Author: Alexandre Crenn

At some point, we have all heard about the saying: “Networking is the key to success”. In this article, we will talk about Venture Capital firm networks for and their benefits.

The VC landscape is full of networks, however the best and most common example of a VC firm network is syndication. Syndication refers to a situation where two or more venture capital firms join forces to make the complete investment for a particular round. In this arrangement, one of them is taking the role of the leader.

In many cases, syndication occurs even when a the funding requirements are modest. This is exactly one of the questions we will address here through providing some empirical evidence. We will talk about the findings of one study which focuses on the Canadian VC industry. In addition we will also discuss another study which focuses on the UK and European VC market.

The Canadian study was conducted by researchers from the University of Pennsylvania and University of British Columbia. While the European study was conducted by researchers from the London School of Economics and University of South Hampton.  

The Canadian Study

The Canadian study set forth to test two theories associated with networking effect. The first theory is the selection theory which basically means that VCs want a second opinion from other VCs before making a decision. The second theory is the value-addition theory which means that VCs go for syndication because it is more beneficial.

Empirically, if syndication is done for selection then the exit return on syndicated investments should be lower than standalone investments. Alternatively, if syndication is done for value-addition then syndicated investments should have higher exit return than standalone investments. The sample size consisted of divestitures of VCs from 1992 till first quarter of 1998.

The total observation set consisted of 584 exits but only 393 were considered as annualized returns couldn’t be calculated for the remaining 171 exits. The study defined syndication as “narrow” and “broad”. A narrow syndication was defined as a situation where, let’s say investor A invests and exits and investor B invests. All this happens in a year. In broad syndication the time period is taken as 6 years. Of the 393 exits there were 147 narrow syndications and 194 broad syndications.

After talking too much about the data, let’s look at the results. The findings indicated that syndicated investments had on average higher return than standalone investments. This finding affirmed the value-addition theory i.e. VCs seek syndication to add more value to their portfolio companies. However, the study also stated that the selection-theory effect is not completely absent. So, there are some instances where VCs seek syndication for second opinion.

The European Study

Now let’s move on to a more recent study involving VCs in United Kingdom and Continental Europe. In the Canadian study we saw that syndication offers better returns than standalone investments. The European study goes deeper to see what happens when syndications are coupled with more relationship-building efforts. The study consisted of 624 VCs and examination period was 1995-2005.

Firstly, the study investigated the effect of GP’s networking with other investors while they sit on the board of portfolio companies, on the fund’s performance. This benchmark analysis yielded that GP’s with more experience and stronger network improves a fund’s performance.

Secondly and lastly, the study wanted to test the extent to which networking benefits fund performance. The results suggested that VC firms get large benefits when they have many ties. These benefits increase when a VC is invited to join many syndicates or when they are well connected to other VCs.

But when VCs act like an intermediary i.e. an agent between two other VCs, there is no significant added value on the fund’s performance.  

So, in a nutshell, networking is beneficial for VCs when they are taking part in different investments.

Want to know more about how Kushim facilitates networking among VCs?

Click here to meet our software venture capital portal.

Our goal in this post is to see what kind of impact can the syndication with CVCs have on a startup’s exit success. The main reason lies in the fact that CVCs investments are increasing year by year.

In 2018, approximately 260 new corporate venture capital (CVC) funds invested for the first time. This marked a 35% year-over-year increase with Google Ventures maintaining its top spot as the most active CVC investor. GV is followed by Salesforce Ventures and the mammoth Intel Capital occupied the third spot. In 2017, the total capital invested by CVCs was north of $30 billion, which included both old and new CVCs.

We will base this talk on a recent academic research study by Prof. Shinhyung Kang involving 1121 firms in the United States that received VC funding between 2001-2013. In addition, we will also refer to the prior research by Castellucci and Ertug (2010) which showed that in a syndicate, other investors tend to cater to the needs of the most reputable investors.

CVCs-IVCs syndication

The National Venture Capital Association, in 2016, stated that more than 13% of all VC deals in the US were done by CVCs. Generally, CVCs have a strategic objective of making an investment while Independent Venture Capital (IVC) funds have a financial focus. However, it often happens that CVCs and IVCs form a syndicate to share the risk of investment. Basically, syndication means that a number of investors come together with one of them acting as the lead investor. Here, the deal value as one transaction.

Here it is important to point out that syndication differs from co-investment. Namely, in the latter, two or more investors come together to invest in the same funding round of a venture. In this regard, it is worthwhile to shed some light on the impact of CVCs involvement in syndicates on a venture’s successful exit.

The impact of investors’ goals on startup’s exit success

If the CVC has a higher reputation than other investors, the CVC will prompt the venture to pursue more R&D activities that will lower the pace of commercialization. In contrast, as IVCs are focused on financial returns, the higher reputation of IVCs in a syndicate will push the venture to pursue more commercialization activities which will, in turn, lead to a successful exit. Kang’s study affirmed that in a syndicate when CVCs have a higher reputation than IVCs, the likelihood of a venture’s successful exit is negatively affected.

Geographic distance is another parameter can affect the startup’s exit success. Majority of IVCs and CVCs tend to prefer ventures that are located in close proximity. When a CVC is located in close proximity to a venture, the knowledge sharing between the venture and the CVC’s parent company increases and there is more spending on R&D investments. This, in turn, reduces the venture’s resources which would have been otherwise used to commercialize the venture’s product. Kang’s study concluded that when CVCs are more reputed in a syndicate and are in close geographical proximity to the venture, the likelihood of venture’s successful exit is further impacted negatively to a certain extent.

