Working Papers

April 2021

Venture Capitalists’ Access to Finance and Its Impact on Startups

With: Jun Chen (Remnin University)
  • Startup financing constraints can be partially explained by venture capitalist constraints
  • Volcker Rule restricted the set of limited partners that could invest in VC
  • This change had different impacts by states in the U.S.
  • Findings: VC funds shrink, fundraising probabilities fall, startups absorb these VC financing constraints.

Paper summary coming soon

September 2020, R&R Journal of Finance

The Evolution of CEO Compensation in Venture Capital Backed Startups

With: Ramana Nanda (Imperial) and Christopher Stanton (HBS)
  • founder-CEOs of VC-backed startups have low pay for only a while
  • a tangible product (“product market fit”) dramatically increases liquid cash compensation
  • “Product market fit” also coincides with key human capital in the startup becoming more replaceable.
 

Paper summary coming soon

December 2020

Board Dynamics over the Startup Life Cycle

With: Nadya Malenko (Univ. of Michigan)
  • The board of directors of VC-backed startups exhibits significant changes in control over time
  • Control starts with the entrepreneur, shifts to a balance or “shared” and ultimately rests with VCs.
  • The independent director  facilitates the shared control board
  • Independent directors help mediate conflicts between entrepreneur and VC
 

Paper Summary coming soon

January 2021

Regulatory Costs of Being Public: Evidence from Bunching Estimation

With: Kairong Xiao (Columbia) and Ting Xu (Univ. of VA)  
  • Regulation a key part of the costs of being public and estimating the costs is challenging
  • Study costs of disclosure and internal governance regulations
  • Use bunching estimators to show that firms manipulate their public float to avoid certain regulations
  • Develop a model to translate float distortion to firm value loss
  • Findings: various disclosure and internal governance rules leads to a total compliance cost of 4.3% of the market capitalization for a median U.S. public firm.
 

Paper summary

September 2020

Measuring Intangible Capital with Market Prices

With:
Ryan Peters (Tulane) and Sean Wang (SMU)

  • The capitalization of intangible investments – R&D and SG&A  require depreciation parameters
  • Market prices of intangible assets found via acquisition or trading of public securities provides information about these parameters
  • Estimate knowledge (R&D) and organizational (SG&A) capital stocks with new parameter estimates
  • Two stocks out-perform existing estimates in market value regressions, patents analysis and human capital regressions

Paper summary

Publications

March 2021, Forthcoming Journal of Financial Economics

Venture Capital Contracts

With: Alexander Gorbenko (UCL) and Arthur Korteweg (USC)
  • The role of contracts in venture capital (VC) value creation and matching with entrepreneurs is unknown
  • estimate the impact of contract terms on startup outcomes and the split of value between the entrepreneur and investor
  • Findings: Venture capital contracts shift value from entrepreneur to VC. Any analysis of contracting must incorporate the complex matching between VC and entrepreneur.

Paper summary

2020, Review of Financial Studies (Editor’s Choice)

The Deregulation of the Private Equity Markets and the Decline in IPOs

With:
Joan Farre-Mensa (Univ. of IL Chicago)

The deregulation of securities laws|in particular the National Securities Markets Improvement Act (NSMIA) of 1996|has increased the supply of private capital to late-stage private startups, which are now able to grow to a size that few private firms used to reach. NSMIA is one of a number of factors that have changed the going-public versus staying-private trade-off, helping bring about a new equilibrium where fewer startups go public, and those that do are older. This new equilibrium does not reflect an IPO market failure. Rather, founders are using their increased bargaining power vis-a-vis investors to stay private longer.

2020, Journal of Financial Economics

Are Early Stage Investors Biased Against Women?

With: Richard R. Townsend (UCSD)

We study whether early stage investors have gender biases using a proprietary dataset from An- gelList that allows us to observe private interactions between investors and fundraising startups. We find that male investors express less interest in female entrepreneurs compared to observably similar male entrepreneurs. In contrast, female investors express more interest in female entrepreneurs. These findings do not appear to be driven by within-gender screening/monitoring advantages or gender differences in risk preferences. Moreover, the male-led startups that male investors express interest in do not outperform the female-led startups they express interest in—they underperform. Overall, the evidence is consistent with gender biases.

