The downside of repeated ties : syndicated capital investments

My dissertation develops a conceptual framework to study the largely unrecognized negative side effects or social costs of repeated ties with the same partners and partners’ social characteristics. Drawing on insights from the literatures on social networks, prestige and endorsements, learning, expertise and small groups, I suggest that the costs of repeated ties with the same partners are manifest by a bias in partner search, evaluation and selection; inadequate monitoring of familiar partners; and the adoption of suboptimal, insufficiently adapted routines developed during prior exchanges. I ultimately argue that these costs can be high enough to outweigh the benefits of repeated ties partially or even completely. I further argue that the level of cohesion in the network in which the actors and their partners are embedded, and the degree of similarity between them will moderate these costs. I also explore the effects of highly sought after partner characteristics such as their prestige/status and prior experience, on the likelihood of success of the partnership. I test the predictions of my theory on a longitudinal dataset consisting of the population of nearly 1,300 startups that received first round investments from syndicates of venture capital (VC) firms during the period 1997 to 2001. As predicted, I find that the likelihood of a syndicate’s success is related to the number of prior ties between syndicate members in an inverted U-shaped manner and that the costs associated with repeated ties are accentuated by partner homogeneity. I also find that the likelihood of the syndicate’s success decreases with an increase in the level of cohesion in the syndicate and the prior experience of the members. Finally, I find that the likelihood of success increases at a decreasing rate as syndicate members’ prestige increases. These findings make a number of contributions to research on strategy and organizational theory, primary among which is to further understanding of the negative effects of social networks. The study highlights the importance of considering the costs of prior ties in addition to their benefits when making partner selection decisions, particularly in contexts characterized by high levels of reciprocity between partners.