Preferences in syndication creation

For future syndication, CVCs tend to choose those IVCs with whom they have had prior syndication. This is important as the IVCs aid the CVCs in seeking, identifying and attract innovative companies in distant locations. Thus, trust reduces the cost of negotiation and increases communication between the firms participating in the syndicate. IVC investors in a syndicate are quite wary of CVCs tendencies to be more opportunistic. However, when there is strong trust between CVC and IVC, the tendency of CVCs to be opportunistic is lowered as jeopardizing the relationship with co-investors is not in the best interest of the CVC. The final conclusion of Kang’s study stated that prior syndication experience between CVC and IVC reduces the negative impact reputed CVCs have on the likelihood of a venture’s successful exit.  

Sources

• Shinhyung Kang, (2019) “The impact of corporate venture capital involvement in syndicates”, Management Decision, Vol. 57 Issue: 1, pp.131-151.
• The Most Active Corporate VC Firms Globally, CB Insights, Published Mar 28, 2019.
• Castellucci, F. and Ertug, G. (2010), “What’s in it for them? Advantages of higher-status partners in exchange relationships”, Academy of Management Journal, Vol. 53 No. 1, pp. 149-166.

The magic rule of venture capital says that you need to screen 1000 companies to find 2 that are successful. How much time and effort an investor puts in his quest of the Holy Grail? And how much more into creating a proper dealflow?

A LOT.

It is simply called Dealflow Management and it’s the second main activity of investors, after fundraising. The dealflow management doesn’t have the best reputation, thus analysts and interns are usually the ones in charge. In fact, their main job is to provide “good dealflow”. In translation this is the equivalent of hours spent doing Excel sheets, powerpoint presentations for the next Partner meeting, writing minutes, updating databases, asking for documents and metrics to companies, preparing reports for management and LPs, etc…

However, the good news is that most of it can be automated with deal flow management software. In this article we are going to share some tips and tricks on how to improve your current approach to dealflow. If you are new to dealflow management, following these steps will help you manage change and efficiency in your organization.

Step 1: Think clearly about your process

In order to do that, think about one company in which you invested that made you proud of how you handled the relationship. Then write down the different stages of evolution and the main activities you performed. For example, these stages can be:

• new deal source
• first meeting
• partner meeting
• terms and agreement
• due diligence
• rejected/invested

Then work with a software venture capital tool that is flexible enough to support your process. Or a better version of your process.

You always want to learn how other investors manage their dealflow. An easy way to find out is to ask a sales provider of dealflow solutions during the demo “what are the best practices in the industry?/do you have customers in similar organizations, how do they organize their dealflow?”. Good sales people are trained to teach you in order to commit to their solution. If a sales person starts pitching his product before learning about your needs you might be in the wrong place.

Step 2: Execute your deal origination strategy

How did you get the best leads in the past?

The most popular and by far the most powerful strategy for deal origination is the network approach. The best venture capitalists have extensive networks and influence. If you share your knowledge people will appreciate it and will want to share something in exchange. At Edda we work with funds that manage assets between 3M$ and 1.3B$. What makes the difference between a very big fund and a small fund is how they leverage their network to create value. Recently we have created a specific tool for one of our biggest customers in New York. Their initial request was: create more transparency with LPs and ecosystem by sharing data from the dealflow. I will tell you more about that in a future article, I don’t want to disclose too much before the product will be launched later this month.

Online deal origination should not be neglected. Sources like Crunchbase, Pitchbook, CB Insights or TechCrunch to name just a few are great sources to learn about new trends. Consider also following your influencers on twitter, linkedin and medium. I personally enjoy reading @Fabrice Grinda blog. He shares raw stories from his life and business with a touch of humour. I even borrowed his technique of writing emails to a future self to deal with difficult choices or doubts.

3) Gather the company data in the same place

Spreadsheets, dropbox and google drive are still very popular to share and store data. And they are not going to be replaced soon. But for the company data, you might want to have everything in the same place: sources, documents, metrics, emails, track who did what and when, todo’s, comments of the team members, news and articles. If you can’t visualize all this information in a single screenshot, your dealflow is not managed effectively.

Something else you might want to do at this stage is to share the company data with a trusted source. Since the company data is already organized, the export should be automated.

4) Measure to improve

I always say what you cannot measure, you cannot improve. Unless you are a business angel investing your money, you have to stay accountable for your LPs but also your team, companies and network. As an overview of your dealflow, I suggest to track the following:

• the sources that give you deals
• the average company time in the different stages of your dealflow
• the team performance (ratio accepted/rejected for each member)

5) Skip any activity that is low-value & time-consuming

If I ask an investor how long it takes to edit an investor note with the profile of a company, I usually get answers varying between 1-6 hours. Usually there is a lack of adrenaline when performing this redundant task. Combined with the procrastinator paradox, the truth is this task can even take several days and analysts are often late delivering it. If the task is really necessary, find out if there is a way to automate it. If not, just skip it.

Of course digital tools and a clear process are major factors in gaining efficiency and escaping redundant tasks. But maybe the best way to get “good dealflow” is to be a “good investor”. Value your team and value your network. I will end this article with a quote of Paul Graham, the founder of Y Combinator:

 No matter how smart and nice you seem, insiders will be reluctant to send you referrals until you’ve proven yourself by doing a couple investments. Some smart, nice guys turn out to be flaky, high-maintenance investors. But once you prove yourself as a good investor, the deal flow, as they call it, will increase rapidly in both quality and quantity.

Thank you very much for reading. I would love to hear your thoughts on dealflow management. If you want to learn more about how Edda can help you manage the dealflow, write me a message. I would be happy to chat with you.

Or you can go ahead and book a demo with me and dig deeper into the possibilities with our dealflow management software.