Startup valuation and the venture capital syndication hypothesis

Abstract

We formally replicate and extend Gompers and Lerner's (2000) findings that positively link venture capital fund flows to startup valuation. We confirm most of the original findings. However, we find a divergence in venture capital fund sizes and startup valuation in recent years. Specifically, the average pre-money valuation of a startup has grown dramatically larger relative to the increase in VC funding. We put forth a "syndication hypothesis" to explain this phenomenon. The funding landscape has changed from a co-opetitive model to a more competitive one as evidenced by less demand for deal syndication. We test a broad version of this hypothesis for both institutional and angel investors and find that the overall degree of syndication has fallen since the 1980s.