Skills and financial Incentives: matching funds providers and syndicates in venture capital investments

Venture Capital investments combine skills and financial risks. The capacity of financial intermediaries to assume financial risk has to meet managerial skills able to screen the projects, then to increase the number and the return of the successful projects among the selected ones. The screening tasks are devoted in seed stage to the Venture Capitalist in charge of the project (the leader). Improving the number and the quality of the successful projects is a task which is partly shared by the members of syndicates associated with the leader during the development stage. Venture capitalists are heterogeneous; there also exist many ways to fund a project; finally, there are many forms of syndicates. Looking at this diversity, the question is to find a relevant way to match - for each kind of Venture Capitalist and for each kind of project - the good financial solutions (which can be interpreted as a financial incentive) and the appropriate form of syndication. Is there a way to reach the best combination: this point is analyzed in depth in our paper. We first present a review of the literature on the nature and goals of funds providers on the one hand and the motives of syndication in the other hand. Then we propose an original model analyzing from the partners (venture capitalists and funds providers) and from the social points of view, the properties of the relevant available technologies associating more or less skillful leader, different forms of syndicates and of financial partners. A first set of results is devoted to the matching competencies of the leader and the syndicates within a given financial environment. A second set of results considers as endogenous the type of incentives introduced by the financial partners and the consequence of their optimization on the form of syndication promoted by the leaders, according to their own skills and the quality of the syndicates. The influence of the level of risk and of the shape of the project on the optimal matching solutions is then analyzed.