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Sianature Redacted Signature Redacted MASSACHUSETTSq INSTITtTF A Taxonomy of Online Syndicates OF TECHNOLOLGY By JUN 2 4 2015 Sascha Jan Eder LIBRARIES B.S. Business Administration University of Mannheim, 2012 SUBMITTED TO THE MIT SLOAN SCHOOL OF MANAGEMENT IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN MANAGEMENT STUDIES AT THE MASSACHUSETTS INSTITUTE OF TECHNOLOGY JUNE 2015 2015 SASCHA JAN EDER. All rights reserved. The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part in any medium now known of hereafter created. Signature redacted Signature of Author MIT SLOAN SCHOOL OF MANAGEMENT May 8, 2015 Sianature redacted Certified by: Christian Catalini Fred Kayne (1960) Career Development Professor of Entrepreneurship Assistant Professor of Technological Innovation, Entrepreneurship, a Strategic Management Thesis Supervisor Accepted by: Signature redacted-- LI Michael A. Cusumano SMR Distinguished Professor of Management Program Director, M.S. in Management Studies Program MIT Sloan School of Management 11 A Taxonomy of Online Syndicates By Sascha Jan Eder Submitted to MIT Sloan School of Management on May 8, 2015 in Partial Fulfillment of the requirements of the Degree of Master of Science in Management Studies. Abstract New businesses financing has evolved over the years from closed-end funds to limited partnership financing, angel investing and the most current form of online syndication. While VC financing has been covered thoroughly from financing and behavioral per- spectives in research, very little is known about online syndicates which have ap- peared in recent years with the creation of AngelList. This paper's objective is to establish a first taxonomy of the most active angel syndi- cates at the time this research was conducted. Based on characteristics related to work experience, education and reputation this paper presents a systematic overview of these syndicates' founders, where they have studied and worked, how well-known they are in social media and how their investments have performed. By dividing the data into quartiles according to total funding raised and number of backers attracted, I find astonishing differences across the quartiles for certain varia- bles while others are rather inconclusive. Education and work experience (e.g. con- sulting, IB, VC, etc.) as well as years spent as entrepreneurs and investors do not show a clear relationship with the number of backers or total funding a lead is able to attain. Number of startups founded, number of acquisition exits, Twitter followers and Google search results, however, seem to explain 36% of the variation of total funding raised and 43% of the variation in the number of backers. The findings suggest that despite a large heterogeneity in syndicate lead characteristics, those successful at raising high amounts of funding and attracting many backers share common traits. Thesis Supervisor: Christian Catalini Title: Fred Kayne (1960) Career Development Professor of Entrepreneurship Assistant Professor of Technological Innovation, Entrepreneurship, and Strategic Management Ill IV Acknowledgements Acknowledgements This thesis is dedicated to my parents. Their constant support throughout my entire life enabled me to get into MIT and to conduct this research. Furthermore, I would like to thank Professor Christian Catalini, who acted as the supervisor of this paper. Professor Catalini and I had frequent meetings to discuss intermediary results, outline next steps and ensure that, despite the complexity of the work, a successful outcome was possible. His work on online syndicates complemented my research and helped me to better understand the landscape before creating a detailed database with over 93 different variables. A great thank you to my friends Sophia Lambert and Edward Woodford, who took time to proofread my thesis and suggest helpful and important improvements. Finally, the MIT Writing and Communication Center worked with me to further improve this paper's wording, understandability and flow. V VI Table of Contents Table of Contents Abstract ........................................................................................................................ Ill Acknow ledgem ents...................................................................................................V Table of Contents.................................................................................. 7 List of Figures...............................................................................................................9 List of Tables ................................................................................................................ 9 1 Introduction..............................................................................................................10 1.1 Motivation and research problem ............................................................................. 10 1.2 Paper structure ............................................................................................................ 11 1.3 Terms and definitions................................................................................................ 12 2 An Introduction to Venture Capital.......................................................................15 2.1 The History of Venture Capital ................................................................................. 15 2.2 The Venture Capital Business Model..................................................................... 16 2.3 The Econom ics of Venture Capital .......................................................................... 19 3 AngelList and Online Syndicates....................................................................... 20 3 .1 A n g e lL ist .......................................................................................................................... 2 0 3.2 Online Syndicates........................................................................................................21 3 .2 . 1 G en e ra l p rin cip le s............................................................................................................................................... 2 1 3 .2 .2 L e a ds2.......................................................................................................................................................................... 2 3 3 .2 .3 B ac ke rs ..................................................................................................................................................................... 2 4 3 .2 .4 S ta rtup s ..................................................................................................................................................................... 2 5 3.3 The Econom ics of Online Syndicates ..................................................................... 25 3.4 Differences between syndicates and traditional VC funds................................... 28 3.5 AngelList in the context of crowdfunding ................................................................ 28 4 Methodology of data collection process ......................................................... 30 4.1 Syndicate Database.................................................................................................. 30 4.2 Data collection............................................................................................................. 30 4 .2 .1 S yn d ic a te da ta ...................................................................................................................................................... 3 1 4 .2.2 L e a d ch a ra cteristics...........................................................................................................................................32 7 Table of Contents 5 Research m odel and hypotheses ..................................................................... 35 5.1.1 Dependent variables - Syndicate characteristics..................................................................... 35 5.1.2 Hypothesis I - Work experience plays a role in attracting funding/backers..............35 5.1.3 Hypothesis II - Reputation plays a role for attracting funding/backers........................ 37 5.1.4 Hypothesis Ill - Education influences a syndicate investor's success ......................... 38 5.2 Syndicate sample description.................................................................................. 38 5 .2 . 1 T o ta l sa m p le ........................................................................................................................................................... 3 9 5.2. 1. 1 Work-related characteristics.....................................................................................................................40 5.2.1.2 Reputation characteristics.........................................................................................................................41 5.2. 1.3 Education-related characteristics..........................................................................................................42 5 .2 .2 Q ua rtile s by fun d in g ........................................................................................................................................... 43 5.2.2. 1 Work-related characteristics.....................................................................................................................44 5.2.2.2 Reputation
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