A Little More Monitoring, a Little Less Screening: Busy Venture Capitalists and Investment Performance

Abstract

While existing studies confirm venture capitalists' (VCs) monitoring ability, evidence of their screening ability remains scarce. This paper exploits the tradeoff between these two roles to show that VCs' intense involvement with existing startups has negative effects on the screening of new ones. To confirm this link, I build on within-individual variation in VC partners’ workload and attention stemming from engagement in their portfolio companies' IPOs. I find that when VCs are busy and distracted, they tend to make underperforming investments: startups added to a VC's portfolio during her IPO engagement period are 9% less likely to go public or become acquired, and they have 19% lower exit multiples. The effects are stronger in cases of higher workload intensity and higher information asymmetry. These results speak to the importance of screening for generating venture capital returns, and point to the meaningful economic tradeoff between engaging with existing companies and screening of new startups.

Keywords: venture capital, IPO, monitoring, screening, investment performance

JEL Classification: G11, G24, M13, O31