Bringing the Context Back In: Settings and the Search for Syndicate Partners in Venture Capital Investment Networks

Most existing theories of relationship formation imply that actors form highly cohesive ties that aggregate into homogenous clusters, but actual networks also include many “distant” ties between parties that vary on one or more social dimensions. To explain the formation of distant ties, we propose a theory of relationship formation based on the characteristics of “settings,” or the places and times in which actors meet. We posit that organizations form relations with distant partners when they participate in two types of settings: unusually faddish ones and those with limited risks to participants. In an empirical analysis of our thesis in the formation of syndicate relations between U.S. venture capital firms from 1985 to 2007, we find that the probability that geographically and industry distant ties will form between venture capital firms increases with several attributes of the target-company investment setting: (1) the recent popularity of investing in the target firm's industry and home region, (2) the target company's maturity, (3) the size of the investment syndicate, and (4) the density of relationships among the other members of the syndicate.

[1]  J. Stiglitz,et al.  The Architecture of Economic Systems: Hierarchies and Polyarchies , 1984 .

[2]  R. Gulati.  Social Structure and Alliance Formation Patterns: A Longitudinal Analysis , 1995 .

[3]  Lynn Smith-Lovin,et al.  Women and Weak Ties: Differences by Sex in the Size of Voluntary Organizations , 1982, American Journal of Sociology.

[4]  B. Uzzi,et al.  The Sources and Consequences of Embeddedness for the Economic Performance of Organizations: The Network Effect , 1996 .

[5]  Pamela R. Haunschild,et al.  Friends or Strangers? Firm-Specific Uncertainty, Market Uncertainty, and Network Partner Selection , 2004, Organ. Sci..

[6]  A. Banerjee,et al.  A Simple Model of Herd Behavior , 1992 .

[7]  J. Pfeffer,et al.  The External Control of Organizations. , 1978 .

[8]  Duncan J. Watts,et al.  Collective dynamics of ‘small-world’ networks , 1998, Nature.

[9]  S. Feld.  The Focused Organization of Social Ties , 1981, American Journal of Sociology.

[10]  J. Coleman,et al.  Social Capital in the Creation of Human Capital , 1988, American Journal of Sociology.

[11]  Mike Wright,et al.  The syndication of venture capital investments , 2001 .

[12]  Steven R. Lerman,et al.  The Estimation of Choice Probabilities from Choice Based Samples , 1977 .

[13]  Toby E. Stuart,et al.  Network Effects in the Governance of Strategic Alliances , 2006 .

[14]  M. Jensen.  The Role of Network Resources in Market Entry: Commercial Banks' Entry into Investment Banking, 1991–1997 , 2003 .

[15]  Gary King,et al.  Logistic Regression in Rare Events Data , 2001, Political Analysis.

[16]  Toby E. Stuart.  Network Positions and Propensities to Collaborate: An Investigation of Strategic Alliance Formation in a High-Technology Industry , 1998 .

[17]  Michael W. Macy,et al.  In Search of Excellence: Fads, Success Stories, and Adaptive Emulation1 , 2001, American Journal of Sociology.

[18]  Jitendra V. Singh,et al.  The Ties That Bind: Organizational and Class Bases of Stability in a Corporate Interlock Network , 1986 .

[19]  Robert B. Wilson.  THE THEORY OF SYNDICATES , 1968 .

[20]  C. Oliver.  Determinants of Interorganizational Relationships: Integration and Future Directions , 1990 .

[21]  Jay R. Ritter,et al.  The "Hot Issue" Market of 1980 , 1984 .

[22]  G. Ahuja.  Collaboration Networks, Structural Holes, and Innovation: A Longitudinal Study , 1998 .

[23]  Yael V. Hochberg,et al.  Whom You Know Matters: Venture Capital Networks and Investment Performance , 2004 .

[24]  Howard H. Stevenson,et al.  Capital market myopia , 1985 .

[25]  Lori Rosenkopf,et al.  INSTITUTIONAL AND COMPETITIVE BANDWAGONS: USING MATHEMATICAL MODELING AS A TOOL TO EXPLORE INNOVATION DIFFUSION , 1993 .

[26]  Guido W. Imbens,et al.  An efficient method of moments estimator for discrete choice models with choice-based sampling , 1992 .

