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.

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