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Entrepreneurial Finance/Private Equity/Venture Capital

Paper Session

Saturday, Jan. 4, 2025 2:30 PM - 4:30 PM (PST)

San Francisco Marriott Marquis, Yerba Buena Salon 5 & 6
Hosted By: American Finance Association
  • Josh Lerner, Harvard University

Moral Hazard in Experiment Design: Implications for Financing Innovation

Patrick Bolton
,
Columbia University
Ramana Nanda
,
Imperial College London
Savitar Sundaresan
,
Imperial College London
Shannon Liu
,
University of Toronto

Abstract

Moral Hazard in Experiment Design: Implications for Financing Innovation

How Does Active Involvement Benefit Investors? Evidence from 85 Billion Cell Phone Signals

Xiaoyong (Jack) Fu
,
University of Pennsylvania

Abstract

I investigate the reputation effects of active involvement, specifically examining how venture capitalists’ (VCs’) on-site meetings with portfolio companies affect VCs’ reputations and future deal flow. By analyzing cell phone signals collected around VC and startup office buildings from 2018 to 2023, I measure VCs’ involvement intensity and deal flow quality. Using exogenous variation in travel ease, I show that increased VC involvement leads them to receive better online reviews from entrepreneurs, attracting more and higher-quality new entrepreneurs to pitch, ultimately improving future investment outcomes. Furthermore, I document six stylized facts about VC involvement: (1) VCs visit underperforming portfolio companies more frequently; (2) the frequency of visits increases when portfolio companies are closer; (3) early-stage investments receive more frequent visits; (4) VCs and nontraditional investors (CVCs, PEs, hedge funds) visit at similar frequencies, while accelerators and incubators visit more often; (5) deals with more co-investors involve more overall visits, but each investor visits less frequently; and (6) larger VCs visit less frequently per deal.

Venture Capital Response to Government-Funded Basic Science

Roham Rezaei
,
University of New South Wales
Yufeng Yao
,
University of New South Wales

Abstract

Science-based R&D can deter venture capitalists due to high technical uncertainty. We study whether mission-oriented public funding, which supplies basic science as a public good, fosters VC investments. Our quasi-natural experiment is the BRAIN Initiative (BI), a government-funded program with the goal of mapping the human brain. Using a large language model, we first show the large spillover effects of BI in neurotech. In a difference-in-differences analysis, we find an increase in VC investments in neurotech startups accompanied by higher valuations and more successful VC exits following the BI. The channels driving these results suggest reduced technical uncertainty: 1) increased supply of high-skilled academic labor; 2) more innovation, including breakthrough patents; 3) enhanced integration with complementary technologies, especially AI and big data, which aligns with the BI's data-driven mission. Our results suggest the supply of government-backed science and scientists can spur follow-on private investments in emerging technologies.

Discussant(s)
Yao Zeng
,
University of Pennsylvania
Shai Bernstein
,
Harvard University
Tania Babina
,
Columbia University
Lara Druyan
,
Silicon Valley Data Capital
JEL Classifications
  • G2 - Financial Institutions and Services