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

Abstract

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'.