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The First Deal Might Be The Last: Building Long Term Relationships In The Venture Capital Community

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Previous analysis of venture capital activity in Silicon Valley has highlighted the role of venture capital syndication as a mechanism through which venture capitalists (VCs) build trusting relationships within the investment venture capital community. But what are the dynamic properties of the resulting network? This paper analyzes the dynamics of syndicated deals in technology sectors. The results suggest that VCs build reputation by committing to provide future funds in a staged deal and honoring their commitment. Reputation increases cooperation, in terms of access to 'deal flow'. The commitment to provide future funding, however, is expensive in terms of the opportunity costs associated with a reduction in the number of new startups in which they can participate. The reputation system is enforced by established VCs, who have more exposure to the 'deal flow'.

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  • Miguel Angel Campo-Rembado, 2005. "The First Deal Might Be The Last: Building Long Term Relationships In The Venture Capital Community," Working Papers 05-11, NET Institute, revised Oct 2005.
    • Handle: RePEc:net:wpaper:0511
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    1. Scott Shane & Daniel Cable, 2002. "Network Ties, Reputation, and the Financing of New Ventures," Management Science, INFORMS, vol. 48(3), pages 364-381, March.
    2. Manigart, S. & Bruining, J. & Lockett, A. & Meuleman, M., 2002. "Why Do European Venture Capital Companies Syndicate?," ERIM Report Series Research in Management ERS-2002-98-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    3. Malcolm Baker & Jeremy C. Stein & Jeffrey Wurgler, 2003. "When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(3), pages 969-1005.
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