[27]  N. Weinberg,et al.  Sifting and sorting : Personal contacts and hiring in a retail bank , 1997 .

[28]  Mark S. Granovetter.  The Strength of Weak Ties , 1973, American Journal of Sociology.

[29]  R. Gulati,et al.  Where Do Interorganizational Networks Come From?1 , 1999, American Journal of Sociology.

[30]  O. Williamson.  Markets and Hierarchies , 1975 .

[31]  S. Cosslett,et al.  Maximum likelihood estimator for choice-based samples , 1981 .

[32]  James R. Lincoln,et al.  Analyzing Relations in Dyads , 1984 .

[33]  S. Feld.  Social Structural Determinants of Similarity among Associates , 1982 .

[34]  Katherine J. Stewart,et al.  Friends in High Places: The Effects of Social Networks on Discrimination in Salary Negotiations , 2000 .

[35]  W. A. Sahlman,et al.  What do venture capitalists do , 1989 .

[36]  Herbert Blumer,et al.  Fashion: From Class Differentiation to Collective Selection , 1969 .

[37]  Bharat Anand,et al.  Resources, Power and Prestige: Formulation of Structural Inequality in Social Exchange Networks , 2000 .

[38]  Mark S. Mizruchi,et al.  Getting deals done: The use of social networks in bank decision-making , 2001 .

[39]  Karen Page,et al.  Network Forms of Organization , 1998 .

[40]  P. Blau.  Exchange and Power in Social Life , 1964 .

[41]  W. A. Sahlman,et al.  The structure and governance of venture-capital organizations , 1990 .

[42]  Joseph Galaskiewicz,et al.  Leadership and Networking among Neighborhood Human Service Organization. , 1981 .

[43]  James N. Baron,et al.  Resources and Relationships: Social Networks and Mobility in the Workplace , 1997 .

[44]  R. Peterson,et al.  Inflating the bubble: examining dot-com investor behaviour , 2004 .

[45]  P. Ingram,et al.  Friendships among Competitors in the Sydney Hotel Industry1 , 2000, American Journal of Sociology.

[46]  Mark S. Granovetter.  Economic Action and Social Structure: The Problem of Embeddedness , 1985, American Journal of Sociology.

[47]  Joel Podolny.  Market Uncertainty and the Social Character of Economic Exchange , 1994 .

[48]  P. Sidey.  The grass roots , 1966 .

[49]  Olav Sorenson,et al.  Strategic networks and entrepreneurial ventures , 2007 .

[50]  R. Burt.  The contingent value of social capital. , 1997 .

[51]  N. Breslow,et al.  Statistical methods in cancer research. Vol. 1. The analysis of case-control studies. , 1981 .

[52]  Daniel J. Brass,et al.  Taking Stock of Networks and Organizations: A Multilevel Perspective , 2004 .

[53]  G. Ahuja.  The duality of collaboration : Inducements and opportunities in the formation of interfirm linkages , 2000 .

[54]  Joel A. C. Baum,et al.  Dancing with Strangers: Aspiration Performance and the Search for Underwriting Syndicate Partners , 2005 .

[55]  J. Lincoln,et al.  Keiretsu Networks in the Japanese Economy: A Dyad Analysis of Intercorporate Ties , 1992 .

[56]  David M. Waguespack,et al.  Social Structure and Exchange: Self-confirming Dynamics in Hollywood , 2006 .

[57]  Philip Selznick.  TVA and the grass roots , 1949 .

[58]  Toby E. Stuart,et al.  Syndication Networks and the Spatial Distribution of Venture Capital Investments1 , 1999, American Journal of Sociology.

[59]  Steven G. Self,et al.  Asymptotic Distribution Theory and Efficiency Results for Case-Cohort Studies , 1988 .

[60]  R. Burt,et al.  Corporate Profits And Cooptation , 1983 .

[61]  R. Breiger.  The Duality of Persons and Groups , 1974 .

[62]  James A. Davis.  Clustering and Structural Balance in Graphs , 1977 .

[63]  Toby E. Stuart,et al.  Interorganizational Endorsements and the Performance of Entrepreneurial Ventures , 1999 .

[64]  R. Emerson.  Power-Dependence Relations , 1962, Power in Modern Societies.

[65]  W. Raub,et al.  Reputation and Efficiency in Social Interactions: An Example of Network Effects , 1990, American Journal of Sociology.