Research Paper 16: Venture Capital Investor Networks and Company Performance
According to the European Venture Report 2020, the volume of venture capital (VC) deals has risen steadily. While the value of European VC deals was just under €4 billion in 2006, it had increased almost tenfold to €34 billion by 2019. Although the European markets are still smaller than the USA and China, they are becoming increasingly important.
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In this paper, we look at a particular aspect of the venture capital industry, namely syndication. Typically, VC investments are not made by a single company, but by a group of co-investors, a syndicate. The most relevant role in a syndicate is played by a lead investor, who usually has extensive experience in selecting investment opportunities and subsequent investments in different technology areas, as well as a strong deal flow. Theoretically, syndicated investments have a better chance of success than non-syndicated investments for various reasons. The existing literature shows that syndications in the United States and China lead to more successful investments. For Europe as a whole, there is as yet no published literature showing that this is also the case here. While the explanations for the effects of syndication should also apply to the European case, this hypothesis has yet to be tested. Indeed, European markets differ significantly from US markets, so some aspects of syndication may be different here.
In order to clarify the extent to which VC syndicates correlate with the success of companies, we use network analysis methods. In the first step, we calculate investor characteristics that measure how well a VC investor is networked. Two measures are used here: Eigenvector centrality and betweenness.
Eigenvector centrality measures the importance of individual VC firms based on the number of relationships that a VC firm has in the network and the importance of the corresponding co-investors. The more connections a VC firm has, the more opportunities there are for exchange and therefore the more influential or central the player is. VC firms that have relationships with many other VC firms can be in an advantageous position. For example, they are less dependent on a single co-investor for information or deals. In addition, they may have access to a broader range of expertise, contacts and pools of capital (Hochberg et al. 2007).
Betweenness describes how many other actors you are dependent on in order to establish influence connections within the network. Specifically, it describes the number of shortest paths between two nodes that pass through a node. Nodes with high betweenness can have considerable influence in a network due to their control over the flow of information between other actors. Betweenness therefore measures the extent to which a VC firm brings together other VC firms with complementary capabilities or investment opportunities with which there is otherwise no direct relationship.
Our main results show that both types of network centrality are important for the success of portfolio companies in Europe. We find a relationship between the network centrality of investors and the survival probability of portfolio companies as well as their sales growth.
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Furthermore, we show that there are differences in the influence of centrality on survival between different financing rounds. Syndication and networks of investors are an important factor for the success of portfolio companies in earlier financing rounds (e.g. seed or pre-seed phase), but less so for later financing rounds.
