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1. Introduction
Venture capital (VC) refers to the financial capital provided to start-up firms and small businesses with perceived potential for long-term growth. VC is a crucial source of funding for startup firms with less access to financial support. It typically generates above-average returns, but it also entails high risk for VC investors. Generally, VC firms jointly invest in the same investment round by working together in syndicates of no fewer than two firms (Terjesen et al., 2013). Depending on the informational and resource-based advantages of joint ventures, VC alliances could alleviate the financial constraints, improve financial status and operating performance, and reduce investment risks for members (Baum et al., 2000; Chen et al., 2015; Powell et al., 1996; Stiglitz, 2002).
Despite these well-known benefits that strategic alliances confer on VC firms, critical obstacles remain to making full use of alliances’ advantages. Two important factors impeding collaborative advantage are the problems of adverse selection and moral hazard (e.g. Elitzur and Gavious, 2003; Ozmel et al., 2013). Adverse selection may arise between a VC alliance and its investee when there is information asymmetry regarding the investee’s potential (An et al., 2011; Basu and Chau, 1999), because VC firms without sufficient resources have difficulty effectively evaluating investees. In addition, given that maintaining effective communication with partners and collecting useful information entail some costs (Gnyawali and Madhavan, 2001; Soda et al., 2004), and it is difficult for other alliance members to observe their behaviors (Sufi, 2007), the moral hazard problem is more likely to appear among alliance members (Holmstitom and Tirole, 1997; Holmstrom, 1979). Both moral hazard and adverse selection problems are likely to increase the project’s investment risk and the followers’ perceived loss (Nicholson et al., 2005; Ozmel, et al., 2013). These problems in essence are caused by the information asymmetry at different levels, including the asymmetry between investors and investees (i.e. the cause of adverse selection) and the asymmetry among members in a VC alliance (i.e. the reason of moral hazard).
To reduce the possibilities of adverse selection and moral hazard, VC firms can enhance their information superiority since it could effectively solve the information asymmetry problem. From a business perspective, information superiority can be defined as...