2018, Review of Financial Studies

Founder Replacement and Startup Performance

With: Matt Marx (Cornell)

We provide causal evidence that venture capitalists (VCs) improve the performance of their portfolio companies by replacing founders. Using a database of venture capital financings augmented with hand-collected founder turnover events, we exploit shocks to the supply of outside executives via 14 states’ changes to non-compete laws from 1995 to 2016. Naive regressions of startup performance on replacement suggest a negative correlation that may reflect negative selection. Indeed, instrumented regressions reverse the sign of this effect, suggesting that founder replacement instead improves performance. The evidence points to the replacement of founders as a specific mechanism by which VCs add value.

2017, Journal of Financial Economics

Cost of Experimentation and the Evolution of Venture Capital

With: Ramana Nanda (Imperial) and Matthew Rhodes-Kropf (MIT)

We study how technological shocks to the cost of starting new businesses have led the venture capital model to adapt in fundamental ways over the prior decade. We both document and provide a framework to understand the changes in the investment strategy of venture capitalists (VCs) in recent years – an increased prevalence of a “spray and pray” investment approach – where investors provide a little funding and limited governance to an increased number of startups that they are more likely to abandon, but where initial experiments significantly inform beliefs about the future potential of the venture. This adaptation and related entry by new financial intermediaries has led to a disproportionate rise in innovations where information on future prospects is revealed quickly and cheaply, and reduced the relative share of innovation in complex technologies where initial experiments cost more and reveal less.

2017, Management Science

Managing Performance Signals Through Delay: Evidence from Venture Capital

With: Indraneel Chakraborty (Univ. of Miami)
  • The role of contracts in venture capital (VC) value creation and matching with entrepreneurs is unknown
  • estimate the impact of contract terms on startup outcomes and the split of value between the entrepreneur and investor
  • Findings: Venture capital contracts shift value from entrepreneur to VC. Any analysis of contracting must incorporate the complex matching between VC and entrepreneur.

Paper summary

2015, Journal of Finance

Is the VC Partnership Greater than the Sum of its Partners?

With: Matthew Rhodes-Kropf (MIT)

This paper investigates whether individual venture capitalists have repeatable investment skill and the extent to which their skill is impacted by the venture capital (VC) firm where they work. We examine a unique data set that tracks the performance of individual venture capitalists’ investments over time and as they move between firms. We find evidence of skill and exit style differences even among venture partners investing at the same VC firm at the same time. Furthermore, our estimates suggest the partners’ human capital is two to five times more important than the VC firm’s organizational capital in explaining performance.

2014, Review of Economics and Statistics

Statistical Discrimination or Prejudice? A Large Sample Field Experiment

With: Bryan Tomlin (Cal. State CI) and Liang Wang (Monash)

A model of racial discrimination provides testable implications for two features of statistical discriminators: differential treatment of signals by race and heterogeneous experience that shapes perception. We construct an experiment in the U.S. rental apartment market that distinguishes statistical discrimination from taste-based discrimination. Responses from over 14,000 rental inquiries with varying applicant quality show that landlords treat identical information from applicants with African-American and white sounding names differently. This differential treatment varies by neighborhood racial composition and signal type in a manner consistent with statistical discrimination and in contrast to patterns predicted by a model of taste-based discrimination.

2013, Review of Financial Studies

The Price of Diversifiable Risk in Venture Capital and Private Equity

With:
Charles Jones (Columbia) and Matthew Rhodes-Kropf (MIT)

This paper demonstrates how the principal-agent problem between venture capitalists and their investors (limited partners) causes limited partner returns to depend on diversifiable risk. Our theory shows why the need for investors to motivate VCs alters the negotiations between VCs and entrepreneurs and changes how new firms are priced. The three-way interaction rationalizes the use of high discount rates by VCs and predicts a correlation between total risk and net of fee investor returns. We take our theory to a unique data set and find empirical support for the effect of the principal-agent problem on equilibrium private equity asset prices.