Our paper highlights how newcomer additions to multiparty syndicates entail a complex interplay between features of co-investors and features of the venture deal.