Affiliated and independent venture capitalists: early stages screening and the syndication / leverage trade-off

The topic of this paper is to analyze comparatively the interest and the advantages of the existence of heterogeneous institutions in the Venture Capital activity. We focus on the duality relevant in Europe between Independent Venture Capitalists and the Bank-Affiliated ones. We first discuss in the second section the different characteristics of these institutions and their comparative advantages in screening and financing risky projects. We then develop a theoretical model which analyses comparatively the two technologies: both IVCs and AVCs take the asymmetric risk in seed and are backed by hedge funds equity or banks at the second round. IVCs syndicate and AVCs use the internal ways of diversification of the bank. Screening technologies are activated in seed and symmetric risks managed during the development phase. We obtain analytical results conform to intuition in the analytical part of the model and concerning the relative advantages and deficits of the two systems. With a specified form, we analyze the coordination of their intervention on given range of variation of the risks (and return). We find that different cases are possible. In some circumstances, IVCs and AVCs naturally intervene on different classes of risk but in other cases they compete on the same ones. The more astonishing observation is that one may observe situations where the two institutions choose to eliminate the projects corresponding to intermediate levels of risk and to finance the projects with low or high levels of risk.