A Signaling Perspective on Partner Selection in Venture Capital Syndicates

This paper analyzes the factors impacting partnering decisions in venture capital syndicates using a unique data set of 2,373 venture capitalist (VC) transactions in Germany. We employ a signaling perspective to partner-selection strategies within VC syndicates. By including time-varying information about industry experience and cooperation patterns, we explicitly take into account not only the changing social context for partner selection, but also the dynamic nature of signals sent and received. Our analysis documents that the informativeness of investment experience as a signal depends on the existence and frequency of previous joint deals with the lead VC. Experience becomes a much stronger signal if previous invitations to syndicates are bilateral rather than unilateral. The willingness to invite others to deals signals the ability to reciprocate through one's own deal flow. Moreover, we show how the value of signals erodes over time, that is, information from the previous year carries more informational value than signals from more distant years. In sum, the data reveal that different signals carry weight for lead VCs, and that the frequency of signals sent and the stage of development of the portfolio firm positively moderate the value and relevance of signaling behavior. While early stage investments are mainly characterized by need to diversify and to spread risks, value-added advice is necessary in later rounds, and hence, the strength of the signals sent and received gain in relevance and in value.