We consider a theoretical model that offers a rationale for the syndication of venture capital investments: syndication improves the screening process of venture capitalists and prevents competition between investors after investment opportunities are disclosed. The analysis identifies the costs of syndication in terms of investment decisions or post-investment involvement of venture capitalists. These costs depend crucially on the level of experience of venture capitalists. The model generates empirical predictions concerning the determinants of syndication and the characteristics of syndicated deals.

We study the fund-raising strategy of an entrepreneur when investors have private information about his project’s profitability. The entrepreneur cares about monetary profits and about the probability to obtain financing. If he contacts both venture capitalists (VCs) simultaneously, he obtains high monetary profits. If he commits to a period of exclusive negotiation with one VC, he increases the probability to obtain financing but deal terms deteriorate. The optimal negotiation strategy results from this tradeoff. We also solve for the equilibrium financial contracts and obtain implications for VCs’ portfolios and entrepreneurs’ deals.