The choice to syndicate and its effect on exit dynamics : A study on Venture Capital firms active in Sweden

Abstract: Venture capitalists enter into an investment with the intent of realising a substantial profit on theventure after a number of years; this realisation is usually labelled the exit. The disinvestment decisionis a critical issue in the venture capital industry, as the return of the investment is realised upon exit.There are two important dimensions to the disinvestment decision; how and when to exit.This thesis studies the role of Venture Capital (VC) syndication, and its’ effect on exit dynamics for VCfirms in Sweden. The aspects of syndication will be focused on firm characteristics of investing parties,were the ambition is to provide an analysis of these characteristics and their effect on exit route(Merger and Acquisitions, M&As, and Initial Public Offerings, IPOs) and exit timing. Our statisticalanalysis rely on survival analysis with Competing Risk Models (CRM), which is adequate to model timein one state, when exit is to a number of competing states. These models allow for a joint analysis ofexit type and exit timing, i.e. model durations that end with multiple exits. Specifically, we apply theWeibull distribution with Gamma Frailty.To conduct the study, we have used a self-collected data set of 300 investments derived from 20 VCfirms in Sweden. For each investment, the data includes information relating to a number ofexplanatory variables concerning selected characteristics of the portfolio company and investingparties. Our results reveal that the presence of one or more experienced VC firms in the syndicatewould prolong time to exit and increase the likelihood of exiting through an IPO. We provided evidencethat a larger syndicate size will increase the time to exit and increase the likelihood for exiting throughan IPO. We also provided empirical evidence that foreign investor involvement in a syndicate prolongstime to exit in comparison to investments with only domestic co-investors and should affect exit routeby increasing the probability of an IPO. Finally, we could infer that a match between location of at leastone VC firm in a syndicate and acquirer country will have an increasing effect on time-to-exit, whileincreasing the probability of an exit in that country.We hope that the findings of this thesis will provide scholars and venture capitalists with novel,valuable information on a syndicates’ effect on exit dynamics.