How does Human Capital Matter? Evidence from Venture Capital

Abstract

We examine the effect of labor mobility on venture capital (VC) investment. Following the staggered adoption of the inevitable disclosure doctrine that restricts labor mobility, VCs are less likely to invest in the affected state. This effect is more pronounced when human capital is more important to startups, VC investment is more uncertain, and VCs’ monitoring cost is higher. Employees’ reduced innovation productivity is a plausible underlying mechanism. To mitigate this adverse effect, VCs stage finance startups and syndicate with other VCs more. Our paper sheds new light on the real effects of labor market frictions.

Keywords: Human capital; labor mobility; venture capital; inevitable disclosure doctrine

JEL Classification: G24, G28, O31