How Do Venture Capital Partners Match with Startup Founders?

Abstract

The venture capital market is characterized by personal interactions between VC firms and the startups they finance. Yet we have little systematic evidence of how startup founders get matched with partners at VC firms. By assembling data at the individual partner and founder level, we compare personal similarity-based rationale with resource complementarity-based reasons explaining the likelihood of an investment match. We find that a match is more likely if the two parties share a common ethnicity or have both attended a top ranked university, and particularly so when information problems are more severe. With such similarities, the VC’s investment also represents a larger fraction of her total investments. We interpret personal similarity as reducing transactions costs in VC matching rather than proxying quality-based matching. Matching based on VC partner’s professional expertise appears to be less determined by their complementarity with the founder’s background and more by the current lifecycle stage of the startup. In particular, VC partners with finance or operational capabilities are more likely to match with mature ventures. Our findings shed new light on how personal characteristics and professional expertise can be important in financing situations where informational frictions are severe and investors are actively involved with their borrowers.

Keywords: venture capital, startups, matching

JEL Classification: G24, M13