The influence of venture capital syndicate size on venture performance

ABSTRACT Venture capital (VC) syndicates pool diverse resources from their members to accomplish the common goal of nurturing new ventures for a successful exit. Although the size of syndicate is a fundamental attribute impacting performance, the influence of syndicate size is less understood in prior studies with mixed findings. To address the gap, we suggest that there is an inverted U relationship between a syndicate size and venture performance. As the number of partners in a VC syndicate increases, a syndicate can provide more heterogeneous resources that can help its portfolio company succeed, but coordination costs increase as well. We thus predict that the net effect combining these two countervailing effects yields an inverse-U relationship between syndicate size and performance. We further examine two boundary conditions under which the nonlinear relationship is likely to manifest. Analyzing 407 investment syndicates formed by 1,106 VC firms for new ventures in the U.S. information and communications technology sector between 1990 and 2006, we find that the relationship between syndicate size and performance is an inverse-U shape. We further find that geographic distance among syndicate partners flattens the inverse-U curve, whereas a strong reputation of the lead VC firms shifts the inverse-U curve to the right.