Follow-on financing through syndication in the VC industry – a signaling perspective of VC human capital and fund characteristics

ABSTRACT

Follow-on equity fundraising for young ventures is a key issue for venture capital (VC) performance and entrepreneurial success. VC managers’ antecedents and fund characteristics might play a role here, through a signaling perspective, in securing additional financing for their portfolio ventures. However, the entrepreneurial finance literature has not yet investigated the importance of the lead VC managers’ profiles for syndication in subsequent VC financing rounds. In this mixed-methods study, we examine these antecedents and determinants of follow-on fundraising through syndication. Using a hand-collected dataset of first-round VC deals and their subsequent financing rounds in France we demonstrate the importance of prior innovation and VC experience for successful follow-on fundraising. We find that general, business and consulting experiences of first investors have a negative signaling effect on outside VC investors for follow-on fundraising. Also, we disprove previous beliefs that banking and finance professionals attract follow-on financing through their rich VC and private equity networks. We show the contrary: that homogenous finance experience sends negative signals to outside investors about portfolio quality and value-adding ability. We triangulate, refine and frame our findings with a qualitative research loop grounded in 12 in-depth interviews with leading French VCs.

KEYWORDS:

• Venture capital
• signaling theory
• human capital
• follow-on financing
• syndication

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. Bpifrance is a French public investment bank and SME development agency (www.bpifrance.com).

2. Gorman and Sahlman (1989) report that VCs visit entrepreneurs once or twice a month and spend an additional 30 h a year in phone discussions with them.

3. FCPI: Fonds Commun de Placement dans l’Innovation, Mutual Funds Investing in Innovative Companies FIP: Fonds d’Investissement de Proximité, Proximity Investment Funds

FCPIs and FIPs are both hybrid structures, i.e., composed of at least 70% of investments in non-listed companies, and the remainder in mutual funds (OPCVMs). Investors benefit from generous income and wealth tax reliefs: 18% deduction in tax revenue (limited to investments of EUR 12,000) or a deduction in solidarity wealth tax of 50% of the payment (limited to EUR 45,000).

4. Both FCPIs and FIPs have disadvantageous highly dispersed and atomized ownership structures: on average more than 1,200 subscribers per fund with less than 7,500 EUR per investor in the past 5 years. This makes coordination of investors in order to monitor fund performance practically impossible.

5. In 2017, French VCs invested €1223M in 847 start-ups (France Invest, Grant Thornton 2018). Between 2009 and 2016, French VCs raised €8,018M from all the categories of limited partners (Le Pendeven and Magnier 2017).

6. In 2013, average second-round VC investments were 3.3 million USD in Europe, compared with 5.7 million USD in the US. At the same time, later-stage VC investments averaged 6.7 million USD in Europe and 10 million USD in the US.