Efffective collaboration is of great importance in different settings of work and life. Collaborative behaviour is particularly important in the context of venture capital (VC) investments, where syndications frequently adopt mechanisms that allow different investors to diversify their portfolio, accumulate and share resources and relevant expertise, or reduce the information asymmetries related to a specific opportunity. See the graphs for this article here.
The choice of syndication partner is therefore of crucial importance, and likely to affect the outcome of co-investment decisions.
A recent working paper by Prof Paul Gompers and associates at Harvard Business School examines two broad questions on collaboration between venture investors. Specifically, the authors investigate what personal characteristics affect investors’ desire to work together and, considering the influence of such characteristics, they test whether this attraction enhances or detracts from performance.
Interestingly, the results of the study show that investors have a strong tendency to partner other investors with a similar ethnic and educational background.
In other terms, VC firms exhibit strong homophily in their co-investment decisions. The authors write: “The tendency of individuals to associate, interact and bond with others who possess similar characteristics and backgrounds has long been viewed as the organising basis of networks. The principle of homophily shapes group formation and social connection in a wide variety of settings, such as school, work, marriage and friendship, in which similarity between group members is observed across a broad range of characteristics, including ethnicity, age, gender, class, education, social status, organisational role, and so on.”
In particular, the Harvard researchers found that “individual venture capitalists choose to collaborate with other venture capitalists for both ability-based characteristics – for example, whether both individuals in a dyad obtained a degree from a top university – and affinity-based characteristics – for example, whether individuals in a pair share the same ethnic background, attended the same school or worked previously for the same employer. Moreover, frequent collaborators in syndication arethose venture capitalists who display a high level of mutual affinity”.
They continue: “While collaborating for ability-based characteristics enhances investment performance, collaborating for affinity-based characteristics dramatically reduces the probability of investment success.”
In contrast, the graphs and tables on the following pages are examples of syndication patterns of the strongest co-investor networks in Silicon Valley of leading VCs, micro-vcs, corporates and corporate venturers, top angel investors and accelerators (Y Combinator).
References
Gompers, P, Mukharlyamov, V and Xuan, Y (2012). The cost of friendship, NBER Working Paper 18141, National Bureau of Economic Research, Cambridge, MA.
Boris Battistini is a senior research fellow at ETH Zurich and a project leader of the Corporate Venturing Research Initiative with Bain & Co (e-mail: bbattistini@ethz.ch)
Martin Haemmig is an adjunct professor at Cetim at UniBW Munich and Leiden University (email: martinhaemmig@cetim.org)
Any reproduction or reuse of the graphs and tables on the following pages is permitted only with the written agreement of Martin Haemmig.