Beyond homophily: Syndication networks in venture capital investments

Authors: Chun-Yun Cheng; Jung-Chin Shen

Journal: Corporate Management Review. Jun. 2023, 43(2): 117-148

Keywords: Homophily, syndication network, network formation

Abstract:
Drawing on social embeddedness theory, the existing literature contends that interorganizational networks arise from familiarity, but relatively few studies have studied similarity. In this study, we address the issue of homophily as a mechanism for network formation and its limits. We explore the circumstances that motivate an organization to form a network comprising dissimilar partners. We tested our argument using data on syndication networks for 5,350 portfolio companies in the U.S. venture capital industry from 1980 to 2003. The results provide some evidence that spatial uncertainties and behavioral uncertainties are critical to the formation of a hybrid syndication network involving both CVC and IVC firms. Spatial uncertainties arise when VC investments involve substantial information asymmetries between VC firms and the companies invested in, particularly when there is geographic and industry space. Behavioral uncertainties result from the issue of incomplete information between lead VC firms and their partners, making it difficult to form expectations about another’s intentions and behaviors. The negative relationship between the likelihood of hybrid network formation and the presence of geographic space is moderated by the presence of industry space between lead IVC firms and target companies. Past experience with hybrid networks and a large number of participants will facilitate the formation of a hybrid network by reducing partners’ behavioral uncertainties.