Venture Capital Syndicate Formation and Competition: Evidence from Biotechnology

Abstract

Venture capital firms (VCs) form syndicates that compete to invest in deals. Does more competition makes it less likely that VCs choose syndicate partners based on past ties? Using over 200,000 observations on how VCs choose each other in 572 biotech deals in Massachusetts from 1967 through 2004, I find the answer is: yes. The theory of embeddedness argues that past ties can explain the pattern of who works with who. I interpret my finding as demarcating when embeddedness might apply. When competition is intense, economic forces might be a better explanation of who works with who.