Performance feedback as a cooperation “switch”: A behavioral perspective on the success of venture capital syndicates among competitors

Research Summary: This study draws on the performance feedback theory to advance a behavioral perspective on the dynamics of cooperation among competitors in venture capital (VC) syndicates. Analyzing VC syndicates over a 33-year period, I find that firms’ performance relative to historical and social aspirations acts as a switch in firms’ behavior with respect to dual goals of cooperation and competition in syndicates with competitors. Competition among firms in a syndicate negatively affects the probability of an IPO, but syndicates composed of firms underperforming their aspirations have a better chance of an IPO than syndicates of firms outperforming their aspirations, ceteris paribus. This effect is stronger when firms’ goals in a syndicate are symmetrical or when firms’ motivations based on both historical and social aspirations are aligned. Managerial Summary: Competition among VC syndicate members negatively affects a syndicate’s prospects of achieving an IPO because syndicate members hold back resources for fear of their appropriation by competing partners. However, firms underperforming their track record or peer firms shift their priorities toward syndicate success and allocate more resources to their syndicates, thereby reducing the negative effect of competition. These results suggest that start-up companies seeking VC investors, VC firms seeking co-investors, and limited partners providing funds to VC firms all need to look beyond the capabilities of VC firms in a syndicate or their complementarity and also consider firms’ relative performance. VC syndicates comprised of firms striving to correct temporary underperformance are likely to show superior results due to those firms’ added motivation.