Failed Venture Capital Fundraising Campaigns and Startup Growth: The Value-Add of Venture Capital Due-diligence for Venture Performance

TY - UNPB

T1 - Failed Venture Capital Fundraising Campaigns and Startup Growth: The Value-Add of Venture Capital Due-diligence for Venture Performance

AU - Gonzalez-Uribe, Juanita

AU - Klingler-Vidra, Robyn

AU - Yin, Xiang

AU - Wang, Su

PY - 2022/7/18

Y1 - 2022/7/18

N2 - We investigate an unexplored role of venture capital (VC) investors on innovation; the potential value-add of due-diligence for companies involved in failed VC fundraising campaigns— i.e., startups that do not receive investment from the VC doing due-diligence. By VC due-diligence we mean the multistage process through which VCs scrutinize businesses for potential investment. Our novel data comprises nearly 2,000 startups applying for funding to a UK VC seed fund (Fund). For identification, we exploit the Fund's process of screening applicants for due-diligence, which features pre-determined selection rules based on the scores of quasi-randomly allocated reviewers with different scoring generosities. We show that assignment to due-diligence leads to substantial increases in venture growth within two years of application, even for companies involved in failed fundraising campaigns. VC due diligence comprises “type improvement” and “type discovery” mechanisms; tentative evidence suggest that type improvement (including coaching, learning-by-doing, and network support) may be primary. This new evidence implies that VCs' role in innovation affects many more companies (approximately 30+ out of every 100 applicants) than existing research has fully recognized, as it goes beyond theirvalue-added effects on the portfolio companies in which they invest (less than 1 out of 100 applicants). Therefore, frictions in the process through which startups seek and obtain VC funding can have profound implications for ecosystem-wide innovation and growth.

AB - We investigate an unexplored role of venture capital (VC) investors on innovation; the potential value-add of due-diligence for companies involved in failed VC fundraising campaigns— i.e., startups that do not receive investment from the VC doing due-diligence. By VC due-diligence we mean the multistage process through which VCs scrutinize businesses for potential investment. Our novel data comprises nearly 2,000 startups applying for funding to a UK VC seed fund (Fund). For identification, we exploit the Fund's process of screening applicants for due-diligence, which features pre-determined selection rules based on the scores of quasi-randomly allocated reviewers with different scoring generosities. We show that assignment to due-diligence leads to substantial increases in venture growth within two years of application, even for companies involved in failed fundraising campaigns. VC due diligence comprises “type improvement” and “type discovery” mechanisms; tentative evidence suggest that type improvement (including coaching, learning-by-doing, and network support) may be primary. This new evidence implies that VCs' role in innovation affects many more companies (approximately 30+ out of every 100 applicants) than existing research has fully recognized, as it goes beyond theirvalue-added effects on the portfolio companies in which they invest (less than 1 out of 100 applicants). Therefore, frictions in the process through which startups seek and obtain VC funding can have profound implications for ecosystem-wide innovation and growth.

KW - Venture Capital

KW - Due diligence

KW - INNOVATION

KW - Friction

KW - Externalities

UR - https://conference.nber.org/conf_papers/f171728.pdf

M3 - Working paper

BT - Failed Venture Capital Fundraising Campaigns and Startup Growth: The Value-Add of Venture Capital Due-diligence for Venture Performance

CY - NBER Summer Institute Entrepreneurship

ER -