When Venture Capitalists Invest with Friends

There are benefits and risks when collaborators invest together often.
When Venture Capitalists Invest with Friends

WHEN VENTURE CAPITALISTS work together by investing in the same projects, their ongoing collaboration reduces the risk that investors will behave selfishly or let colleagues do all the work. This, in turn, increases the likelihood that the enterprises they back will thrive. However, if they collaborate too often, they encounter other risks, such as relying too much on their trust in each other. When this happens, ventures are less likely to succeed.

Those were the findings of Cristiano Bellavitis, an assistant professor in management and international business at Auckland Business School at the University of Auckland in New Zealand; Joost Rietveld, an assistant professor at the University of London College’s School of Management in the U.K.; and Igor Filatotchev, a professor of corporate governance and strategy at King’s College London.

The researchers analyzed 4,550 U.S. new ventures that received investments from collaborating venture capitalists from 1980 to 2017. The researchers discovered not only that long-time collaborations present both benefits and risks, but that those effects were more pronounced for younger ventures than for older ventures.

Bellavitis, Rietveld, and Filatotchev also found that collaborators who were located more closely to each other experienced the whole cycle more quickly: Their success rate from working together repeatedly peaked sooner and declined faster.

The researchers concluded that because extended collaborations have positive and negative consequences, venture capitalists should look for opportunities to work together—but not too often.

“The effects of prior co-investments on the performance of venture capitalist syndicates: A relational agency perspective” was published May 8, 2019, in the Strategic Entrepreneurship Journal.