How Does Human Capital Matter? Evidence from Venture Capital

Abstract

We investigate the effects of human capital mobility on venture capital (VC) investment and outcomes. To establish causality, we use a difference in-differences approach that relies on plausibly exogenous variations generated by staggered recognition of the inevitable disclosure doctrine (IDD). We find that a reduction in human capital mobility reduces VCs' investment propensity and successful exits. Further analysis shows that the effects are more pronounced in industries with more high-skilled workers, with higher patenting intensity, or in earlier-stage VC investment. To mitigate the adverse effect of the IDD, VCs stage finance startups more and are more likely to syndicate with other VCs. Finally, we show that the IDD reduces the mobility of inventors, which contributes to the reduction in startups' patenting and successful exits. Our paper sheds new light on the effects of an important but under-explored determinant of VC investment - the human capital of startups.

Keywords: Venture capital, inevitable disclosure doctrine, human capital risk

JEL Classification: G24, G23, G34