How does Human Capital Matter? Evidence from Venture Capital

47 Pages Posted: 30 Oct 2017 Last revised: 24 Jul 2019

See all articles by Lifeng Gu

Lifeng Gu

The University of Hong Kong

Ruidi Huang

Southern Methodist University (SMU) - Finance Department

Yifei Mao

Cornell University - SC Johnson College of Business - Finance Department

Xuan Tian

Tsinghua University - PBC School of Finance

Date Written: July 1, 2019

Abstract

We examine the effect of trade secret protections on venture capital (VC) investment. Exploiting variation generated by staggered adoption of the Inevitable Disclosure Doctrine (IDD) that protects trade secret by restricting labor mobility, we find that IDD reduces VC investment likelihood. This effect is more pronounced when human capital is more important to the startups, VC investment is more uncertain, and VCs’ monitoring cost is higher. Further analyses show that muted employees’ incentives to produce innovation output is a plausible underlying mechanism. To mitigate this adverse effect, VCs stage finance startups and syndicate with other VC investors. VCs, however, still experience a decrease in successful exit rates because they cannot fully adjust their portfolio firms across states. Our paper sheds new light on the real effects of labor market frictions via the lens of VC markets.

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

JEL Classification: G24, G23, G34

Suggested Citation

Gu, Lifeng and Huang, Ruidi and Mao, Yifei and Tian, Xuan, How does Human Capital Matter? Evidence from Venture Capital (July 1, 2019). Available at SSRN: https://ssrn.com/abstract=3060837 or http://dx.doi.org/10.2139/ssrn.3060837

Lifeng Gu

The University of Hong Kong ( email )

Hong Kong
+852 3917-1033 (Phone)

HOME PAGE: http://https://sites.google.com/site/uiuclifenggu/

Ruidi Huang

Southern Methodist University (SMU) - Finance Department ( email )

United States

Yifei Mao (Contact Author)

Cornell University - SC Johnson College of Business - Finance Department ( email )

Ithaca, NY 14850
United States

Xuan Tian

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing 100083
China
+86-10-62794103 (Phone)

HOME PAGE: http://xuantian.info/

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