How Venture Capitalists Share Risk through Syndication

By Nicole Gravagna, Peter K. Adams

In venture capital, syndication means having a number of investors get together and share in the deal rather than making the entire investment alone. Venture capital (VC) investors syndicate on a deal for three main reasons:

  • They don’t have enough money to fund the deal. Perhaps their limited partnership agreement limits the size of the deal that they can invest in. Maybe they are nearing the end of their investment period and have limited funds available.

  • They want to share risk with other investors. If a VC invests in just a few high risk deals, his chance of hitting the jackpot on one of them is relatively small. On the other hand, if he can syndicate with others and get in on many deals, he shares the risk and increases his chance of success.

  • Syndicating gives VCs an opportunity to take advantage of increased deal flow. Having pre-screened, pre-researched deals fall into their laps is much easier than constantly looking for deals and screening for the very best ones on their own.

Syndicating with other investors also puts more eyeballs on the deal. The new investment partners who are asked to look at the deal may not be as swayed by a personal relationship that the first VC may have formed with the entrepreneur. Syndication partners add depth to the due diligence process and increase the chances of success.